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Understanding a Yield Trap: A look at AGNC’s Stock Dividend History

Updated: Apr 14

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Reddit's dividend investment community has grown quickly and is comprised of some great people looking to help each other out. I highly recommend you join the subreddit if this is the type of investment you're interested in learning more about. It's a great community and an outstanding resource. I recently posted on Reddit's r/Dividends community page with the question "what dividend stock they thought I should write an article on or analyze next." My goal was to write an article that the community was interested in so I would choose the company with the highest number up votes. User u/8oggl3 recommended that I write an article that covered a poor dividend performer so dividend investors could see what a poor performer looks like. This was a perfect idea since all my other articles cover solid performing companies. I chose the top comment from that thread which ended up being AGNC as suggested by u/cheese69696969. Below is my analysis of AGNC Investment Corporation.

Interested in starting you own Dividend Investing journey? Check out my Ultimate Dividend Investing Guide and personal Dividend Growth Portfolio!

What is a yield trap?

A yield trap is a stock that has a high dividend yield that newer dividend investors typically fall for because they ONLY choose a stock based on yield alone. Once you look further you can analyze a stock to see if its dividend is healthy and maintainable. New investors can get "trapped" in poor investments due to lack of information/analysis and chasing yield.

Table of Contents

Company Review

Total Returns


Profit Margin

Dividend Yield & Dividend Yield on Cost

Dividend Payout Ratio


Company Review


"Founded in 2008, AGNC Investment Corp. (“AGNC”) is an internally-managed real estate investment trust (“REIT”). They invest predominately in agency residential mortgage-backed securities on a leveraged basis, financed primarily through collateralized borrowings structured as repurchase agreements."

First off for those who don't know AGNC is a REIT so some of the factors that we use to analyze normal dividend stocks are different. I'll do the heavy lifting but if you're interested in analyzing REITs, check out my article here on how-to understand and analyze REITs.

Total Returns

AGNC boasts total returns since inception of 445% and a Dividend yield at 9%~. This includes reinvesting 100% of dividends since IPO in May 2008. AGNC is a mREIT so its' dividends are ordinary income and therefore taxed at a much higher rate if not held inside a tax-exempt account. This would drag down the overall total return as declared by AGNC. Additionally, had you not reinvested your dividends your capital would have depreciated by -23.31% (Since IPO), -17.09% (last 5Y), and -0.97% over the last year. AGNC's overall stock price has depreciated since June 2014 and has not recovered above $23.73 since. Newer investors may see the run-up post COVID drop as a sign that the company is a good ROI but it appears AGNC is settling back into its' pre COVID value. AGNC also has several periods where the total return was horizontal or even negative. Again, that includes if you had reinvested your dividends.

AGNC total return

Furthermore, AGNC Compound Annual Growth Rate (CAGR) has averaged around 6% for the last fifteen years. Compare that to the 12%~ average the SP500 returned over the same period. A 6% gap in total return would have resulted in significant underperformance for your portfolio compared to the broader market.

AGNC Total Return CAGR

AGNC Revenue

Part of AGNC's issues stem from their inability to maintain a steady revenue stream. A decrease in 2020 during COVID would have been normal. I wouldn't even consider their revenue stream as cyclic because there is no normal up in down pattern to their returns. I would be define them as erratic and unpredictable. Both definitions I don't want in my portfolio as a passive income investor.

AGNC Revenue

AGNC's Profit Margin

AGNC's historical profit margins are all negative for the 3Y, 5Y, 10Y, and 15Y values which is concerning as it further contributes to the poor performance of the companies' dividends and stock price. A low profit margin means that the company is doing a poor job of checking its costs or it has an inefficient pricing mechanism in place. As such, a low ratio can result from poor management, mismanaged expenses, or poor pricing strategies.

AGNC Profit margin

AGNC Dividend Yield & Dividend Yield on Cost

AGNC's dividend yield, as of 06 December 2021, sits at 9.20% which is a good number if you only look at the dividend yield and want only passive income. Unfortunately, AGNC has been regularly decreasing their dividend over time. This is most likely due to the unpredictability of AGNC's revenue as seen above. Typically, you should look for companies that increase their dividend and maintain it over time. These dividend decreases could lead to unpredictable income during retirement and could be devastating on your retirement plans if AGNC was any portion of your portfolio that you needed to pay your bills and live.

AGNC Dividends Per Share

AGNC's Yield on Cost paints an uglier picture for how this companies performance can hold you back as a dividend investor. Typically, you want your YOC to go up as a company increases their dividend. AGNC does the exact opposite. As stated, AGNC's current dividend yield is around 9.20%. Had you invested in AGNC three/five years ago your dividend yield would have dropped to around 8%. Even worse after a decade your yield on cost would drop to a staggering 5.02%. That's almost a 50% loss in dividend income! Additionally, their dividend CAGR is negative.

For example, had you invested $10,000 into AGNC in 2011 you would have bought in at $29.47 per share. This equates to 339~ shares. Those shares would have earned $5.60 a share, totaling $1,898~ in dividends annually. As, of December 6th, 2021, your initial investment would be worth $15.65 a share (THIS IS INCLUDES 100% REINVESTED DIVIDENDS!) or $5305 and would only produce $488.16 in passive income. This is a loss of 47% of your capital and 74% of your passive income. This would be FAR worse had you not reinvested your dividends which most investors plan to do in retirement. This factor alone would erode your Retirment income extremely quickly! The final killing blow is inflation. Inflation hovers around 3% per year so your buying power on your remaining $5305 would be reduced by another 30%~ over a decade. Meaning your true buying power value of your initial investment would be $3,713.

AGNC yield on cost
AGNC Dividend CAGR

Dividend Payout Ratio

Lastly, AGNC's payout ratio is above 100% which means that they are paying out more than they are earning in the form of dividends. This most likely means they will need to decrease their dividend in the future to decrease their dividend payout ratio. REITs have higher than normal payout ratio due to their requirement to pay most of their earnings out as dividends to be classified as a REIT. For example, Realty Income, has a payout ratio around 85% which is healthy for a REIT. AGNC's 3Y average payout ratio is a mind blowing 183%.

AGNC Dividend payout ratio

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AGNC's has a clear track record of poor performance in overall stock price and dividend income return. It's important to look at the full picture when you choose an investment. Understanding the full picture will ensure that you don't get sucked into a yield trap. Don't be blinded by high yield. If it's abnormally high or unbelievable it should be approached with caution. Choosing the right investment could save $1,000s and years of your time. You will thank yourself later for the analysis you do now. Remember, routinely review your investments to ensure they are still trending in a healthy direction.

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