“Don’t judge a book by its cover” is an old adage that should be followed when considering high yield stocks. A good example is about a 15% yield on withdrawals History of AGNC Investment(NASDAQ: AGNC). It is, in fact, too good to be true if you want reliable cash flow. Most investors may be better off Realty Income(NYSE: O) and its yield is 5.6%.
There is nothing wrong with AGNC Investment. The mortgage real estate investment trust (REIT) has done a respectable job of generating solid returns for its shareholders over time. But investing for absolute returns is very different from investing.
If you are investing to earn money, you may want to collect and use the shares that the company distributes. If you’re investing to get a full return, you’ll need to reinvest profits to maximize your earnings. That distinction is important because AGNC Investment does not act like a typical real estate REIT. Think of it more like an institution that invests in mortgage loans, which are difficult things to invest in. Just look at the graph below and you will see why using the high income stream provided by AGNC Investment would be a bad choice.
AGNC data and YCharts.
The blue line is the dividend, which rose sharply after the REIT’s IPO and then began to decline. The purple line is the stock price, which closely followed the dividend. If you’ve used your shares along the way, you’ll be accumulating less money and have a position that’s a little more valuable as well. But the return line is much higher because large stocks have more than made up for the decline in stock prices as AGNC Investment bought and sold mortgage securities over time. But you will only get that return if you reinvest the results.
There is an argument to be made that the accumulated dividends over time caused a decrease in the value of the shares, as the increase in dividends and the end of the share price would have left investors with about $300,000 of the initial $10,000 investment. However, if you use shares at living costs you will still spend the period with less income due to the dividend cut and loss of assets on your initial investment. It’s not a win-win for anyone looking for money.
AGNC Investment is suitable for a small group of investors, but that group does not include people looking for reliable investments.
At the other end of the reliable-income-stream spectrum is Realty Income. This net lease REIT has increased monthly payments for 30 consecutive years. It has even increased its own dividends for more than 100 consecutive quarters. It’s probably as close as you can get to a stock that can replace a paycheck. Add in its attractive yield — 5.6% at the current share price — and it’s clear why investors should be digging deep.
Net lease REITs are typically self-leasing properties in which the owners are responsible for the property’s operating capital. While any personal property can carry the risk of a tenant falling behind on their rent, the larger the portfolio, the lower the risks. With a portfolio of more than 15,400 properties, Realty Income is the largest net rental REIT. It also has an investment-grade-rated balance sheet. As a result, it often has easier access to larger markets at more attractive prices than its smaller peers. That, in turn, allows Realty Income to be more aggressive when it comes to acquisitions.
There are challenges in being a player in the net lease sector. More importantly, it takes multiple transactions to meaningfully increase the Realty Income lines above and below. However, with a portfolio spread across the United States and Europe, and with an increasingly broad list of property types in the portfolio (management has recently added casinos and data centers to the potential set), Realty Income has many growth levers to pull. So investors should expect its slow and steady growth to continue.
If you’re an investor looking for a reliable long-term dividend stock, you’ll want to consider adding Realty Income stock to your portfolio, despite the fact that it hasn’t outperformed AGNC Investment in the past few months. It won’t make you happy, but it will give you an attractive way to pay while allowing you to sleep well at night. AGNC Investment, on the other hand, is not really designed to provide reliable dividends over time. Buying its high yield can leave you tossing and turning because of the real risk that another dividend cut will come one day and raise the financial issue.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
1 High-Yield REIT Stock to Buy Hand Over Fist and 1 to Avoid previously published by The Motley Fool.
