A sky-high dividend yield is often a danger sign for investors. It typically signals that the underlying company is enduring severe hardships that will likely cause it to reduce or eliminate the dividend.
However, none of that is the case with AGNC Investment (AGNC -0.11%). The real estate investment trust (REIT), which focuses on investing in agency mortgage-backed securities (MBS) -- pools of home loans insured against credit losses by government agencies like Fannie Mae -- is thriving these days. That was evident in its recently reported third-quarter financial results.
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Profiting from the Fed pivot
AGNC Investment generated $0.78 per share of comprehensive net income during the third quarter. This income, which includes both net income earned and changes in the value of investments, easily covered the mortgage REIT's monthly dividend payments of $0.12 per share ($0.36 per share in the period). The company also reported a $0.47 per share increase in its tangible net book value per share, representing assets minus liabilities and intangible items, a 6% increase from the second quarter.
Add in the dividend payments, and the REIT's total economic return on tangible common equity -- measuring total return based on actual cash and equity -- was a robust 10.6% in the period. These results represent a significant improvement from the turbulent second quarter, when the company reported a $0.13 per share comprehensive loss and a negative 1% economic return.
The catalyst driving the turnaround was the Federal Reserve's policy shift. During the quarter, the Fed lowered the federal funds rate and signaled that more cuts were coming. "The easing of fiscal policy concerns," noted CEO Peter Federico in the third-quarter earnings press release, "drove robust financial market performance and a significant improvement in investor sentiment." He highlighted that "Agency mortgage-backed securities were one of the best performing fixed income asset classes during the quarter and have now outperformed U.S. Treasuries for five consecutive months for the first time since 2013." Those strong market conditions helped drive the REIT's robust economic return in the period.
NASDAQ: AGNC
Key Data Points
Positioned to continue prospering
The good times should continue to roll for this REIT. Federico stated in the press release, "Looking ahead, several macroeconomic dynamics continue to support our constructive outlook for Agency MBS." He then ran through the factors driving this optimistic view, including the manageable supply of MBS and the growing demand for these investments as interest rates fall. This bodes well for AGNC Investment, which is the largest leveraged Agency MBS-focused investment vehicle. Federico believes the mortgage REIT is "well-positioned to generate attractive risk-adjusted returns in this evolving investment environment."
The company has strengthened its position to capitalize on improving market conditions by raising additional capital during the third quarter. AGNC Investment issued $345 million of preferred stock during the quarter -- the largest such offering by a mortgage REIT since 2021. It also issued over $300 million of its common stock at a meaningful premium to its book value, meaning it sold shares for more than the value of the company's net assets. These stock sales provide the company with a lot of capital to make new MBS investments.
AGNC has been actively deploying its capital to expand its portfolio. The REIT had $90.8 billion of assets at the end of the third quarter, up from $80.3 billion at the end of the second quarter. These new investments have increased the average yield -- the annual income from investments, expressed as a percentage of the portfolio -- from 4.87% to 4.95%, while the average cost of its repurchase agreements, short-term loans used to buy more securities, has fallen from 4.44% to 4.43%. Meanwhile, it has robust liquidity to continue expanding its portfolio, with $7.2 billion of unencumbered cash and Agency MBS at the end of the period.
The strong market environment bodes well for AGNC Investment's ability to continue paying its current dividend level, which it has maintained for over five straight years. It should enable the company to continue earning a high enough return on its investments to cover its dividend payments.
The dividend looks safe these days
Market conditions are crucial to supporting AGNC Investment's high-yielding monthly dividend payment. As long as conditions remain healthy, the REIT can easily earn a high enough return to maintain its payout. While concerns arose early in the second quarter due to market turbulence caused by tariffs, those fears have since faded, giving way to a more positive market for these investments. As a result, AGNC is thriving, which puts its big-time dividend on a much firmer foundation.
