For the first half of 2024, the market was led higher by a narrow group of mega-cap tech stocks as capital investment into Artificial Intelligence (AI) has been the center of attention. And rightly so. Now, bulls are embracing a broadening out of sector participation. I like AGNC Investment Corp. (AGNC) here, explains Bryan Perry, editor of Cash Machine.
The spending on AI is historic — some $200 billion alone this year that will mushroom to over $1 trillion by 2028, and possibly $2 trillion by 2030. AI is transformational progress in motion that will make the economy more efficient and companies more productive and profitable.
The good news of late is that disinflation is starting to show up in some of the economic data, which has the bond market firming up with yields coming down. The yield on the benchmark 10-year Treasury is at 4.20%, 53 basis points lower from where it was trading in late April. Clearly, the bond market senses rate cuts by the Fed are imminent, even as the latest consumer sentiment survey shows ongoing concerns about inflation and home affordability.
AGNC Investment Corp. (AGNC)
As for AGNC, it is one of the largest mortgage Real Estate Investment Trusts (mREITs). It stands to benefit from potentially tighter mortgage spreads as fixed income volatility eases and rates begin to come down.
AGNC’s business revolves around investing in agency mortgage-backed securities. These investments are underwritten with collateralized borrowings in the form of repurchase agreements (repos). Interest is generated from the company’s investments, and the difference after paying their borrowing costs is what funds the dividends.
Investing in mREITs that borrow short-term repos and are leveraging 30-year, investment-grade, agency mortgage-backed securities in a market where yields are trending lower has historically been a winning trade, as book values tend to rise in this environment. If the Fed does embark on a streak of rate cuts over the next year, liquid government debt instruments will appreciate.
AGNC trades at around $10.50 per share and pays a $0.12 monthly dividend, or $1.44 per year. That equates to a recent yield of 13.7%. The dividend has been stable over the past year, with the next ex-dividend date scheduled for July 31.
Recommended Action: Buy AGNC.
