AGNC Investment (AGNC 2.37%) is not your typical real estate investment trust (REIT). It doesn't own physical properties, but rather invests in a portfolio of mortgage securities. That makes it more similar to a mutual fund than to a traditional REIT, and the difference has material implications for investors. If AGNC Investment's massive dividend, which currently yields 14.2%, looks tempting, there's one big factor you need to be aware of.

What's a REIT worth?

Technically, there isn't a big difference in the way you would think about the value of a property-owning REIT and the way you should think about the value of a mortgage REIT (mREIT). Both types of business own income-producing assets. And in both cases, the value of the company is, essentially, the value of the underlying assets that it owns.

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There's just one wrinkle: Physical properties don't change hands often, so it's harder to value them. Any estimate of what a property-owning REIT's underlying value is will be a rough estimate, at best. However, AGNC Investment owns mortgages that have been pooled into bond-like securities. These assets are traded continuously, and their value is relatively easy to determine. AGNC Investment actually reports that value publicly every quarter, using a metric dubbed tangible net book value per share.

At the end of 2024, its tangible net book value per share was $8.41. That was down $0.41 from $8.82 at the end of the third quarter. Clearly, this is an important number for investors to monitor because it is, effectively, what you are buying when you pay for the stock. 

However, AGNC Investment's stock price often diverges meaningfully from its tangible net book value per share.

AGNC Investment's big rally

Heading into the end of 2024, AGNC Investment's share price fell sharply to $9.12 per share. That was still above the tangible net book value per share, but it was clearly heading toward that figure. As the new year got underway, however, the price of the stock started to rally toward a recent level around $10.25 per share. That is far above its net tangible book value per share.

AGNC data by YCharts.

It makes sense for investors to be optimistic if they believe that something in the market will change to increase the value of the mortgage securities that AGNC Investment owns. The list of possible catalysts for such a change includes interest rates, housing market dynamics, and mortgage repayment rates, among others. However, if you are thinking about buying shares of AGNC Investment right now, you should probably do a reality check, and ask yourself this question: Has enough changed in the market that AGNC Investment's tangible net book value per share has increased from $8.41 per share to around $10.25? That's a nearly 22% difference, which is massive.

It seems unlikely that this type of increase has taken shape in less than three months. To be fair, a wide divide between the mortgage REIT's tangible net book value per share and its market cap is actually a net benefit to AGNC Investment. It allows the REIT to sell essentially overpriced shares and invest the proceeds into mortgage securities. Effectively, management can buy more mortgage securities than it would have been able to if the REIT traded at its tangible net book value per share.

Are you the one overpaying?

The problem for an investor who is buying when the stock price is way above the last reported tangible net book value per share is that it suggests that the new investor is the one overpaying. The benefit to AGNC Investment is, basically, coming at the new shareholder's expense. And unless that new investor expects the mREIT's tangible net book value per share to increase dramatically, they are just giving extra money to existing shareholders for no particular reason.

AGNC Investment isn't a bad company, and its stock has a place in some portfolios. But it's also a complicated company to understand, and to make a fully informed investment decision about it requires looking beyond the huge 13%-plus dividend yield. Right now, given its most recently provided tangible net book value per share figure, it seems like buying this mREIT would be a costly decision.