AGNC Investment Yields 14%. Here Are 3 Things You Should Know Before Buying the Stock.

If you're investing for income, AGNC Investment 's (NASDAQ: AGNC) monthly payout and yield of 14.4% is quite attractive.

However, its stock price has fallen significantly over recent years, and investors' overall returns have been less than stellar due to its sensitivity to rising interest rates. The Federal Reserve's potential rate cuts by the end of the year could bode well for AGNC, but there are three things to consider before buying AGNC today.

It lacks a strong moat

AGNC Investment invests in agency mortgage-backed securities (MBS), which are pools of residential mortgage loans bundled together and sold to investors. Specifically, AGNC focuses on agency MBS or mortgages where government-sponsored entities like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) guarantee principal and interest payments.

AGNC is a commodity-like business dealing with a standardized product subject to external factors relating to interest rates and their associated volatility. The space is highly competitive, with other players vying for the same MBS, making it hard to differentiate itself with a strong economic moat .

Other real estate investment trusts leverage their expertise to invest in specific properties with attractive risk profiles and have a stronger moat as a result. For example, Prologis invests in logistics facilities , Extra Space Storages invests in self-storage facilities , and Realty Income invests heavily in retail investment properties.

It uses leverage to boost returns

Mortgage-backed securities don't have very high yields; AGNC's investment portfolio has a weighted average yield of around 4.5%. To boost returns for investors, the mortgage real estate investment trust (mREIT) uses leverage, which is why it can afford its lofty dividend. Its leverage usage changes based on market conditions but is generally between six and 12 times its tangible shareholders' equity.

AGNC uses repurchase agreements (repo), which mature anywhere from in one day to one year. Short-term interest rates and volatility in funding markets are what determine the interest AGNC pays on these agreements.

Leverage can help boost returns for the mREIT when times are good, markets are calm, and interest rate spreads are narrow. Conversely, leverage can exacerbate losses when markets are less favorable.

It's vulnerable to interest rate fluctuations

AGNC makes profits from the difference between the interest income earned from its MBS portfolio and the amount it pays in borrowing costs. Because it borrows money on a short-term basis and invests in MBS on a long-term basis, the business is highly sensitive to the yield curve .

The yield curve represents the relationship between interest rates and time to maturity for an asset. A steep yield curve benefits AGNC by allowing it to borrow at a lower cost and invest in higher-yielding MBS.

Changes in monetary policy should benefit AGNC. Many market participants believe the Federal Reserve will begin lowering its benchmark interest rate as soon as September, which could help steepen the yield curve.

Furthermore, declining interest rate volatility and a fall in short-term interest rates would help boost its book value. That's because there is an inverse relationship between interest rates and book value. Since interest rates began rising in 2022, AGNC's tangible book value per share has fallen 47% from $15.75 to $8.40.

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According to CME Group , markets are currently pricing in six 25-basis-point interest rate cuts (1.5%) over the next year. However, previous expectations for several rate cuts this year did not come to fruition. So while interest rates are expected to go down, the timing remains uncertain.

Also, it remains to be seen how much interest rates will come down and if they will stay low for any extended period of time. One risk for AGNC is if rates remain higher for longer over the next decade. JPMorgan Chase CEO Jamie Dimon cautioned that there are "multiple inflationary forces in front of us" and that "interest rates may stay higher than the market expects ."

If short-term interest rates do indeed decline over the next year or two, AGNC's business will benefit, and its book value will see a boost. However, it isn't unreasonable to think inflation and interest rate fluctuations will remain elevated over the next decade, posing a notable long-term interest rate risk for those investing in AGNC today.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase, Prologis, and Realty Income. The Motley Fool recommends CME Group and Extra Space Storage and recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy .