Forget AGNC Investment, Buy This Magnificent High-Yield Stock Instead

AGNC Investment (AGNC 0.21%) has one shockingly enticing feature: a 15% dividend yield. But don’t get too enamored by that dividend; it comes with a great deal of risk. A better option would be a company that is so confident in its dividend paying ability that it trademarked the nickname “The Monthly Dividend Company.” Here’s what you need to know.

AGNC Investment, the dividend that just quits

The single most important thing that dividend investors need to understand about AGNC Investment’s dividend is that you simply can’t rely on it. It has been cut multiple times over the past dozen years. The stock has tracked the dividend lower, as well, so not only are investors collecting less income, they are also sitting on capital losses.

AGNC data by YCharts

To be fair, AGNC is a mortgage real estate investment trust (REIT). This is a very complex niche in the REIT sector that is really meant for institutional-level investors, like pension funds. The goal isn’t really to generate a lot of income for shareholders, but to provide a strong total return, which assumes dividend reinvestment. Small dividend investors just aren’t the target market. Even though the huge 15% dividend yield will likely be enticing to some small investors, most will be better off with a more reliable dividend stock.

Look at Realty Income

While Realty Income‘s (O 0.25%) 5.8% dividend yield doesn’t match up to AGNC’s yield, there’s a very different track record here. Realty Income has increased its dividend annually for 29 consecutive years. Within that streak, the monthly dividend has been increased every quarter for 105 quarters. If you are looking for a reliable dividend stock, Realty Income is a great starting point. And the yield on offer is notably higher than the average REIT (4.1%) and the border market (1.4%). You aren’t exactly settling for a low yield when you buy Realty Income, just one that’s lower than the worryingly high 15% from AGNC.

Realty Income’s dividend, meanwhile, is backed by an investment-grade-rated balance sheet. And the adjusted funds from operations (FFO) payout ratio in 2023 was a solid 76.3%. The dividend is on very solid ground.

The REIT, meanwhile, is the largest net lease REIT you can buy, with a market cap over twice the size of its next largest competitor. Size comes with advantages, as increased liquidity makes it easier for Realty Income to tap the capital markets for growth capital. Meanwhile, with a globally diversified portfolio of more than 15,000 properties, trouble at any single asset won’t have a big impact on the company’s overall performance.

O Chart

O data by YCharts

The only major drawback that investors have to consider with Realty Income is that growth is, at best, going to be modest. That’s a function of the scale of the business, since growth requires materially more investment than would be needed to move the needle at a smaller peer. But if you are looking to maximize current income, that’s probably not going to be too big an impediment. Notably, the roughly 4.3% annualized dividend growth over the past 29 years outpaces the historical growth rate of inflation. Thus, the buying power of Realty Income’s dividend has grown over time.

Be careful what you wish for

If all you care about is giant yields, then AGNC Investment will be attractive to you. The problem is that a big yield is only desirable if it is sustainable. History suggests you can’t trust that AGNC’s dividend is sustainable. However, there’s a 29-year history of sustainability at Realty Income. And while the yield isn’t as high, it is hard to get too upset by a 5.8% yield when the S&P 500 index is only yielding 1.4% or so. If you are considering AGNC, you should probably dial back your yield expectations and buy much more reliable Realty Income.

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