With an Over 16% Yield, Is Now the Time to Buy AGNC Stock?

If you're a dividend stock investor, you've probably come across AGNC Investment (NASDAQ: AGNC) and its over 16% dividend yield. While high yields can sometimes be a red flag, AGNC has paid out the same $0.12 monthly dividend since 2020. Meanwhile, its net spread income, which is used to fund its payout, continues to exceed its dividend.

AGNC is a mortgage real estate investment trust (mREIT) that holds a portfolio of agency-backed mortgage-backed securities (MBS). Because its fixed-income investments are backstopped by government agencies like Fannie Mae and Freddie Mac, they carry very little default risk. However, like most long-term bonds, MBS values can be significantly impacted by movements in interest rates and, for MBSes specifically, changes in mortgage rates. Traditionally, changes in mortgage spreads, or the difference in rates between mortgages and 10-year Treasuries, have a big impact on the value of MBSes.

Falling portfolio value

Not surprisingly, with the Fed changing course and beginning an interest rate hiking cycle, the value of AGNC's MBS portfolio took a hit in Q3. This was reflected in AGNC's tangible book value (TBV) falling nearly 17% quarter over quarter, or $1.45 per share, to $7.13 from $8.58 at the end of Q2. TBV is essentially the value of AGNC's MBS portfolio, and this is the metric on which mREITs are typically valued. It said that as of Oct. 3, its TBV had risen 3% from quarter-end, or a little over 2% when accounting for its monthly dividend accrual.

With its stock trading at above its TBV during the quarter and it seeing strong volumes after being added to the S&P MidCap 400 index, AGNC raised $992 million through its at-the-market offering program. Equity raises above TBV actually help increase TBV for mREITS and give them cash that they then invest in more MBSes.

Meanwhile, AGNC continues to produce solid net spread and dollar roll income (dollar roll is a hedging strategy employed in MBS markets to avoid losses when MBS values decline), which is used to cover its dividend. For Q3, this came in at $0.37 per share, while it paid $0.36 per share in dividends. That was an increase from $0.35 a year ago, although down from $0.40 in Q2 and $0.42 in Q1. Its net interest spread was up 8 basis points year over year to 1.86%, although down from 2% in Q2. Its TBV at-risk leverage was 7.9 times, up from 7.4 times in Q2.

AGNC CEO Peter Federico said that agency MBSes are "considerably more attractive at current valuation levels" with yields near 6.5%. He thinks MBSes should outperform once interest rate volatility abates, predicting an 18% to 20% return on new investments, as there should be fewer new agency MBSes hitting the market for the rest of this year and into next. Federico noted that the market has essentially now priced in four rate hikes by the middle of 2027. JPMorgan Chase echoed this sentiment when it said the rise in 10-year Treasury yields looks overdone and that long-term yields could ease.

Should investors hold the stock?

Mortgage REITs like AGNC offer high yields, but their stocks can see big swings from changes in interest rates and/or mortgage spreads. While this remains a risk, especially during what looks like the start of a rate-tightening cycle, it does look like the market has quickly priced much of that in.

That is why, after what was, not surprisingly, a dreadful quarter, now may actually be a good time to buy AGNC stock. The mREIT will be able to purchase MBSes at some pretty attractive rates not seen in a very long time, while future Fed hikes look largely priced in. A shift in Fed policy, meanwhile, would benefit the stock.

JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.