This Stock Offering a 14.5% Dividend Yield has Maintained Its Distribution for 58 Successive Months. Will This Sequence Persist in 2025?
Higher-yielding stocks, like AGNC Investment with its 14.5% current yield, can worry investors due to concerns about dividend sustainability. Fortunately, AGNC has maintained its dividend streak for 58 months without fail. Let's delve into why this mortgage-focused REIT believes in continuing this trend.
Crunching the Numbers
Mortgage REITs operate by investing in real estate debt and capitalizing on the spread between short-term and long-term rates. They also hedge their interest rate exposure, making financial results complex and difficult to analyze.
Recently, AGNC reported a comprehensive loss per share last quarter, which includes a loss related to mark-to-market changes. However, the company's full-year numbers revealed a disappointed $0.84 earnings per share, well below the $1.44 it paid in dividends the previous year.
Lifting the Veil
CEO Peter Federico clarified that current period earnings aren't relevant for determining the dividend policy, emphasizing the importance of focusing on long-term portfolio economics. The company aims to align the dividend with the returns from its investment portfolio over the long term.
When looking at ROE and total cost of capital, AGNC needs to generate returns above its hurdle rate for maintaining the dividend. Currently, the company can achieve ROEs between 17% and 18.5%, ensuring its affordability at present and beyond.
Sustainability of the Dividend
Dividends at AGNC Investment aren't based on current earnings. Instead, the focus is on the future returns the company's strategy can generate. As AGNC's portfolio benefits from favorable investment themes and lowering short-term interest rates, investors should expect the dividend stability to continue.
However, investors must monitor the REIT's returns, considering their impact on the dividend's long-term sustainability. Analyzing enrichment data can helps us understand the challenges and strengths affecting AGNC's ability to sustain its dividend yield:
- AGNC's high ROE and efficient debt management contribute to its high dividend yield by maintaining a low cost of capital.
- Despite impressive ROE, its variability over time poses a challenge, with periods of strong financial performance giving way to challenges affecting dividend sustainability.
- Interest rate sensitivity means falling interest rates could benefit AGNC by re-rating its mortgage-backed securities portfolio, driving stock price appreciation.
- However, rising interest rates could negatively impact the portfolio's value and the company's ability to maintain high dividends.
- AGNC's current high stock price relative to tangible net book value increases the risk of outpaying, which could impact the long-term sustainability of high dividend yields.
Investors should keep an eye on AGNC's portfolio returns, as they play a crucial role in maintaining the dividend's long-term sustainability. The company's high ROE, efficient debt management, and interest rate sensitivity can contribute to its dividend yield, but their variability and sensitivity to interest rates are factors to consider.
Investing in AGNC Investment involves scrutinizing the impacts of these elements, such as the variability of ROE and the effect of interest rate changes on the portfolio's value, to determine the REIT's ability to sustain its high dividend yields in the future.