Market volatility has increased significantly this year. The Trump administration's introduction of reciprocal tariffs spooked the market, causing concerns that we could be heading toward a recession. That drove investors to sell off stocks and bonds as they repositioned their portfolios to better navigate the current period of uncertainty.
These market changes have already had some impact onAGNC Investment(NASDAQ: AGNC). Despite that, the mortgage REIT remains comfortable with its current monthly dividend level, which gives it an eye-popping yield of more than 16%.
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Turbulent times
The CEO of AGNC Investment, Peter Federico, discussed the recent market shift on the company's first-quarter earnings conference call. He commented that the tariff policy announcement earlier this month "caused volatility to increase significantly across all financial markets." The issue is that "with the breadth and magnitude of the tariffs being greater than anticipated, recession fears increased materially."
As a result, stock prices tumbled, and "interest rate volatility also increased substantially. Federico noted that "This interest rate volatility and broad macroeconomic uncertainty caused normal financial market correlations to break down, liquidity to become constrained, and investor sentiment to turn negative." He also stated that the agency MBS market, which is AGNC's investment focus, "was not immune to these adverse conditions and also came under significant pressure in early April."
On a positive note, "AGNC was well prepared for the recent market volatility and navigated it without issue," stated the CEO. However, he commented, "AGNC's net asset value was negatively impacted by the mortgage spread widening."
Still at a comfortable level
Given the recent market volatility and the decline in the book value of the company's assets, an analyst on the call asked about the management's comfort level with the dividend.
Federico responded by reminding investors that AGNC's benchmark for dividend stability is its total cost of capital. He went through the math on the call:
At the end of the first quarter, our total cost of capital and the way we're calculating our total cost of capital is the dividends that we pay both on our common and preferred stock, plus all of our operating expenses divided by our total tangible capital which at the end of the first quarter was about $9.5 billion. And by that measure, it would say that the breakeven return on our portfolio to sustain all of those costs was 16.7%.
That's the return hurdle the company needed to exceed on MBS investments to maintain its dividend.
However, that was the benchmark at the end of the first quarter. The numbers have shifted since volatility increased in the early part of the second quarter. Federico stated that if you calculate it based on more recent numbers, it's "probably closer to 18%."
The good news is that the returns it can earn on MBS investments have also increased amid the market's volatility. The CEO stated that "a portfolio of swaps levered the way we lever them would generate a return in the low 20%." Federico noted that "those are historically high levels." That drives his belief that "at current valuation levels, we believe Agency MBS provide investors with a compelling return opportunity."
Given all this, and to answer the question, Federico believes that even with the recent decline in its book value, the increase in returns puts them at a level that still aligns well with its total cost of capital. The REIT remains comfortable with the current dividend level.
Still safe for now
AGNC Investment believes it can continue paying its current dividend level, even with all the recent changes in the market. It looks like an enticing option for those seeking a monster monthly income stream.
However, it is very much a high-risk, high-reward income stock. If market conditions shift again, and its investment returns no longer align with its cost of capital, AGNC might need to reduce its dividend, which it has done several times over the years. It's not the best dividend stock to buy if you're seeking a reliable income stream that can withstand future market turbulence.
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Matt 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.
