There are several ways to beat the market with dividend stocks. People who have a long window of time before having to dip into their savings like to buy stocks of growing companies that can quickly increase their dividend payments.
There’s nothing necessarily wrong with dividend growing stocks, but what happens if you insist on paying large dividends from the start? The first thing to know about eye-catching dividend yields is that they are typically high because most investors don’t believe the underlying company can generate enough cash to meet its commitments.
For those of you who insist on chasing ultra-high returns, there are a few names that a major investment bank considers to buy right now. Janney Montgomery Scott analyst Jason Steward recently initiated coverage of AGNC Investment (NASDAQ:AGNC) And Annaly Capital (NYSE:NLY) with purchase notes.
The two companies are real estate investment trusts (REITs) who invest in mortgage-backed securities rather than real estate. At recent prices, AGNC Capital and Annaly Capital offer eye-popping dividend yields of 14.7% and 13%, respectively.
AGNC Investment
As a mortgage REITAGNC Investment makes its living in the margin between the interest received from its mortgage-backed securities and the interest paid on shorter-term debt.
Mortgage spreads, or the difference between 30-year mortgage rates and 10-year Treasuries, have been wider than usual. After noting that mortgage spreads are the primary driver of mortgage REIT book value, Steward initiated coverage of AGNC Investment with a Buy rating.
Steward issued a fair value estimate of approximately 6% above AGNC Investment’s recent price. Of course, with a dividend yield of 14.7%, the stock price doesn’t need to rise to produce market-beating gains for patient investors.
AGNC investors don’t have to worry much about mortgage defaults. About $62.2 billion of its $63.3 billion portfolio is tied up in securities guaranteed by a government agency in the event of default.
Before investing in AGNC assuming it can maintain its dividend forever, it is important to realize that the company uses the mortgage-backed securities in its portfolio to obtain relatively low interest rate loans.
Through no fault of the company itself, if the Federal Reserve ceases to meet demand for mortgage-backed securities, the value of AGNC’s portfolio could drop significantly. That means a collapse in the overall mortgage-backed securities market could force the company to sell a large portion of its portfolio at fire-sale prices to satisfy lenders.
Before you buy shares of this stock, be aware that investors who bought AGNC Investment 10 years ago only gained 36%, and that’s only if they reinvested all their dividends. Most income-seeking investors are wise to avoid this risky stock.
Annaly Capital
Steward also initiated coverage on Annaly Capital with a Buy rating and a fair value estimate of $21. It is a larger mortgage REIT than AGNC Investment. At the end of March, Annaly’s investment portfolio stood at $87.5 billion, of which $63.5 billion is tied up in agency-guaranteed securities.
Annaly Capital’s dividend offers a yield of 13.1% at recent prices. This is significantly lower than AGNC Investment because Annaly seems more stable. The perceived stability comes from significant revenue streams beyond its portfolio of agency-guaranteed mortgage securities.
Annaly Capital invests in mortgage servicing rights, which are assets that increase in value when the Federal Reserve raises interest rates. Annaly also has approximately $2.7 billion in residential mortgages directly on its books.
Annaly Capital is arguably more stable than AGNC Investment, but it is still too risky for most investors. The company reported negative net interest margins, which is unsustainable.
Investors who bought Annaly Capital ten years ago saw their capital drop by more than half. Those who reinvested their dividends gained just 40.6% over the past 10 years.
If Annaly fails to quickly turn around her agency-backed portfolio of higher-interest-rate assets, a dividend cut and another decade of unsatisfactory returns could be in store for investors who buy the stocks now. Most income-seeking investors also want to avoid these risky stocks.
Should you invest $1,000 in AGNC Investment Corp. right now ?
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Motley Fool has a disclosure policy.
2 Very High-Yielding Dividend Stocks That One Wall Street Analyst Says Are Smart Stocks to Buy Now was originally published by The Motley Fool
