Federal Realty Investment Trust (FRT +0.24%) and AGNC Investment (AGNC +1.75%) are both structured as real estate investment trusts (REITs). But that's where the similarities end. However, comparing these two dividend payers is actually quite important because it highlights the difference between investing for yield and investing to create a reliable income stream. Here's what you need to know before you buy either one of these high-yield stocks.
What does Federal Realty do?
Federal Realty is actually a pretty simple company to understand. It owns strip malls and mixed-use properties, an asset type that usually includes retail, housing, and office space. It leases out the properties it owns to tenants and collects rents. The REIT has a focus on quality over quantity, owning only about 100 properties or so. That's a bit different from its peers, which usually focus on growth through acquisition. In addition, Federal Realty has a knack for development and redevelopment, so it is always working on some construction project that will enhance the value of its assets.
NYSE: FRT
Key Data Points
All in, however, Federal Realty is your run-of-the-mill REIT. At least until you consider the dividend. The dividend yield is roughly 4%, which is a little above the REIT average and much higher than the 1.2% or so yield offered by the S&P 500 index. But still, Federal Realty is hardly sporting a shockingly high yield. What sets Federal Realty apart from every other REIT is that it has increased its dividend annually for 57 consecutive years. That's the longest streak of any REIT and makes the company a Dividend King. It is the only REIT that is a Dividend King.
If you need a dividend you can rely on to pay for your living expenses, Federal Realty has proven that it is, perhaps, the best REIT option available to you. And while the 4% or so yield isn't going to generate huge streams of income, it is in keeping with the 4% withdrawal rate rule that many retired investors follow for using their savings.
What does AGNC Investment do?
AGNC Investment is structured as a REIT, but it is a mortgage REIT. That means it buys mortgages that have been pooled into bond-like securities. This is nothing like a property-owning REIT and it is, actually, a fairly complex business. The mortgage securities it buys trade all day (properties tend to trade infrequently), interest rates have a direct impact on the value of the securities it owns, and the housing market can also play into the mix (buying and selling trends, mortgage repayment rates, and even home construction patterns all have to be considered). If you are looking for a simple income stock, AGNC is not that stock.
NASDAQ: AGNC
Key Data Points
But AGNC has a towering 13.8% dividend yield. That's an incredibly enticing figure if you are trying to maximize the income your portfolio generates. There's just one problem: AGNC's dividend has been, to be polite, highly variable. The truth is that after a quick rise after the REIT's 2008 initial public offering it has basically headed lower for years. The stock price has followed along for the ride. That means income investors have been left with less income and less capital, which isn't ideal for someone who is using the income their portfolio generates to pay bills.
To be fair, there's a nuance here. AGNC has paid out much more in dividends than it has lost in price. That has led to a solid total return, assuming you reinvest the dividends. That's something that is more appropriate for an investor who is using an asset allocation approach than one focused on generating a sustainable income stream.
Extreme examples, but important ones
Pitting Dividend King Federal Realty up against regular dividend cutter AGNC Investment probably isn't a fair comparison. The two REITs have very different goals. The key to figuring out which high-yield REITs are better for you has to start with an honest assessment of what you are trying to achieve. This comparison shows that some REITs (Federal Realty) are better at generating a reliable income stream while others (AGNC Investment) have such high yields that you need to change the way you look at them. With AGNC that means thinking in terms of total return.
Make sure you understand what you are buying and, more importantly, how it fits in with your goals. A huge yield won't help you pay the bills if the dividend backing the yield isn't secure and reliable.
