AGNC Yields More Than 3 Times the 10-Year Treasury. Is That Enough Extra Pay for the Risk?

The 10-Year Treasury yield recently rose to 5.3%, its highest level since 2007. As a result, other fixed-income investments -- including bonds and CDs -- must raise their yields to remain competitive. Those low-risk yields will draw investors away from riskier dividend stocks.

However, dividend stocks that pay much higher yields than U.S. Treasuries could be better insulated from that rotation. So should you invest in AGNC (NASDAQ: AGNC), the mortgage real estate investment trust (mREIT) that pays a whopping forward dividend yield of 17%?

How does AGNC pay such a high dividend?

As an REIT, AGNC must pay out at least 90% of its taxable income as dividends to maintain a lower tax rate. But unlike equity REITs, which buy properties and rent them out, mREITs invest in mortgages and mortgage-backed securities (MBS) to collect interest payments.

That strategy might seem risky, but it allocates 89% of its $97.2 billion portfolio to Agency MBS (backed by Fannie Mae, Freddie Mac, or Ginnie Mae) instead of riskier mortgages. However, it's sensitive to interest rates because it takes out loans at lower short-term rates to fund its long-term MBS purchases. That gap, officially known as its net interest spread, has held stable at roughly 2% over the past year. But if the Federal Reserve continues to raise its benchmark rates, its NIM will likely shrink as its short-term borrowing costs rise.

For 2026, analysts still expect AGNC's EPS to rise 5% to $1.58 per share and cover its forward dividend rate of $1.44 per share. But for 2027, they expect its EPS to decline 6% to $1.49. If the Fed keeps raising rates and squeezing its net interest spread, it could eventually need to cut its dividend -- as it did several times over the past decade.

Why is AGNC's yield not worth the risk?

AGNC's dividend looks sustainable for now. Unfortunately, its stock has declined by 14% over the past 12 months, offsetting all of those dividends and resulting in a negative total return.

AGNC's stock is under pressure because investors expect elevated interest rates to compress its net interest margins. Therefore, most investors would rather collect a risk-free 5% yield on fixed-income plays that won't depreciate in the same way as AGNC's core business.

Over the past five years, AGNC's stock price has plummeted 46%. With reinvested dividends, it delivered an anemic 8% total return. The S&P 500 (SNPINDEX: ^GSPC) generated a total return of 90% during the same period. So while AGNC might seem like a tempting way to generate some extra monthly income, its risks easily outweigh its potential rewards.

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.