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AGNC (NASDAQ: AGNC), the world's second-largest mortgage real estate investment trust (mREIT), pays a massive forward dividend yield of 17.6%. But over the past five years, its stock declined nearly 50%, delivering a dismal total return of 2%. Let's see why AGNC's stock flopped -- and where it will head higher or lower over the next five years.
As an mREIT, AGNC buys mortgage-backed securities (MBS). To generate stable profits, it borrows at short-term rates to buy longer-term MBS.
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This business model flourishes when interest rates are low, but it flounders when rising rates boost its short-term borrowing costs while reducing the value of its existing MBS. That's what happened when the Fed raised its rates 11 consecutive times in 2022 and 2023.
From 2021 to 2025, AGNC's book value per share plummeted from $15.75 to $8.88, and sank to just $7.13 per share in the third quarter of 2026. Its net spread and dollar roll income per share -- which gauges an mREIT's profitability -- dropped from $3.11 in 2021 to $1.50 in 2025.
Even though the Fed didn't raise its rates again in 2024 and 2025, AGNC couldn't simply roll its older MBS off its balance sheet. If interest rates had remained stable -- or declined -- over the following year, it could have stabilized its book value and profits. Unfortunately, the Iran war and persistent inflation prompted the Fed to raise its benchmark rates again this September.
At $8, AGNC only trades slightly above its last-known book value per share and five times its estimated net spread and dollar roll income per share for 2026. AGNC also plans to execute a $1 billion buyback plan (10% of its market cap) if its stock price drops below its book value.
Therefore, AGNC's downside could be limited at these levels if you expect the Iran war to end, inflation to cool, and the Fed to cut rates again. Analysts expect its net spread and dollar roll income per share to dip slightly to $1.49 by 2028, but it should still easily cover its forward dividend rate of $1.44 per share. However, AGNC has a history of cutting its dividends during economic downturns, and it hasn't raised its dividend since 2020.
If AGNC can hold its net spread and dollar roll per income steady at $1.50 per share through 2031, and its stock trades at ten times that estimate, its stock could rise back to $11.50 over the next five years. That steady recovery, along with its double-digit dividend yield, could help AGNC beat -- or at least match -- the S&P 500 (SNPINDEX: ^GSPC).
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Where Will AGNC Investment Stock Be in 5 Years? was originally published by The Motley Fool
