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AGNC Investment (NASDAQ: AGNC) currently pays a monster dividend each month. The $0.12 per share monthly payment puts its annualized dividend yield at 15.6% based on its recent stock price. That's over 10 times the S&P 500's dividend yield (1.4%).

A double-digit dividend yield can signal trouble, sometimes suggesting that the market believes a cut is coming soon. Those concerns were part of the discussion on the mortgage REIT's recent first-quarter conference call. Here's a look at the key metric the company pointed toward when discussing the dividend's safety.

Still very much in alignment

An analyst on AGNC Investment's first-quarter call asked the REIT's management team about their comfort level with the dividend, given its current return on equity (ROE) breakeven level. That metric looks at what the company needs to earn on its investments to cover its operating expenses and dividends, common and preferred.

CEO Peter Federico ran through the rough math on the call. He noted that if you focused on the dividend yield on the common stock, the ROE breakeven level is above 17%. That's a concern because he has previously noted that the company's current ROE is in the 16%-18% range, suggesting it's barely earning enough to cover its costs.

However, the CEO highlighted the current value of its preferred equity, which has a much lower yield of 7.25% before a recent upward reset. The preferred equity is "still generating a lot of incremental value for our common shareholders," stated Federico on the call. He pointed out, "If you think about it from a total cost of capital, the amount of common dividends we pay, preferred dividends, and our operating costs, and you think about that as a percentage of equity," the breakeven level comes in around 15.7%. That's below the low end of its current ROE return range. This key metric led the CEO to conclude that "our dividend level and that total cost of capital remains well aligned."

Focused on returns, not current earnings

Many companies base their dividends on their earnings, which are backward-looking. That can give investors a false sense of security. They deem the payout safe if they see that a company is earning enough to cover its dividend. However, those earnings could drop significantly in the future, putting the company at risk of needing to reduce its dividend.

That's why AGNC Investment takes a different approach. Federico stated on the call that the REIT is "setting the dividend policy based on the level of return from an economic perspective that we're seeing as opposed to the current period earnings." That's not because of any earnings shortfall. The REIT's comprehensive income in the first quarter was $0.48 per share, more than enough to cover its $0.36 per share in dividend payments during the quarter. Instead, ROE is a more forward-looking metric for the mortgage REIT. It shows what it can earn in the current environment. So, as long as its ROE aligns with its breakeven level, the REIT believes it can maintain its current dividend. That's the case today as its dividend is very much in line with its ROE breakeven level.

Because ROE matters more than comprehensive income, AGNC investors should focus on that key metric each quarter. As long as it lines up with the company's breakeven level, the payout should remain safe. However, if its breakeven starts rising above its return range, the company might need to adjust its dividend, which it has done several times in the past.

The dividend remains in alignment

AGNC Investment is currently earning a high enough return to maintain its dividend. That suggests the payout looks safe for the foreseeable future. However, the mortgage REIT's payout comes with a higher risk profile. While the elevated risk of a future reduction means this REIT isn't ideal for those seeking a rock-solid income stream, it's an enticing option for more risk-averse investors willing to stretch for a higher yield.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.