AGNC Investment (AGNC +0.94%) has a massive 15.7% dividend yield. In comparison, the 6.5% yield on offer from Bank of Nova Scotia (BNS +1.18%) seems tiny. But if you are trying to find a reliable dividend stock, you should probably go with the lower-yield stock here. This is why Bank of Nova Scotia is a better income option than AGNC Investment.
AGNC Investment just isn't reliable
There's one big reason why dividend-focused investors should stay away from AGNC Investment and its gargantuan yield -- dividend cuts. In the graph below, the orange line represents this mortgage real estate investment trust's (REIT's) quarterly dividend. Notice that it rises sharply at the start of the graph and then falls steadily over the last decade or so. That's not so great if you are trying to live off the income your portfolio generates.
Worse, look at the purple line, which is the stock price. That line generally follows the trend of the dividend. Over the past decade or so, that has meant a fairly steady decline in the value of AGNC Investment's shares. And yet, if you look at the orange line, the dividend yield has remained attractively high throughout, a function of the basic math behind dividend yields. Still, that high yield has long tempted investors despite the (obvious in hindsight) dividend cut risk that income seekers faced here.
In fairness, AGNC Investment is really meant for institutional investors that are focused on asset allocation and total return (which assumes dividends get reinvested, not spent on living expenses). So there's a place for the stock -- it just isn't appropriate for investors who are trying to live off the income their portfolios generate.
But what about Bank of Nova Scotia and its still-impressive 6.5% dividend yield? While not a REIT, it does have a finance angle to it -- and, notably, it makes mortgage loans.
NASDAQ: AGNC
Key Data Points
Bank of Nova Scotia is unique
For starters, Bank of Nova Scotia, or Scotiabank as it is more commonly known, has paid a dividend every year since 1833. That's pretty incredible and speaks to both the bank's ability to reward investors and its ability to survive massive financial dislocations, like the Great Depression and the Great Recession. Notably, during the Great Recession, Scotiabank didn't have to cut its dividend like many of the largest U.S. banks.
But what really sets Scotiabank apart is that it primarily operates in Canada, its home market, and in South America. Canadian banking markets are highly regulated, which gives Scotiabank an entrenched industry position at home. That regulation also results in a generally conservative ethos throughout its business. So it has a strong foundation from which to grow.
NYSE: BNS
Key Data Points
Unlike most of its Canadian peers, however, Scotiabank has chosen to focus on South America and not the United States for growth. There's more risk in this choice, but that's why the yield is so much higher than the average bank's 2.8% yield, using the SPDR S&P Bank ETF (KBE +0.00%) as a proxy.
If you were considering AGNC Investment, taking on a little extra risk probably won't be too much for you to handle. But, notably, relative to AGNC Investment, the risk of owning Scotiabank is fairly low. Scotiabank's risk is just higher compared to other large, conservatively run Canadian banks.
To be fair, Scotiabank is attempting to improve its financial performance on key metrics like earnings growth, return on equity, and return on risk-weighted assets. That said, a key part of the plan is to shift toward the most profitable markets it serves, which basically means Canada, Mexico, and, to a lesser extent, the United States. So Scotiabank is going to get less risky as time goes on.
In the meantime, the bank has a strong Tier 1 Capital Ratio, a measure of a bank's ability to weather adversity, of 14.8%. So there's no particular reason to believe that the investment grade rated bank can't successfully revamp its business even if economic uncertainty increases.
If you are going to take a risk, hedge your bets
Basically, AGNC Investment is an ultra-high-yield REIT with a terrible dividend history. Scotiabank is an ultra-high-yield bank with a great dividend history. And Scotiabank's management has stated clearly that it stands behind the dividend even as it works to reposition the business. From a risk/reward point of view, Scotiabank will be a much better option than AGNC Investment for most dividend investors.
