Good dividend stocks are an important pillar of a sound portfolio. Their major benefit is that they stockholders a dividend -- a share of company's earnings -- typically every quarter or month, which provides a steady stream of income. The payouts can then be used to build wealth or reinvest in the stock. The higher the dividend rate, the more income the investor earns. In addition to the dividend payments, investors can earn through the stock's long-term capital appreciation.
In a time of market uncertainty, where many believe stocks could pull back a bit, a steady dividend from a solid, stable company could help offset potential losses in the portfolio.
As this is the start of a new year, it may be a good time to reassess your portfolio. As a part of that review, you may want to consider a dividend stock that has been paying investors well in recent years: AGNC Investment Corp. (AGNC 0.31%).
AGNC is a mortgage real estate investment trust (REIT) that invests primarily in government agency mortgage-backed securities (MBS), such as Fannie Mae and Freddie Mac, through repurchase agreements. It actively manages a portfolio of about $102.6 billion in securities, of which about $99 billion is in residential mortgage-backed securities. The company, based in Bethesda, Md., generates income primarily from the interest earned on its investments.
Over the past year, the stock has been a solid, if not spectacular, performer, up about 11%. It has benefited, in part, from falling interest rates. In general, falling and low interest rates are good for residential mortgage REITs. When rates fall, net interest margin -- which is the difference between interest generated and paid out -- typically expands. Conversely, when interest rates increase, net interest margins are negatively affected.
AGNC trades around $17.75 per share and lately has been paying out $0.16 per share every month, for a dividend rate of 10.8%. Dividend yield rates over 10% are considered relatively high, as most dividend stocks pay out in the single digits. But REITs typically pay out higher dividend rates because they are required to pay out 90% of their taxable income. Case in point: AGNC's payout ratio is 89.7%.
So AGNC's dividend yield is certainly attractive at 10.8%. The question is: Can it stay there?
Good outlook for AGNC
I think AGNC remains a solid dividend stock for investors in 2020 for a few reasons. To begin, the company invests primarily in agency-backed loans, which are protected against default by Fannie Mae or Freddie Mac, so that makes it a relatively low-risk investment.
The interest rate environment also looks better than expected for 2020. Last year's rate cuts and the progress made on a trade deal with China have reduced some of the economic risks. At the Fed's last meeting in December, the board indicated that monetary policy would remain unchanged "for a time," citing a still healthy outlook for the economy in 2020. As mortgage REITs are affected by rate changes, the forecast should provide stability for the dividend rate, which has remained in the 10% to 12% range over the past few years.
While the company's payout has been steadily going down over the past few years -- from $0.22 per month in 2014 to $0.16 today -- I believe that will stabilize and perhaps even bump back up as AGNC is well-positioned for continued growth. The company generated net spread income -- which is net interest income minus operating expenses -- of $0.59 per share in the third quarter, an increase of $0.10 over the second quarter. On the third-quarter earnings call, President and CEO Gary Kain said he believes the majority of that increase is sustainable in the near term due to the optimization of its MBS holdings and the repositioning of its hedge portfolio. That metric is an important measure of dividend decisions, Kain said on the call -- as are other factors, like market conditions. Since last August, the stock price has climbed about 22%, and that's due in large part to the rate cuts.
Bottom line, AGNC still pays out a really solid dividend and, by its nature, it has to pay out a high percentage to investors. It's come through a rough patch and seems to be moving in the right direction, so it should continue to provide investors with a solid dividend in the near term.