The dividend yield on the S&P 500 is very low today. At 1.2%, it’s near its lowest level in greater than 20 years. Due to that, you will not generate much passive dividend income by investing in an S&P 500 index fund.
While the S&P 500 doesn’t pay much today, loads of other dividend stocks pay lots more. One in every of the more impressive payouts comes from AGNC Investment (NASDAQ: AGNC), which currently yields almost 15%. Here’s a take a look at how it will possibly afford to pay such a lucrative dividend.
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AGNC Investment is an actual estate investment trust (REIT) focused on investing in residential mortgages. The corporate buys residential mortgage-backed securities (MBS), that are pools of mortgages guaranteed against credit losses by government agencies like Fannie Mae, Freddie Mac, or Ginnie Mae. Those credit protections make MBS very low-risk fixed-income investments.
MBS investments even have a comparatively low return profile (typically within the low- to mid-single digits). Nonetheless, mortgage REITs, like AGNC Investment, can enhance their returns by investing in MBS on a leveraged basis (i.e., borrowing money to finance additional MBS investments). The corporate capitalizes on the difference between shorter-term rates of interest (where it borrows) and longer-term rates (where it invests), being profitable on the spread between the 2 rates.
AGNC Investment currently holds $73.1 billion in MBS assets with a median yield of 4.73%. It has a leverage ratio of seven.2 times, meaning it has borrowed greater than $7 for each $1 of equity it has invested in its portfolio.
That leverage significantly increases its return on equity, which is currently within the mid to high teens. Using leverage enables AGNC to generate more income for each dollar of equity it invests in MBS.
The mortgage REIT is currently generating more-than-enough income to cover its monster dividend. AGNC Investment recorded $0.48 of comprehensive income per share through the third quarter. That in comparison with dividend payments adding as much as $0.36 per share within the quarter ($0.12 per share every month).
AGNC Investment has paid over $13 billion in dividends since its formation through the financial crisis. Its dividend payment has been stable because the pandemic at $0.12 per share every month. Nonetheless, the REIT has reduced its dividend level several times through the years:
The REIT has needed to cut its payment during periods of significant changes in rates of interest and the MBS market. While the corporate has faced some difficult conditions in more recent years, it has maintained its dividend for the past 55 months by adeptly navigating those market conditions.