Key Points

AGNC Investment focuses on low-risk Agency MBS.
The mortgage REIT employs leverage to enhance returns.
This approach has enabled 75 straight months of dividend payments at the current level.

AGNC Investment (NASDAQ: AGNC) is known for its substantial monthly dividend. The REIT offers a yield of 13.4%, significantly higher than the S&P 500's 1.1% yield.

The mortgage REIT backs its high dividend with a substantial portfolio of mortgage investments. Here is an overview of the holdings supporting AGNC Investment's dividend.

The Portfolio Behind the Dividend

AGNC Investment disclosed its second-quarter results, providing details on its investment holdings. The portfolio reached $97.1 billion by the end of the quarter, an increase of $2.5 billion from the previous period. This makes it the second-largest among residential mortgage REITs, following Annaly Capital's $109.4 billion portfolio.

The majority of the portfolio, $92 billion or 95%, comprises fixed-rate Agency mortgage-backed securities. These are pools of mortgages protected from credit losses by agencies like Fannie Mae. Primarily 30-year mortgages with a weighted average coupon of 5.04%, up from 4.95% previously, they deliver steady fixed income.

The rest includes Agency MBS for multifamily properties ($3.5 billion or 4%), adjustable-rate mortgages ($815 million or 1%), and other credit and non-Agency securities.

Emphasis on a Low-Risk Asset Class

Nearly the entire portfolio consists of Agency MBS, which are very low-risk fixed-income assets. This profile permits AGNC to use leverage, currently at 7.0 to 7.5 times (7.4x at quarter end), to amplify returns.

In today's market, the REIT can achieve a return on equity of 15% to 17% on new MBS investments with that leverage. This is appealing relative to the dividend. AGNC can issue stock at about 13.5% yield and invest the proceeds into MBS for higher returns, supporting the dividend sustainability.

AGNC's Approach Delivers Results

By concentrating on Agency MBS, AGNC Investment maintains a low-risk stance while using leverage wisely to generate income for its high yield. Although leverage adds risk, the REIT has managed market conditions effectively, sustaining dividends for 75 consecutive months. The strategy should continue benefiting investors absent significant changes in returns on levered Agency MBS.