AGNC Investment Is Joining the S&P MidCap 400 Index. Here's What That Means for Its 14%+ Yield.

AGNC Investment (NASDAQ:AGNC) joined the S&P MidCap 400 Index before the market opened on Sept. 21 as part of its quarterly rebalancing. That's an important milestone for the real estate investment trust (REIT). It has grown large enough to be a constituent in a key benchmark for mid-sized companies. As a result, it also gains a spot in the S&P Composite 1500, S&P 900, and the S&P 1000 indexes.

Here's what index inclusion means for the mortgage REIT and its high-yielding dividend (14.6% current yield).

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What index inclusion means

The S&P MidCap 400 is an index designed to measure the performance of 400 mid-cap U.S. companies. It's distinct from the large-cap S&P 500, which many view as the default benchmark of the U.S. stock market. It focuses on midsized companies that haven't yet reached the size and scale of their large-cap peers.

AGNC's CEO, Peter Federico, called the REIT's inclusion in this index "an important milestone for the company," in a press release announcing its addition. He went on to say: "Inclusion in this widely followed index is a testament to the scale AGNC has attained over our 18-year history. Since inception, AGNC has been a significant source of private capital for the U.S. housing market, and we have remained steadfast in our focus on delivering attractive yield-driven total returns for our stockholders through a specialized approach to Agency MBS investing."

One of the benefits of index inclusion is that it will automatically increase the institutional ownership of the REIT's stock, as index funds and ETFs tracking the index must buy shares. For example, the Vanguard S&P Mid-Cap 400 ETF passively tracks this index and will purchase shares of AGNC Investment in its ETF.

What does it mean for the REIT's big-time dividend?

Index inclusion won't directly impact AGNC Investment's dividend. The REIT currently pays $0.12 per share each month, and this amount will remain unchanged. It has maintained that monthly dividend rate since reducing its dividend to that level in April 2020.

While the monthly rate hasn't changed, the yield has steadily risen due to the 20% slump in its share price from its high earlier this year. That's due to the challenging market environment this year, as the war with Iran is causing a resurgence in inflation, which recently led the Federal Reserve to hike interest rates for the first time in three years. Mortgage REITs are highly sensitive to changes in interest rates.

The index inclusion should provide some additional price support. That would make it easier for the REIT to raise equity capital. Unlike other REITs, the key factor driving dividend sustainability for AGNC Investment is its ability to earn a return on equity above its cost of capital (operating costs and dividend payments). The company noted on its second-quarter earnings conference call that its current returns are in the 15% to 17% range, which Federico stated: "aligns really well with the economics of our dividend."

It won't impact the dividend

Index inclusion is an important milestone for AGNC Investment, especially as more investors favor passive investments like ETFs. However, it doesn't automatically make its dividend safer. AGNC will always be a higher-risk income stock due to its exposure to interest-rate fluctuations, which can significantly affect returns on its mortgage investments. If its returns fall out of alignment with its costs, it might have to cut its dividend again.

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.