If You Like AGNC Investment, You Should Check Out These 2 Ultra-High-Yield Dividend Stocks

AGNC Investment (NASDAQ: AGNC) is a popular income investment. It's not hard to see why that's the case. The company pays a monthly dividend that currently yields 12.8%. That's more than 10 times higher than the S&P 500 (1.2% yield).

The mortgage REIT isn't the only stock with a big-time yield these days. Starwood Property Trust (NYSE: STWD) and Main Street Capital (NYSE: MAIN) also have ultra-high dividend yields. That makes them intriguing options for those seeking to maximize their passive dividend income.

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Reducing risk through diversification

Like AGNC Investment, Starwood Property Trust is a mortgage REIT. However, it has a very different investment strategy. Whereas AGNC invests solely in Agency MBS (mortgage-backed securities guaranteed against credit losses by government agencies such as Fannie Mae), Starwood has an increasingly diversified portfolio. It has grown from a focus on commercial mortgages to investing in residential and infrastructure loans, as well as making real estate equity investments.

Starwood's diversification strategy provides two distinct benefits. It helps reduce risk while giving it the flexibility to pursue the best investment opportunities available at any given time. The company's diversification has enhanced its ability to navigate the challenges of the real estate market over the years. That has allowed it to pay a very stable dividend. Starwood has never cut its dividend in its 15 years as a public company and has maintained its current dividend level for over a decade. AGNC Investment, on the other hand, has cut its dividend several times since going public in 2008 and has maintained its current payment level only since 2020.

The REIT's most recent diversification move was the $2.2 billion acquisition of Fundamental Income Properties last year. The deal provided it with an expandable portfolio of high-quality properties secured by long-term net leases (17-year weighted-average lease terms and 2.2% average annual rent escalations). It will supply Starwood with durable, rising income, further supporting its ability to maintain its 10.9% yielding dividend.

Starwood also doesn't use as much leverage as AGNC, which helps lower its risk profile. It has a sub-3.0 times leverage ratio, compared to AGNC's more than 7x leverage ratio. While AGNC's higher leverage ratio boosts returns during a favorable market environment, it can have a negative impact when conditions deteriorate.

Dual income streams

Main Street Capital is a business development company (BDC). These entities share some similarities with REITs. They invest in debt and equity and must distribute at least 90% of their taxable net income to shareholders.

Instead of investing in real estate-backed loans, Main Street Capital primarily provides secured loans to small private companies. It will also make equity investments in its portfolio companies, which generate dividend income and offer potential for capital appreciation. The BDC invests conservatively, with its leverage ratio currently below 1x.

Main Street Capital has a unique dividend policy. Like AGNC Investment, it pays a monthly dividend. However, it sets this payment at a level it can sustain if market conditions deteriorate. As a result, Main Street has never suspended or reduced its monthly dividend. Instead, it has steadily increased the payout (136% since its IPO in 2007), including by 4% over the past year.

Additionally, Main Street Capital distributes its excess net income to shareholders through periodic supplemental quarterly dividends. While the BDC doesn't always pay a supplemental dividend, it has maintained its current rate for the past several years.

Main Street Capital's two streams of dividend income currently add up to a 7.6% annualized yield. The company's monthly dividend provides a steadily rising income floor, while the supplemental payment is a nice additional income stream that investors will receive when market conditions are positive.

Enticing income investments

Starwood Property and Main Street Capital offer investors lucrative income streams. While their dividend yields aren't as high as AGNC's, they have lower risk profiles. That makes them enticing options for those who are seeking other companies that offer big-time income streams like AGNC Investment.

Matt DiLallo has positions in Main Street Capital and Starwood Property Trust. The Motley Fool has positions in and recommends Starwood Property Trust. The Motley Fool has a disclosure policy.