AGNC Investment: 15% Dividend Yield Defies Market Challenges

AGNC Investment attracts the attention of income-oriented investors with an attractive dividend yield of 15%. The real estate investment fund, classified as a Real Estate Investment Trust (REIT), further pleases its investors with monthly dividend payments. Since April 2020, the monthly dividend has remained unchanged at $0.12. Despite these stable distributions, the AGNC stock has struggled with significant price fluctuations in recent years. The price has fallen by about 44% over the past five years. Including dividends, the total return during this period was a meager 3%. Considering the general market development, this represents a modest result, even though AGNC has managed to achieve a positive total return. To understand the mechanisms behind AGNC, investors should be aware that it is a mortgage REIT that invests in mortgage-backed securities (MBS) secured by government or quasi-government agencies. These agencies include Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are essentially government-backed, which means they carry no default risk. AGNC's earnings strategy is based on using short-term financing to acquire long-term MBS. The earnings potential lies in the interest rate differential between the financing costs and the income from MBS investments. The generated earnings are then used to pay the dividends. Since short-term financing rates can fluctuate, mortgage REITs apply hedging strategies to better align the durations of their MBS portfolios. These include interest rate swaps, among others. In recent years, hedging has played an important role, as a historically long-lasting inverse yield curve was observed. This has only recently normalized. Despite rising financing costs, AGNC was able to maintain a healthy net interest margin in the last quarter. Without hedging, portfolio returns would have been lower than financing costs.