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Dividend kings and dividend aristocrats get a lot of attention from investors and the media due to their prolific track record of delivering passive income. That said, there is an abundance of other stocks that can generate passive income streams. One is AGNC Investment (Nasdaq: AGNC), a mortgage REIT. This stock may not be familiar, but it has paid investors a 14% dividend for almost the last six years.
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Mortgage REITs function by purchasing large tranches of mortgage-backed securities (MBSs), many of which are backed by Fannie Mae and Freddie Mac. Because these loans are secured, their profit yield is relatively low. Mortgage REITs generate extra profit by aggressively borrowing money to acquire as many MBSs as possible.
AGNC Investment, like all mortgage REITs, ability to generate profit hinges on their ability to borrow money at a lower interest rate than the borrowers whose loans are in the MBSs are paying. If the portfolios are large enough and most borrowers pay on time, mortgage REITs can generate solid income for investors. However, the post-COVID run-up in interest rates has created difficult market conditions for many Mortgage REITs.
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Despite that, AGNC Investment has successfully paid its expected dividend through the Federal Reserve’s rate increases. This is not to say that higher interest rates haven’t impacted AGNC Investment in the past. There have been dividend cuts in this Mortgage REIT’s history. However, AGNC’s management has hedged its portfolio and stockpiled enough cash to outlast the recent rise in borrowing costs.
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It’s on a 55-consecutive-month streak of paying out investor dividends – that’s almost six straight years. Now that interest rates are declining and the market is regaining its equilibrium, AGNC Investment looks well-positioned to continue making those dividend payments that passive income investors love so much.
