It is hard to pass up a big yield, but sometimes an ultra-high dividend yield is a sign of risk. That's the case with AGNC Investment (AGNC 0.61%), which is offering a massive 15% yield. You would be much better off lowering your yield expectations and buying out-of-favor Realty Income (O +0.71%). Its 5.9% yield isn't nearly as enticing, but you can actually count on it. Here's why you should forget about AGNC and buy Realty Income instead.
One graph is all you need
There's that old saying that a picture is worth a thousand words. Well, in the case of AGNC Investment, that picture is actually a graph, which you'll see below. To summarize the image in as few words as possible, the dividend is highly variable and has headed steadily lower for at least a decade. The stock price has followed along for the ride, trending lower and lower as well.
What's interesting is that the dividend yield (the blue line) has remained fairly high all along. That's just the basic math of dividend yields, but it means that AGNC is regularly popping up on dividend yield screens even though an investment here would have left dividend investors with less income and less capital over the past decade. That's about as bad as it can get for an investor trying to live off of the income their portfolio generates.
Most investors should pass this stock by and instead consider a reliable dividend stock like Realty Income.
Realty Income is a dividend machine
Realty Income and AGNC are both real estate investment trusts (REITs). But AGNC is a unique type of REIT that buys mortgage securities, a complex and high-risk niche in the REIT space. Realty Income is much more boring; it buys physical properties that it leases out to tenants. Virtually all of its portfolio is net lease, which means that a single tenant is leasing a property and that the tenant is responsible for most property-level operating costs. Although any single property is high risk, across a large portfolio, the risk is very low. Realty Income is the largest net lease REIT, with a portfolio of more than 15,000 properties.
O Dividend Per Share (Quarterly) data by YCharts
The yield, at around 5.9%, is near its highest levels of the past decade, which suggests that now is an attractive time to buy Realty Income stock. The first question you should ask is, "Why is the yield historically high?" The answer is that interest rates have gone up, increasing the cost of capital for Realty Income (and other REITs). That is a headwind for sure, but property markets have historically adjusted to interest rate shifts and are likely to do so again.
Meanwhile, Realty Income is the largest net lease REIT by a wide margin. It is more than twice the size of its next-closest competitor, giving it a size advantage when it comes to buying new assets. In fact, it has bought up a couple of REIT peers in recent years, adding industry consolidation to its growth opportunities. Helping the bullish thesis is an investment-grade balance sheet and an increasingly diversified portfolio, including a growing presence in Europe.
NYSE: O
Key Data Points
The proof of the company's success is found in the dividend, which has increased for 29 consecutive years. While the annualized dividend growth rate is modest, coming in at roughly 4.3% over that span, it is pretty clear that income investors can count on Realty Income to keep paying through thick and thin. If you are looking for a sustainable high yield, Realty Income is a much better choice than AGNC.
Be careful what you wish for
If all you do is look at a stock's dividend yield, you risk setting yourself up for severe pain. AGNC is a good example of this. Its yield remained high even as it was regularly cutting the dividend payment. Realty Income will serve dividend investors much better, if history is any guide. And the fact that the REIT is out of favor today, and offering a historically high yield, is a long-term opportunity that you shouldn't overlook.
