AGNC Investment (AGNC 0.21%) seems like a dream stock for dividend investors. The real estate investment trust (REIT) offers a high-yielding dividend that it pays monthly. That makes it an enticing option for those seeking income.
However, the mortgage REIT might not be the best dividend stock for everyone. Here's a look at why it might not be right for you and an alternative to consider.
A big-time mortgage-backed payout
AGNC currently pays a monthly dividend of $0.12 per share ($1.44 annualized). That gives it a dividend yield of 16.2% at its recent share price of less than $9.00 apiece. That's a hefty income stream compared to other options. For example, the S&P 500's dividend yield is around 1.6%, while the average REIT dividend is currently less than 5%.
AGNC Investments' business model is a big driver of its high-yielding payout. It's more like a bank than a traditional REIT. Instead of owning income-producing real estate, it invests in interest-paying agency mortgage-backed securities (MBS). Like a bank, it takes on a lot of leverage to fund its investments and earns a net interest margin on the spread between its borrowing costs and the income generated from its portfolio.
The REIT held $58 billion in assets at the end of the second quarter. It had a leverage ratio of 7.2. After factoring in interest costs on its borrowings, the company earned a 3.26% annualized net interest spread on this portfolio.
The company's portfolio generated $0.43 per share of net income in the second quarter. That covered its dividend outlay of $0.36 per share.
A high-risk, high-yielding income stream
AGNC Investment offers a high-yielding dividend that many income-focused investors desire. However, that higher yield comes with a higher risk profile. A big risk for AGNC is that its business model is highly sensitive to changes in interest rates. Higher interest rates make it more expensive to borrow money. That can cause the spread between its borrowing costs and interest income to narrow. While the company uses interest rate hedges to help mitigate this risk, it's not a perfect solution.
Higher costs have hit the company's income in the past. That has forced AGNC to cut its dividend several times over the years:
AGNC Dividend data by YCharts
On a positive note, AGNC has managed to keep its dividend flat over the past several years following its last cut during the early days of the pandemic.
While the company is currently generating enough income to maintain its dividend, higher rates could weigh on its earnings and ability to pay dividends in the future. That means AGNC isn't the best option for investors seeking a sustainable monthly income stream.
A better alternative
AGNC Investment is best for those willing to take on more risk for a higher-yielding monthly income stream. Those seeking something more sustainable should consider an alternative.
Realty Income (O 0.70%) is a great option for those desiring a lower-risk monthly dividend. The REIT currently offers a 6.1% yielding payout backed by a more sustainable business model.
Realty Income owns a diversified portfolio of commercial real estate net leased to high-quality tenants in industries relatively immune to economic downturns and the pressures of e-commerce. Those net leases require the tenants to cover maintenance, building insurance, and real estate taxes, which are more variable costs. That enables it to generate very steady and predictable rental income.
It pays a conservative portion of its stable rental income via its monthly dividend (a little more than 75%). That gives it a nice cushion while enabling the REIT to retain some cash to fund new investments. Realty Income also has an elite balance sheet with a relatively low leverage ratio of 5.3. That gives it additional financial flexibility to invest in income-producing real estate.
Realty Income's investments have helped grow its rental income over the years. This rent growth has enabled it to steadily increase its dividend. Whereas AGNC has cut its dividend several times over the years, Realty Income has raised its dividend 122 times since its public market listing in 1994, including for the last 104 consecutive quarters. That steady upward trend should continue as it grows its portfolio and rental income.
AGNC Investments is a high-risk, high-reward income stock
AGNC Investments isn't for everyone. While the mortgage REIT offers a very high-yielding monthly dividend, it has cut its payout several times over the years because of the impact interest rates have on its business model. Therefore, it's not the best dividend stock for those seeking a sustainable income stream. A better alternative is Realty Income, which has a long history of paying a steadily rising monthly dividend.
