AGNC investment (AGNC -0.48%) is not an easy stock to understand. It is often considered an income investment because it has a huge dividend yield of over 14%. Dividend-only investors have been disappointed by the company’s long string of dividend cuts. You need to look at AGNC differently if you want to buy it. Here’s what you need to know about this niche real estate investment trust (REIT) and why it’s not too late to buy it, but only if you know what you’re buying.

What does AGNC Investment do?

Most real estate investment trusts are relatively simple to understand. They buy properties and rent them to tenants, which is basically the same thing you would do if you were buying a rental property. However, mortgage REITs like AGNC don’t buy properties. They buy mortgages that have been bundled into bond-like securities. This has nothing to do with what a landlord does. It’s more like managing a bond fund.

The mortgage securities that AGNC buys are complex. First, they trade throughout the day, so their prices change quickly. Buildings tend to trade infrequently. Mortgage securities prices can be affected by investor sentiment, interest rates, housing market dynamics, and repayment rates, among other factors. Additionally, REITs like AGNC tend to use leverage to boost their returns, which are often backed by the value of their loan portfolio. Mortgage REITs come with a high level of risk, especially if you’re trying to live off the income your portfolio generates.

To highlight the risk, note that the dividend yield in the chart below – the blue line – has been above 10% for most of the past decade. However, the dividend itself has been steadily declining over that period. Given the math behind dividend yield, that can only happen if the share price falls along with the dividend, and that’s exactly what happened. So if you had bought for the yield, you would have ended up with less income and less capital.

AGNC data from YCharts

Why would someone want to buy AGNC Investment?

AGNC Investment is clearly not a stock that will meet the needs of an income-oriented investor. But that doesn’t mean it’s a bad investment per se. It just means it’s a poor choice for income-oriented investors. Some investors will find AGNC Investment attractive, and here’s why:

AGNC data from YCharts

Notice the blue line representing the total return in this chart. It’s up more than 500% since the company went public. And that’s despite the drop in share price and any dividend cuts. The total return assumes reinvestment of the dividend. The basic logic here is that the high dividend has allowed investors to buy more and more shares, which has led to growth in their investment over time. That’s not how most income investors think about investing, but that’s how asset managers and some larger investors like pension funds think.

When you’re trying to build a diversified portfolio, you’ll often want to invest your money in asset classes. If mortgages make up one of those classes and you want to reinvest the dividends you receive, AGNC Investment could be an attractive investment option. However, this is a very specific purpose.

AGNC Investment is more like a mutual fund than a REIT

As mentioned, AGNC is not an easy dividend stock. If you want to live off your dividend income, you should probably look elsewhere. But it is a good way to gain exposure to mortgage securities if you follow a total return approach and focus on asset allocation in particular. And since the portfolio is managed similarly to a mutual fund, there really is no bad time to buy AGNC Investment. The key is to hold for the long term and reinvest dividends to benefit from the total return potential over time.