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AGNC Investment- High Returns in a Mortgage REIT

Mortgage REITs, also called mREITs, have been bumping along the bottom of their respective trading ranges but that underperformance could be about to change, explains Bryan Perry, income specialist and editor of Cash Machine.

The pivot by the Fed, which has bond yields trading considerably lower than at the end of 2018, changes the investment proposition to favor having some exposure to the mREIT sector.

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Reduced interest rates translate to improving fundamentals in the form of stable book values, robust housing activity and solid mortgage credit performance. Those factors are causing me to recommend a mortgage REIT with an enticing yield today.

AGNC Investment (AGNC) is a real estate investment trust primarily focused on the development of a mortgage portfolio, the majority of which are made by government-sponsored agencies like Fannie Mae and Freddie Mac.

This is a lower-risk strategy than that employed by other mREITS and has proven to be effective in producing reliable income where the stock yields a very appealing annual dividend yield of 12% and offers a monthly payout.

The high yield is more of a function of the  shares declining from $22 back in September 2018 to the current price of $18, reflecting investor concerns that rising interest rates would deter AGNC Investment's future cash flows, as higher interest rates both on the short and long end are assumed to work negatively on finance companies that borrow short and lend long.

The current landscape of rates flattening out, housing activity picking up and the Fed not having a bias on the direction of rates creates a favorable environment for mREITs and AGNC Investment in particular because of the high level of creditworthiness of the mortgages in their portfolio.

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AGNC Investment’s portfolio is leveraged around 8.6 times capital as of the end of 2018. The company also employs a wide-ranging and highly liquid hedging strategy to minimize volatility from unforeseen moves in the bond market.

The mREIT pays a monthly dividend of $0.18 per share. The $2.27 per share in forecasted earnings for 2019 and $2.36 guidance for 2020 are sufficient to support the $2.16 annual dividend.

The next ex-dividend date will fall on or around April 29 with the payment date coming in about 10 days thereafter. Let’s get long in AGNC Investment in this favorable environment for mREITs and lock in a juicy yield for our Aggressive High-Yield Portfolio.

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