A sky-high dividend yield is often a warning sign that a company's dividend payment is unsustainable. However, that's not always the case.
AGNC Investment (AGNC 2.62%) currently yields over 13%, more than 10 times higher than the S&P 500's dividend yield of 1.1%. The real estate investment trust (REIT) has maintained its current monthly dividend payment for several years, a trend it expects will continue.
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The dividend remains in alignment
AGNC Investment currently pays its investors $0.12 per share a month. The mortgage REIT has paid that monthly rate since April 2020.
The REIT supports its monthly dividend by investing in Agency residential mortgage-backed securities (MBS), pools of mortgages guaranteed against credit losses by government agencies such as Fannie Mae. AGNC invests in Agency MBS on a leverage basis, primarily through repurchase agreements. This investment strategy increases its returns and risk profile.
AGNC Investment can maintain its dividend as long as its investment returns align with its cost of capital (dividend payments and operating costs). In the current environment, the REIT is earning a return on equity in the 16% to 18% range. Meanwhile, its cost of capital is currently up to around 17% after it issued new equity in the quarter. As a result, its dividend remains in alignment with its costs.
NASDAQ: AGNC
Key Data Points
Further, the recent quarter marks what the company believes will be a low point for its earnings, which declined due to market conditions and the drag of issuing new equity during the quarter. It expects its earnings to improve in the future, enhancing the sustainability of its dividend.
While AGNC Investment is a higher-risk dividend stock, it believes it can continue to pay its current monthly dividend. That makes it one of the rare stocks with a 10%+ yield that actually pays these days.
