The big draw for AGNC Investment (AGNC 0.97%) is its 15% dividend yield. But you have to step back and understand why that yield is so high. When you do that, you'll realize that the lower 6% yield from fellow real estate investment trust (REIT) Realty Income (O -0.17%) is likely to be a better choice for most dividend-focused investors.
AGNC isn't a traditional REIT
REITs were designed to pass income from institutional-level real estate investments on to everyday investors. The basic concept is sound since small investors wouldn't be able to buy a diversified portfolio of large properties. But all REITs are not created to own the same things. For example, some buy offices and others apartments. But there's another sub-sector that really flips the script: mortgage REITs.
A mortgage REIT like AGNC doesn't buy property at all. It buys mortgages that have been pooled together into bonds, often referred to as collateralized mortgage obligations (CMOs) or something similar. These are institutional-level investments, but they are very different from an investment in a physical building.
CMOs trade all day and can be very volatile. The interest paid on these securities comes from the interest payments made on the individual mortgages within the CMOs. Repayments, refinancings, interest rates, and housing market conditions all have an impact on the income and price of a CMO. They are complex. Physical property is generally bought and held for long periods of time, thus providing consistent cash flows to support REIT dividends. That's comparatively simple.
The high yield on offer from AGNC is really a function of the risk inherent in the mortgage REIT sub-sector. To highlight this you just have to look at a graph of the dividend over the past decade. Now compare that to the dividends investors collected from Realty Income. Which would you rather own in your passive income portfolio?
AGNC Dividend Per Share (Annual) data by YCharts
Dividend, dividend yield, and share price
If the dividend chart above isn't enough to convince you that Realty Income is a better dividend option, then the next couple of charts should seal the deal. The chart below shows that as AGNC's dividend has headed steadily lower over the past decade, so too has its share price. That, in turn, has allowed its dividend yield to remain high the whole time, often in excess of 10%.
The same chart for Realty Income shows that, despite some price volatility, the dividend and the price have generally trended higher. The yield, meanwhile, remains roughly in a range between 3.5% and 6%. It is at the higher end of that range today. But the bigger question to ask yourself is, "Which stock would I rather have in my dividend portfolio?" The answer should probably be Realty Income if you are trying to live off the passive income stream you are creating and hope to leave some assets behind for your heirs.
You could argue that you really need to consider total return, which assumes reinvested dividends, given the big yield difference. But even here, Realty Income comes out way ahead despite its far lower yield, as the next chart highlights.
AGNC Total Return Level data by YCharts
There are investors who might find AGNC appealing, but they are likely to be institutional investors, like pension funds. And the reason to own AGNC centers around asset allocation, not its ability to provide a reliable dividend. For most small investors, it just isn't a great choice.
Building a reliable dividend portfolio
Realty Income is a large and well-respected REIT with a long history of regular dividend increases behind it. To some degree, it is cherry-picking to compare it to AGNC, which has a long history of dividend cuts. However, it highlights the point that AGNC isn't a great option for income-focused investors looking to live off of the income generated from a portfolio of dividend stocks.
That said, given the historically high yield Realty Income is offering today, it does look like it could be a good time to consider it as an investment alternative to AGNC.
