Income-minded investors won’t find a much higher-paying option right now than AGNC Investment(AGNC 0.21%), with its dividend yield of almost 15%. That’s a much higher yearly payout than the stock market’s average annual gain.
However, stepping into this high-yielding stock simply because of its hefty dividend isn’t necessarily the best move. There’s more to the story. There’s a lot more to the story, in fact.
But first things first.
What the heck is a mortgage REIT?
You’re probably familiar with stocks of conventional companies. Owning a stake in Coca-Cola, for instance, means you share in the profits generated by the sales of some of the world’s favorite beverages. A position in Apple reflects the revenue-bearing and profit-producing success of the iPhone and the company’s other devices and services.
AGNC Investment isn’t a conventional company, though. It’s a real estate investment trust, or REIT. Most of these businersses are structured to hold rent-producing real estate like hotels, apartment complexes, or shopping malls. As long as 90% of a REIT’s earnings are passed along to shareholders annually in the form of dividends, that income isn’t first taxed at the corporate level (which would reduce its net bottom line).
Even by REIT standards, however, AGNC Investment is an unusual outfit. It doesn’t own real estate. Rather, it owns bundles of mortgage loans made by government-run entities like Fannie Mae, Freddie Mac, and Ginnie Mae. These mortgages, of course, yield interest payments to their holders.
The twist? AGNC Investment uses borrowed money — which also incurs interest expenses — to purchase these bundles of mortgage loans.
That can be a bit of a head-scratcher. The REIT is paying interest to earn interest. The model usually works, however, because AGNC Investment borrows short-term funds at lower interest rates to finance purchases of longer-term mortgage loans that pay higher interest rates.
Except the model’s been broken of late.
AGNC Investment on the defensive
Even if you only keep loose tabs on the market’s condition, you’ve likely heard over the course of the past several months that the yield curve is inverted. That just means interest rates on short-term securities and bonds are higher than the interest rates on longer-term bonds and other debt — a phenomenon sometimes seen when investors have doubts about the economy’s near future, and anticipate stimulative rate cuts as a result. Such rate cuts tend to have a much greater impact on long-term bond prices, so investors gravitate toward relatively more stable short-term instruments during uncertain times.
And yes, such a shift can really mess things up for a mortgage REIT like AGNC Investment. In fact, it has messed things up for it. With its short-term borrowing costs creeping up while interest rates on its longer-term mortgage loan bundles are edging lower, AGNC Investment reported negative net interest income in each of its past four reported quarters. It’s also now regularly reporting unrealized losses on the value of some of the mortgage-backed securities it’s holding.
That hasn’t prevented it from continuing to pay its dividend — at least not yet. AGNC Investment has some cash and cash-like equivalents on its books, and it can sell securities as needed to come up with money to pay the dividend.
That’s a less-than-ideal situation, though. No company wants to be forced to sell assets at terms other than of their choosing. (Price-wise, the REIT could be doing itself long-term harm by shedding securities that could be worth much more in the future.)
It’s also a given that operating in the red is a problem even beyond the matter of supporting its dividend payments.
This is all why AGNC Investment has been such a disastrous performer since mid-2021, when economic cracks started to show and we first started seeing hints that the yield curve would eventually invert. The REIT’s shares have lost roughly half their value over that timeframe.
There’s the rub for would-be investors, of course. The dividend is still being paid, but AGNC’s unrealized losses are significant. Any investor who likes the option of being able to liquidate a dividend-paying position with at least most of the initial position intact would struggle to stomach such a setback.
Then there’s the other ugly reality: While the company is still paying its dividend, something has got to give sooner or later. If the yield curve remains inverted for a while, the maintaining the dividend may prove untenable.
Not the right dividend-paying stock for everyone
But maybe the global economy will experience a soft landing that un-inverts the yield curve. That would certainly work in the REIT’s favor. And for the record, interest rates are moving in that direction after the fourth quarter’s preliminary gross domestic product annual growth rate came in at 3.3%, which easily exceeded expectations of 2%. Never say never.
Still, this isn’t palatable volatility for faint-of-heart income investors… even with the enormous dividend yield that has resulted from it. Mortgage REITs like AGNC Investment that rely heavily on borrowing leverage are highly sensitive to even the slightest degree of turbulence in interest rates and credit markets. Full-blown economic weakness can be near-catastrophic to them.
In other words, if safety is a concern, look elsewhere. You may not find another stock yielding as much as this one does. However, you can find above-average yields attached to stocks that are much less volatile and risky. Being able to sleep at night counts for something, too.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
