AGNC Investment(NASDAQ: AGNC) is one of the more alluring dividend stocks around. The mortgage-focused real estate investment trust (REIT) pays its investors a monthly dividend yielding an eye-popping 15%. That's 10 times higher than the S&P 500 index's 1.5% dividend yield.
Given its massive size, the company routinely gets questions about the payout's long-term sustainability. That was the case on its recent fourth-quarter conference call. Here's a look at one crucial factor the mortgage REIT's CEO highlighted on the call driving its ability to pay that monster dividend.
A crucial factor supporting the dividend
An analyst on AGNC Investment's fourth-quarter call asked the question that most income investors want answered. UBS analyst Doug Harter queried, "Wondering if you could talk about your outlook for the dividend, given the volatility you just managed through and how you're thinking about dividend levels throughout 2024?"
CEO Peter Federico answered:
A lot goes into the dividend decision. It always does in terms of the operating environment, our expectations about leverage on a go-forward basis and importantly, interest rate volatility and sort of the cost of rebalancing. But again, like I mentioned last time, another key input into that equation is what is our breakeven ROE (return on equity) on our business. When you take into account the dividends on both our common and preferred, our operating costs, what is that number on a percentage basis of our total capital. That number, for example, at the end of the fourth quarter, if you annualize those numbers is somewhere in as a breakeven ROE of around 15.5%.
As Federico pointed out, AGNC Investment's dividend hinges on its ability to earn a return on equity above its break-even level, which was 15.5% at the end of the fourth quarter. The company can't sustain its dividend for long if it isn't earning an ROE at or above that level. However, as long as its ROE is consistently at or above that level (and other factors are favorable), it can continue paying dividends at its current level.
Is AGNC Investment hitting its dividend target?
Federico then addressed whether the company is currently achieving its return target and its outlook in the current environment. He pointed out that if you look at the economics of the company's current portfolio, "I think you can conclude that mortgages are generating mid-teens ROEs given the way we're managing our portfolio." According to the CEO, the "important takeaway" from all this is that the company's ROE and current dividend level "remain relatively well aligned." In other words, AGNC Investment can maintain its big-time dividend.
However, as Federico noted earlier and last quarter, ROE isn't the only factor driving its ability to sustain its dividend. The current market environment also plays a role. While the environment has been problematic over the past couple of years, some big headwinds should start fading this year. Federico noted some favorable drivers on the horizon, including that a "decline in interest rate volatility is beneficial" to sustaining its dividend.
All of this bodes well for AGNC Investment's ability to sustain its dividend this year. It's currently earning a mid-teens return, which is right around its target. Meanwhile, the headwind of interest rate volatility is declining. As long as these factors persist and other issues don't crop up, AGNC Investment should be able to continue paying its hefty monthly dividend. However, if things change for the worse, the payout could be at risk for another reduction.
Seems safe for now
AGNC Investment offers investors a monster passive income stream. While questions remain about its long-term sustainability, the company believes its current payout level is well aligned with its returns and improving market conditions. Because of that, it should be able to continue paying its current dividend level for the foreseeable future.
However, income-focused investors still need to be aware of the risks that the factors supporting its dividend could change. If that happens, the company might need to cut its payout (which it has done in the past). That risk makes it a less-than-ideal option for those seeking a safe and sustainable income stream.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
