The dividend yield on the S&P 500 has been quite low recently. At a mere 1.2%, it has neared its lowest point in over 20 years. This means that by simply investing in an S&P 500 index fund, one won't be able to generate a substantial amount of passive dividend income.
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AGNC Investment: A Real Estate Investment Trust Focused on Mortgages
AGNC Investment is a real estate investment trust that primarily focuses on investing in residential mortgages. It buys residential mortgage-backed securities (MBS), which are essentially pools of mortgages that are guaranteed against credit losses by government agencies like Fannie Mae, Freddie Mac, or Ginnie Mae. These credit protections make MBS highly secure fixed-income investments.MBS investments typically have a relatively modest return profile, usually in the low to mid-single digits. However, mortgage REITs like AGNC Investment can enhance their returns by leveraging their investments in MBS. They borrow money to finance additional MBS investments, capitalizing on the difference between shorter-term and longer-term interest rates. This enables them to make money on the spread between the two rates.Currently, AGNC Investment holds $73.1 billion in MBS assets with an average yield of 4.73%. It has a leverage ratio of 7.2 times, meaning it has borrowed more than $7 for every $1 of equity it has invested in its portfolio. This significant leverage increases its return on equity, which currently ranges from the mid to high teens. By using leverage, AGNC is able to generate more income for every dollar of equity it invests in MBS.The mortgage REIT is currently generating more than enough income to cover its substantial dividend. During the third quarter, AGNC Investment recorded $0.48 of comprehensive income per share. This compares to dividend payments totaling $0.36 per share in the quarter, with $0.12 per share paid out each month.The Risk Involved with AGNC Investment
AGNC Investment has paid over $13 billion in dividends since its formation during the financial crisis. Its dividend payment has remained stable since the pandemic, with $0.12 per share paid out each month. However, over the years, the REIT has had to reduce its dividend level on several occasions.AGNC Dividend data by YCharts shows the fluctuations in its dividend payments. The REIT has had to cut its payment during periods of significant changes in interest rates and the MBS market. While the company has faced some challenging conditions in recent years, it has managed to maintain its dividend for the past 55 months by skillfully navigating those market conditions.Looking ahead, the company believes that the recent interest-rate cuts by the Federal Reserve will have a positive impact on its business. CEO Peter Frederico stated in the third-quarter earnings press release, "The outlook for Agency MBS today is decidedly better than it was in 2022 and 2023 as a result of the positive direction of the broader economy, the accommodative Fed monetary policy stance, and the stability of Agency MBS spreads at these historically favorable levels." This gives the REIT confidence that it can continue to generate a high enough return to maintain its current dividend level.However, there is always a risk that the future may not unfold as expected. A resurgence in inflation could lead the Federal Reserve to reverse its rate cuts, and an unexpected event could have a significant impact on the MBS and credit markets. For example, no one anticipated the pandemic in 2020, which was the last time AGNC cut its dividend.An Attractive Income Investment Opportunity
AGNC Investment currently offers a dividend yield that is more than 10 times higher than the S&P 500. This makes it a potentially highly lucrative income investment option in today's market. Although it is a higher-risk dividend stock due to its use of leverage, it also presents the potential for higher returns.Investors need to carefully consider the risks and rewards associated with AGNC Investment. While it offers the potential for significant income, it also comes with the inherent risks of the mortgage market and interest rate fluctuations. However, for those willing to take on a bit more risk, AGNC Investment can be an intriguing addition to a diversified portfolio.