The dividend yield on the S&P500 is very low these days. At 1.2%, this is almost the lowest level in more than twenty years. Therefore, you won’t generate much passive dividend income by investing in an S&P 500 index fund.
While the S&P 500 isn’t paying much these days, a lot of other dividend stocks pay much more. One of the most impressive payouts comes from AGNC investment (NASDAQ: AGNC)which currently yields almost 15%. Here it is a look at how it can afford to pay such a lucrative dividend.
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AGNC Investment is a real estate investment trust (REIT) aimed at investing in residential mortgages. The company purchases residential mortgage-backed securities (M.B.S), these are pools of mortgages that are guaranteed against credit losses by government agencies Fannie Mae, Freddie Macor Ginnie Mae. These credit protections ensure that MBS carries a very low risk fixed income investments.
MBS investments also have a relatively low return profile (typically in the low to mid single digits). However, mortgage REITscan, like AGNC Investment, increase their returns by investing in MBS on a leveraged basis (i.e. by borrowing money to finance additional MBS investments). The company profits from the difference between shorter-term rates (where it borrows) and longer-term rates (where it invests), and makes money from the spread between the two rates.
AGNC Investment currently owns $73.1 billion in MBS assets with an average yield of 4.73%. It has a leverage ratio of 7.2 times, meaning it has borrowed more than $7 for every $1 of stock it has invested in its portfolio.
That leverage increases leverage significantly return on equitywho is currently in her mid-teens. By using leverage, AGNC can generate more revenue for every dollar of equity it invests in MBS.
The mortgage REIT is currently generating more than enough income to cover the monster dividend. AGNC Investment posted total earnings per share of $0.48 during the third quarter. That compared to dividend payments that rose to $0.36 per share ($0.12 per share per month) in the quarter.
AGNC Investment has paid out more than $13 billion in dividends since its founding during the financial crisis. The dividend payout has remained stable at $0.12 per share since the pandemic every month. However, the REIT has cut its dividend level several times over the years:
The REIT has had to reduce its payments during the crisis periods of significant changes in interest rates and the MBS market. Although the company has faced some challenging circumstances in more in recent years, it has maintained its dividend over the past 55 months by adeptly navigating these market conditions.
