The second quarter got off to a rocky start following the Trump administration's "Liberation Day" tariff announcement in early April. Stocks and other financial assets initially tumbled due to increased uncertainty about how tariffs might impact the economy. However, most financial assets recovered throughout the quarter as the administration ultimately delayed its tariff plan.
Agency mortgage-backed securities (MBSes) -- residential mortgage pools protected against default risk by government agencies like Fannie Mae -- were the exception as they underperformed. While this negatively impacted AGNC Investment's (AGNC 0.94%) results, it did not alter the company's outlook on its 15%-yielding monthly dividend.
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Navigating a challenging period
Interest rate volatility and a sharp negative turn in investor sentiment posed challenges to the mortgage market during the quarter. Those issues weighed on the value of MBS assets. As a result, AGNC Investment reported an economic return of negative 1% in the period, while it posted a comprehensive loss of $0.13 per share.
Despite those negative headline numbers, the mortgage REIT navigated the quarter's challenges effectively thanks to its robust risk management and strong liquidity. This allowed AGNC to preserve its portfolio and add assets at attractive levels. Its solid preparation heading into the period allowed the company to sustain its massive monthly dividend despite the volatility.
A favorable outlook
While the MBS market experienced some turbulence last quarter, it's still an attractive investment market. "We continue to have a favorable outlook for levered and hedged Agency MBS investments," said AGNC Investment CEO Peter Federico in the second-quarter earnings press release. He noted that "mortgage spreads to benchmark rates remain elevated by historical standards and range-bound, an extremely favorable return environment." Further, he remarked that the supply of MBSes is in balance with demand, which should strengthen as anticipated regulatory changes allow banks to increase their MBS investments.
AGNC Investment believes these positive market conditions will continue even if the Trump administration makes changes to the status of mortgage agencies Fannie Mae and Freddie Mac. The administration has floated the idea of ending the Federal conservatorship of those entities by taking them public. However, the administration has made it clear that it plans to preserve the pristine credit profile of agency MBSes. AGNC Investment believes this move would be a positive step for the mortgage markets and MBS investments, as it could help lower costs.
Meanwhile, despite the recent turbulence in the mortgage market, AGNC continues to earn a high enough return on its MBS investments to cover its cost of capital (its operating costs plus dividend payments). Federico noted on the second-quarter earnings conference call that in the current environment, AGNC is earning a return on equity of around 19%. While that number fluctuates from quarter to quarter, it currently aligns well with its cost of capital, suggesting it can continue to pay its current dividend level.
Additionally, the mortgage REIT sold 92.6 million shares of its common stock during the second quarter, raising $799 million in proceeds. It put about half that capital to work in the period by opportunistically investing in MBSes. As it continues to accretively deploy that capital, it will further boost its returns in a way that supports its dividend. AGNC plans to continue seeking accretive opportunities to raise capital and increase its scale, which will help lower its operating costs and therefore, its cost of capital.
A higher-risk, high-reward passive income stream
AGNC Investment stands out for its massive 15%-yielding monthly dividend, which remains safe even amid recent market turbulence. By seizing opportunities to expand its MBS portfolio during a turbulent period and maintaining its disciplined risk management, AGNC has demonstrated its ability to sustain this high-yield payout.
Despite all that, this ultra-high-yield REIT may not be suitable for everyone. It has a higher risk profile that investors must watch closely. However, for those with a higher risk tolerance, it can potentially provide them with a huge reward in the form of its lucrative monthly dividend.
