Is AGNC Investment’s 16.5%-Yielding Dividend Still Safe? Its Earnings Are Declining, But the CEO Just Said Another Metric Matters More.

AGNC Investment (NASDAQ:AGNC) is coming off a very challenging quarter. The mortgage REIT's earnings and book value both declined during the third quarter, and it posted a negative economic return on tangible common equity. Surging interest rates drove down its share price, sending its dividend yield up to 16.5%. That sky-high yield suggests the payout is on shaky ground.

Despite all that, CEO Peter Federico proclaimed on the third-quarter earnings conference call that "I would say that our dividend continued to be well-aligned with the economics of our business." Here's a look at the conflicting metrics clouding the sustainability of its high-yielding monthly dividend.

A challenging quarter seems to put its dividend at risk

AGNC Investment faced significant pressure during the quarter as surging interest rates weighed heavily on Agency MBS investments. They were the worst-performing fixed-income sector in the Bloomberg U.S. Aggregate Bond Index during the quarter.

The poor performance of Agency MBS drove the mortgage REIT to report a $1.45-per-share decline (16.9%) in its tangible net book value per share, which ended the quarter at $7.13. The mortgage REIT also reported a -12.7% economic return on common equity in the quarter.

Meanwhile, its net spread and dollar roll income per share came in at $0.37. That's dangerously close to the $0.36 per share in dividends it paid during the period ($0.12 each month). It was the third straight quarterly decline in spread income, which was $0.42 per share in the first quarter.

Why things aren't as bad as they appear

For a typical REIT, the earnings deterioration would be worrisome. However, earnings aren't what drives AGNC Investment's dividend sustainability. CEO Peter Federico discussed the metric that matters more on the call. In response to an analyst's question about his thoughts on the appropriate dividend level in the current environment, he stated, "You've heard me say this before, but the first thing I look at is what is our total cost to capital." He noted that the company "ended the quarter probably somewhere right around 19%-ish as a total cost to capital." He then ran through how this compares to the economics of its business. Federico noted that its existing portfolio generated $0.37 per share of spread income in the third quarter, which was around a 20% return on equity at its lower book value. Meanwhile, he stated that the company can currently generate about a 19% return on equity on new investments, which also aligns with its cost of capital. This drives his view that "our dividend continued to be well-aligned with the economics of our business."

Tight but still aligned

Challenging market conditions in the third quarter weighed on AGNC's income and book value. However, it can still generate a high enough return on both its existing portfolio and new investments to cover its cost of capital, including its dividend. That suggests the payout remains safe, at least for now. If its returns start falling below its costs, that would put its dividend at risk. This showcases the risks of investing in AGNC. It currently offers a very high dividend yield due to its high-risk profile. That's the trade-off investors need to be comfortable with before buying the mortgage REIT for income.

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.