On Wall Street you often make out better when you avoid extreme choices. For instance, AGNC Investment (AGNC 0.22%) is currently offering dividend investors a huge 15% dividend yield. But is that enough to make it worth buying over another real estate investment trust (REIT) with a lower yield, like W. P. Carey (WPC 2.13%), which is offering a 6% yield, which by the way is more than triple the S&P 500 average? Here's a very clear picture of why chasing yield is often a bad idea.
The short and long of it
Over the past three years, AGNC's yield has been materially higher than what you would have received from investing in W. P. Carey. For most of the time, the comparison isn't even close, with W. P. Carey's dividend yield hovering around 6% the entire time and AGNC's yield peaking at more than triple that level.
Data source: YCharts AGNC Dividend Yield
Investors comparing these two REITs on yield alone would have picked AGNC every day of the trading week. But, when you look at the stock returns and the total return, which includes the reinvestment of dividends, that choice would have been a big mistake.
Look at those numbers! AGNC's stock price has fallen 27% over the past three years compared to a gain of 27% for W. P. Carey. That's more than a 50 percentage point difference. And even if you reinvested the big dividends from AGNC, which is total return, you would have still come up short. Over the past three years AGNC's total return was basically zero compared to W. P. Carey's total return of 50%. That disparity tracks over the past decade, as well. So this isn't just a short-term phenomenon.
What's going on?
One of the most important factors here is that AGNC is a mortgage REIT and W. P. Carey is a more traditional landlord that owns physical properties. Mortgage REITs such as AGNC own portfolios of loans that have been pooled into what are often called collateralized mortgage obligations (CMOs). These are like bonds and are affected by interest rate changes, supply and demand (they trade openly on public securities exchanges, unlike illiquid physical properties), and housing market conditions. It is a very complex type of investment and over the past decade the company's dividend payout has been heading steadily lower, taking the stock price along with it.
By comparison, W. P. Carey's dividend has headed steadily higher as it has continued to expand the size of its property portfolio. In fact, the REIT has actually increased its dividend each and every year since its initial public offering in 1998. The stock price over the past decade hasn't exactly been all that rewarding, but it has held up much better than AGNC's stock. And when you add in the dividend, despite the vastly lower yield, the total return is much better. Simply put, AGNC's yield has only remained high amid dividend cuts because the stock price has plunged.
This isn't to suggest that AGNC is a bad mortgage REIT. Other mortgage REITs have performed very similarly, such as Annaly Capital. The real takeaway is that mortgage REITs aren't a great option for investors looking to live off of the dividends their portfolios generate. Traditional property-owning REITs will likely be a better option. And, on that score, sticking to industry-leading names with long histories of annual dividend growth behind them, a list that would include W. P. Carey, is probably better still.
This is all about risk versus reward. And, much too often, the highest yield ends up being a poor, and risky, choice. A lower yield from a slow and steady performer can, and often does, win over the long term.
Tread with caution
If you are looking at AGNC because of its huge yield, that's fine. Just make sure you understand that the business is complex and the dividend has proven to be less than reliable. That may be fine with you, but for most dividend investors it won't be acceptable. A stock such as W. P. Carey will likely be the better choice, as it has been over the past decade.
