If you’re looking at high yield stocks while the S&P 500 index (SNPINDEX: ^GSPC) is trading near all-time highs, as is the case now, you’ll likely be considering higher-risk stocks. Simply put, the high return is the compensation for the extra risk.
As an income investor, you need to make sure you are taking risks that are worth taking. AGNC investment (NASDAQ: AGNC) and the nearly 14% return has a very real chance of eventually letting you down. EPR properties (NYSE: EPR) And W. P. Carey (NYSE: WPC) have also failed investors, but it appears they are both on an upward trajectory. Here’s what you need to know.
AGNC Investment is one to avoid
To be honest, AGNC Investment is not a bad company. Since going public, it has delivered quite strong total returns. But total return also includes reinvesting dividends.
If you’re a dividend investor trying to live off your dividends, you don’t buy stocks anymore with that income, you spend it on things like food and housing. This is where the big problem arises for this mortgage real estate investment trust (REIT).
As the chart above shows, the share price (purple) and dividend (blue) have been steadily lower for years, while the total return line (orange) is positive. And before that decline started, the dividend was volatile.
Even if the dividend is increased from current levels, there will always be a significant risk that it will be cut again due to the nature of the mortgage REIT niche. Mortgage REITs are indeed quite complicated investments that only more aggressive and active investors should probably look into.
But dividend investors don’t really need to take a deep dive into the mortgage REIT sector to see that AGNC Investment’s payout history won’t be attractive.
Not all dividend cuts are the same
That said, just because a REIT cuts its dividend doesn’t mean you should permanently remove it from your high-yield wish list. Two dividend-cutting REITs you might want to consider today are landlords EPR Properties and WP Carey.
EPR Properties cut its dividend during the pandemic as the experiential properties it owns (such as casino resorts and movie theaters) were effectively closed due to social distancing.
WP Carey cut its dividend in early 2024 when it decided to exit the office sector in one quick move after the pandemic’s work-from-home trend led to continued problems for that property type.
What’s notable, however, is that both are growing their dividends again. WP Carey’s move was all the more compelling because it resumed its streak of quarterly increases in the quarter after the cut. It was a clear sign that it was nothing more than a reset, caused by the major portfolio change it had made (office space was 16% of assets before the exit from that property type).
And the REIT’s exit from the office sector has left the REIT with record levels of liquidity. Management plans to put that money to work by purchasing more properties, which will add to the company’s portfolio and its ability to continue growing the dividend.
In other words, WP Carey’s 5.8% yield not only appears to be on solid footing, but it also seems like the dividend will very likely continue to grow. It’s the kind of dividend stock you’ll want to get your hands on before investors realize the opportunity they’re missing.
The story of EPR Properties is slightly less attractive, but certainly not bad. Owning assets that bring people together is a solid model in the internet age, even if it has been a terrible focus during the pandemic.
And while the portfolio is still overweight in cinemas (37% of rentals), total rental coverage is now 2.2x, up from 1.9x before the pandemic. Rental coverage for cinemas, which were hit particularly hard, is back to 2019 levels. Simply put, the risk profile here has improved enormously.
EPR’s payout ratio of adjusted funds from operations in Q2 2024 was approximately 72% – a very reasonable number. The dividend has now been increased three times since the cut, with the last increase coming in March 2024.
EPR Properties did what was necessary to weather a massive exogenous event. At the moment, it looks like the country is back on the growth path, suggesting it could be worth grabbing a handful of the 7.1% yielding stocks.
Investing involves risks, but only some risks are worth taking
With every investment you make, you must bear some risk, even if you have cash (which could cause you to miss out on other investment opportunities). The goal is to balance risk and reward so that you can sleep at night.
For income investors, the dividend risk with AGNC Investment is probably not worth it. But the dividend risk at WP Carey and EPR Properties appears to be quite low, even though both have cut their dividends in the recent past.
However, Wall Street’s perception of increased dividend risk could provide an opportunity for long-term dividend investors to lock in high yields from these two REITs that have already started raising their dividends again.
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Reuben Gregg Brewer holds positions at WP Carey. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
2 High-Yield REITs to Buy By Hand and 1 to Avoid was originally published by The Motley Fool
