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Dividend kings and dividend aristocrats receive a lot of attention from investors and the media because of their prolific track record of generating passive income. That said, there are a plethora of other stocks that can generate passive income streams. One of these is AGNC Investment (Nasdaq: AGNC), a mortgage REIT. This stock may not be well known, but it has paid investors a 14% dividend over the past six years.
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Mortgage REITs function by purchasing large tranches of mortgage-backed securities (MBSs), many of which are backed by Fannie Mae and Freddie Mac. Because these loans are secured, the profit yield is relatively low. Mortgage REITs generate additional profits by aggressively borrowing money to acquire as many MBSs as possible.
As with all mortgage REITs, AGNC Investment’s ability to generate profits depends on their ability to borrow money at a lower interest rate than the borrowers whose loans are in the MBSs are paying. If portfolios are large enough and most borrowers make payments on time, mortgage REITs can generate solid income for investors. However, the rise in interest rates following the COVID-19 crisis has created difficult market conditions for many mortgage REITs.
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Despite this, AGNC Investment has successfully paid out the expected dividend through the Federal Reserve’s rate hikes. This isn’t to say that higher interest rates haven’t affected AGNC Investment in the past. There have been dividend cuts in the history of this mortgage REIT. However, AGNC management has hedged its portfolio and built up enough cash to survive the recent increase in financing costs.
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The company is on a streak of 55 consecutive months of paying dividends to investors – that’s almost six consecutive years. With interest rates falling and the market returning to equilibrium, AGNC Investment appears well positioned to continue making the dividend payments that passive income investors love.
