AGNC Investment (NASDAQ: AGNC) stands out for its mammoth monthly dividend. The real estate investment trust (REIT) currently yields 13.4%, more than 10 times higher than the S&P 500 (1.1% yield).
The mortgage REIT supports its ultra-high-yielding payout with a large portfolio of mortgage investments. Here’s a look at the portfolio behind AGNC Investment’s dividend.
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The portfolio supporting the dividend
AGNC Investment recently reported its second-quarter financial results, which included an update on its investment portfolio. The REIT‘s portfolio stood at $97.1 billion at the end of the second quarter, up $2.5 billion from the prior quarter. That’s the second-largest portfolio among residential mortgage REITs behind Annaly Capital, which had a $109.4 billion investment portfolio at the end of the second quarter.
The bulk of AGNC Investment’s portfolio ($92 billion or 95%) consists of fixed-rated Agency mortgage-backed securities (MBS: pools of mortgages guaranteed against credit losses by government agencies such as Fannie Mae). These primarily 30-year mortgages have a weighted-average coupon of 5.04%, up from 4.95% at the end of the first quarter. They provide the REIT with stable fixed income.
Most of the REIT’s remaining investments are Agency MBS backed by multifamily properties ($3.5 billion or 4%). AGNC also has some Agency MBS backed by adjustable-rate mortgages (ARMs: $815 million, or about 1%), as well as some other credit and non-Agency securities.
Focused on one low-risk asset class
Almost all of AGNC Investment’s portfolio is Agency MBS, which are extremely low-risk fixed-income investments. That low-risk profile allows AGNC Investment to leverage its capital to earn a higher return. It currently leverages its capital at 7.0 to 7.5 times (7.4x at the end of the second quarter). That leverage boosts its returns.
In the current market environment, the REIT can earn a return on equity of 15% to 17% on new MBS investments if it leverages its capital at 7-7.5x. That’s an attractive return compared to its current dividend level. AGNC Investment can sell stock at around a 13.5% yield and leverage that capital into new MBS investments, earning returns of 15% to 17%. That aligns with the economics of its dividend. As long as that alignment remains, AGNC can continue paying its current dividend.
