Buy High-Reward Real Estate Investment Trust (REIT) Shares Proactively and One to Steer Clear Of
Buy High-Reward Real Estate Investment Trust (REIT) Shares Proactively and One to Steer Clear Of
"Don't judge a book by its cover" is an old saying that holds true when considering high-yield dividend stocks. A prime example is the approximately 14.8% yield offered by AGNC Investment Corp. (AGNC with a yield of 1.72%). This seems almost too good to be true for those seeking a consistent income stream. Many investors might find better value in Realty Income Corp. (O with a yield of 1.29%) and its 5.6% yield.
Steer clear of AGNC Investment for income seeking
AGNC Investment isn't flawed as an investment option per se. The mortgage real estate investment trust (REIT) has managed to deliver decent total returns for its shareholders over the years. However, investing for total returns is quite different from investing for income.
If you're after income, you primarily aim to earn and spend the dividends a company pays out. If you're after total returns, you'll reinvest the dividends to maximize your gains. This difference is crucial because AGNC Investment functions differently than a traditional REIT that owns properties. Instead, think of it as an entity that invests in mortgage-backed securities, which are complex investment vehicles. Upon examining the graph below, you'll understand why spending the substantial income stream provided by AGNC Investment may not have been an intelligent decision.
The blue line represents the dividend, which experienced a significant spike post-IPO and then began to descend. The purple line signifies the stock price, which largely followed the dividend trajectory. If you spent your dividends along the way, you'd now be collecting less income and holding a position worth less too. However, the total return graph has risen substantially due to the large dividends more than compensating for the falling share price, as AGNC Investment bought and sold mortgage-backed securities over time. But you only benefitted from such a return if you reinvested your dividends.
It can be argued that the dividends accumulated over time may have offset the decline in the share value, leaving investors with approximately $30,000 on an initial $10,000 investment. However, if you spent the dividends on living expenses, you'd still be left with a smaller income stream due to dividend cuts and a substantial loss on your initial investment. That's not a favorable outcome for an income-focused investor.
AGNC Investment caters to a niche group of investors, but it's not suitable for those seeking consistent income streams.
Realty Income: A dream for income-focused investors
On the other end of the spectrum for reliable income streams is Realty Income. This net-leased REIT has boosted its monthly payouts for 30 years in a row. It's also increased its quarterly dividends for over a hundred quarters consecutively. Realty Income may be as close as you can get to a stock that can function as a income replacement. Add its appealing yield – 5.6% at the current share price – and the reasons for dividend investors to be interested become clear.
Net-leased REITs typically own individual properties leased by tenants responsible for most maintenance costs. The risk associated with individual properties may be small in the context of a large portfolio. With more than 15,400 properties, Realty Income holds the title as the largest net-leased REIT. Its investment-grade-rated balance sheet gives it an edge when accessing capital markets at attractive rates, allowing it to pursue more acquisitions.
Being the largest player in the net-leased sector has its drawbacks. Realty Income requires significant transactions to move the needle in terms of growth. However, with a portfolio spanning the US and Europe, and an expanding list of property types, Realty Income has numerous growth opportunities. Therefore, investors should likely anticipate its slow and steady growth to continue.
Choose Realty Income, avoid AGNC Investment
If you're a dividend investor in search of a reliable income-generating stock for the long term, Realty Income stock is worth considering, despite its recent underperformance against the higher-yielding AGNC Investment. It's unlikely to set your heart racing, but you can expect it to provide a consistent stream of payouts while giving you a good night's sleep. AGNC Investment, however, may not offer reliable dividends in the long term. Choosing its high yield could potentially leave you restless, as the risk of further dividend cuts looms.
After considering the complex nature of AGNC Investment's mortgage-backed securities and its fluctuating dividends, it might be prudent to diversify your finance portfolio by exploring other investing opportunities that offer a more reliable income stream. Realty Income Corp., with its consistent dividend increase history and diversified property portfolio, could be a better choice for income-focused investors seeking long-term dividend stability.
Given the market volatility, it's crucial to consider not only the high yield of an investment like AGNC Investment but also the underlying risk and potential for dividend cuts, which could impact your income stream in the long run. A promising option for a reliable income source could be Realty Income Corp., as its low risk profile and consistent payout growth have made it a preferred choice for many dividend investors over the years.