Are you a passive income investor looking for a stock that can still pay dividends in a recession? You might be surprised to learn that mortgage real estate investment trust AGNC Investment (NASDAQ: AGNC) has paid investors a double-digit dividend since 2022 . Keep reading to find out why this stock could be well-positioned to boost your portfolio returns during a downturn.
AGNC combines investor contributions and leveraged debt, or loans, to buy agency-backed mortgage-backed securities portfolios. The investor profits are generated through the REIT's ability to borrow money at lower interest rates than the loans in the portfolio are charging the homeowners. So, If AGNC borrows money at 4.5% to buy a portfolio of MBS at 7% APR, AGNC makes a 2.5% annual profit.
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That's not a massive return, but AGNC's careful use of leverage allows it to multiply returns by acquiring very large portfolios. A theoretical 2.5% return on tens of thousands of mortgages could still result in a healthy dividend for AGNC investors. AGNC's leadership team also employs a combination of short-term hedging and careful planning to protect themselves against higher borrowing costs.
It's no secret that high interest rates eat into mortgage REIT profits. That reality also explains why AGNC investors could potentially profit from a recession. Why? The Federal Reserve knows that maintaining the flow of capital is a time-tested way of blunting a recession's effect on the economy. That means it will likely halt interest rate increases for as long as the threat of a recession exists.
It may also lower interest rates if there is a severe recession. That could result in even higher returns for AGNC investors. AGNC's website notes that 98% of its MBS portfolios are agency-backed. This means that in addition to having collateral securing the MBS in AGNC's portfolio, AGNC offers the added security of having loans backed up by Fannie Mae and Freddie Mac.
It's also worth noting that AGNC was formed in 2008. This mortgage REIT navigated the Great Financial Crisis and the COVID-19 pandemic and continues delivering for investors. According to the company's website, AGNC has delivered an average annual return of 10% since 2008.
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Annual returns in the double-digit range are not the only factors adding to AGNC's potential appeal. It pays monthly dividends, not quarterly like many other REITs or passive income stocks. Those monthly payments will help passive income investors manage their cash flow more effectively. AGNC is currently paying a very attractive 14.75% dividend on its $9.83 share price.
That translates to $1.44 per share. If the economy continues experiencing turbulence, the likelihood of a long-term pause in rate increases, or even rate cuts, increases. Either scenario could benefit AGNC shareholders and lead to increased monthly returns. That doesn't mean there is no risk. The probability of mass defaults on AGNC portfolio assets would increase during a severe recession. With that caveat, AGNC has proven its ability to weather economic downturns.
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