Month-to-month Dividend Inventory In Focus: AGNC Funding Corp.

Up to date on December ninth, 2022 by Josh Arnold

AGNC Funding Corp (AGNC) has an especially excessive dividend yield of 14.9%, which is one thing this inventory is definitely recognized for. By way of present dividend yield, AGNC is close to the very prime of our record of high-yield dividend shares, significantly given its measurement.

As well as, AGNC pays its dividend every month, reasonably than on a quarterly or semi-annual foundation, as is the case with most dividend shares.

Month-to-month dividends give buyers the flexibility to compound dividends even sooner. There are usually not many month-to-month dividend shares, as the executive burden on the businesses paying the dividends is greater than paying quarterly, for instance.

Certainly, there are solely 49 shares that at the moment pay month-to-month dividends. You possibly can obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yields and payout ratios) by clicking on the hyperlink under:

That mentioned, additionally it is vital for buyers to evaluate the sustainability of such a excessive dividend yield, as yields in extra of 10% are sometimes an indication of elementary challenges dealing with the enterprise. Double-digit dividend yields usually sign that buyers don’t consider the dividend is sustainable, and are pricing the inventory in anticipation of a lower to the dividend. This text will focus on AGNC’s enterprise mannequin, and whether or not the inventory is interesting to revenue buyers.

Enterprise Overview

AGNC was based in 2008 and is an internally-managed REIT. Whereas most REITs personal bodily properties which are leased to tenants, AGNC has a unique enterprise mannequin. It operates in a distinct segment of the REIT market: mortgage securities.

AGNC invests in company mortgage-backed securities. It generates revenue by amassing curiosity on its invested property, minus borrowing prices. It additionally information beneficial properties or losses from its investments and hedging practices. Company securities are those who have principal and curiosity funds assured by both a government-sponsored entity, or the federal government itself. They theoretically carry much less threat than personal mortgages.

The belief employs important quantities of leverage to put money into these securities as a way to enhance its potential to generate curiosity revenue. AGNC borrows totally on a collateralized foundation via securities structured as repurchase agreements.

The belief’s said aim is to construct worth through a mix of month-to-month dividends and web asset worth accretion. AGNC has performed effectively with its dividends over time, however web asset worth creation has typically confirmed elusive.

Certainly, the belief has paid greater than $44 of whole dividends per share since its IPO; the share worth at the moment is slightly below $10. That form of observe document is extraordinary and is why some buyers are drawn to the inventory. In different phrases, the belief has distributed money per-share to shareholders of greater than 4 instances the present worth of the inventory.

AGNC reported its Q3 2022 outcomes on October twenty fifth, 2022. Tangible ebook worth per share was down from $11.43 within the June quarter to $9.08 on the finish of September. Financial return of tangible frequent fairness was -17.4%, versus -10.1% within the second quarter.

Web unfold and greenback roll revenue per share was 84 cents, which was up from 83 cents within the earlier quarter, and beat estimates of 69 cents. Annualized web curiosity unfold was 2.81%, up from 2.70% in Q2. Money and unencumbered company MBS was $3.6 billion on the finish of Q3, up from $2.8 billion in Q2. The belief’s weighted common yield on its portfolio was 9.2%, down from 12.4% within the second quarter.

A extra detailed breakdown of AGNC’s third quarter might be seen within the picture under:

Supply: Investor Presentation

Following Q3 outcomes, the inventory is buying and selling at a roughly 7% premium to tangible web ebook worth per share.

Development Prospects

The most important disadvantage to mortgage REITs is that the enterprise mannequin is negatively impacted by rising rates of interest. AGNC makes cash by borrowing at short-term charges, lending at long-term charges, and pocketing the distinction. To amplify returns, mortgage REITs are additionally extremely leveraged. It is not uncommon for mortgage REITs to have leverage charges of 5X or extra as a result of spreads on these securities are usually fairly tight.

In a rising interest-rate setting, mortgage REITs usually see the worth of their investments decreased. And, greater charges normally trigger their curiosity margins to contract because the fee acquired is mounted typically, however borrowing prices are variable. This double-impact is what buyers skilled most lately in 2018 when spreads contracted and ebook worth fell.

Nevertheless, as rates of interest as soon as once more fell beginning in 2019, AGNC noticed the profit as its spreads stabilized as effectively, permitting it to supply financial earnings.

Rates of interest are as soon as once more again on the rise, as central banks around the globe have aggressively hiked charges in an try to scale back inflation. The belief’s ebook worth contracted in current quarters on account of these strikes in rates of interest, with the sharp decline in Q3 the direct results of this setting.

General, the excessive payout ratio and the risky nature of the enterprise mannequin will hurt earnings-per-share development. We additionally consider that dividfinish development shall be anemic for the foreseeable future.

Dividend Evaluation

AGNC has declared month-to-month dividends of $0.12 per share since April 2020. This implies AGNC has an annualized payout of $1.44 per share, which equals an especially excessive present yield of 14.9% based mostly on the present share worth, which has been very weak in current months as charges have risen.

Supply: Investor Presentation

Excessive yields is usually a signal of elevated threat. And, AGNC’s dividend does carry important threat. AGNC has decreased its dividend a number of instances over the previous decade, together with dividend cuts in 2020 and in 2021.

We don’t see a dividend lower as an imminent threat at this level on condition that the payout was pretty lately lower to account for unfavorable rate of interest actions and that AGNC’s web asset worth seems to have stabilized. Administration has taken the mandatory steps to guard its curiosity revenue, so we don’t see one other dividend lower within the close to time period. In truth, we see the payout ratio remaining under 75% of earnings for the foreseeable future. If that’s the case, there can be no purpose to chop the payout as AGNC can at the moment fairly simply afford its dividend.

Nevertheless, with any mortgage REIT, there’s at all times a major threat to the payout, and that’s one thing buyers ought to take into accout, significantly given the risky habits of rates of interest lately.

Remaining Ideas

Excessive-yield month-to-month dividend paying shares are extraordinarily enticing for revenue buyers, not less than on the floor. That is significantly true in an setting of low rates of interest, as various sources of revenue typically have a lot decrease yields. AGNC pays a hefty yield of 14.9% proper now, which may be very excessive by any normal.

We consider the REIT’s excessive yield to be secure for the close to future, however that is hardly a low-risk state of affairs given the corporate’s enterprise mannequin and interest-rate sensitivity. Whereas AGNC ought to proceed to pay a dividend yield many instances greater than the S&P 500 Index common, it isn’t a horny possibility for risk-averse revenue buyers.

In case you are all for discovering extra high-quality dividend development shares appropriate for long-term funding, the next Certain Dividend databases shall be helpful:

The most important home inventory market indices are one other stable useful resource for locating funding concepts. Certain Dividend compiles the next inventory market databases and updates them month-to-month: