AGNC Investment (NASDAQ: AGNC) has one of the highest dividend yields around. At over 17%, it’s more than 10 times higher than the broader market (the S&P 500‘s dividend yield is less than 1.5%).
Usually, a dividend yield that high tends to indicate that a cut is forthcoming. However, a payout reduction doesn’t seem to be in the cards for AGNC Investment. Instead, the company believes it’s a good investment in the current market.
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AGNC Investment is a real estate investment trust (REIT) that invests in mortgage-backed securities (MBS) protected against credit risk by government agencies like Freddie Mac. Because of that, they’re very low-risk investments. Given the low-risk profiles of MBS, AGNC Investment uses leverage to enhance its returns.
While utilizing leverage increases the REIT’s risk profile, it doesn’t believe this strategy will cause problems for the company amid the current market instability. Instead, CEO Peter Federico stated in the first-quarter earnings report his belief that “With our conservative leverage profile and ample liquidity at quarter end, AGNC was well-positioned for this instability.” He noted that the company ended the first quarter with “tangible ‘at risk’ leverage of 7.5x and a substantial liquidity position of $6 billion of unencumbered cash and Agency MBS.” That’s a meaningful amount of liquidity compared to its $78.9 billion investment portfolio.
There’s a lot of uncertainty in the market these days regarding the impact of tariffs on the economy. There are growing concerns that they could cause a significant recession. That could have a major impact on stock returns.
However, the picture for MBS investments is much brighter despite all the uncertainty. In AGNC’s recent earnings report, Federico commented: “In the first quarter, the prospect that potential governmental policy actions could adversely impact economic growth and accelerate inflationary pressures caused investor sentiment to turn decidedly more cautious. These concerns, in turn, initially drove a flight to high-quality assets – U.S. Treasuries, Agency MBA, and cash – from higher-risk assets such as equities and corporate debt.” That helped boost the REIT’s returns during that period. Its investment portfolio produced an economic return of 2.4%, while its stock delivered a 7.8% total return to investors despite a declining stock market.
