Almost by definition, income investors pay a lot of attention to the dividend yield. There is nothing wrong with that, but it should not be the only thing an investor takes into account. The company behind the dividend is just as important to think about.
This fact is emphasized by a comparison of AGNC investment (NASDAQ: AGNC) and the yield of more than 15% and W. P. Carey (NYSE:WPC) and the yield of about 6.3%. This is why most dividend investors will likely prefer the lower yield.
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AGNC Investment and WP Carey are both real estate investment trusts (REITs), a business structure designed to pass income to investors in a tax-advantaged manner. As long as a REIT distributes at least 90% of its taxable profits to investors, it will avoid tax at the corporate level. That’s a huge advantage on the income front, but investors should remember that REIT dividends are taxed as regular income. So this is a good deal for investors, but there may be some downsides as well.
That said, AGNC Investment and WP Carey are vastly different types of REITs. WP Carey is easier to explain. It buys physical properties and rents them to tenants. This is what you would do if you were buying an investment property, but on a much larger scale.
It’s worth noting that WP Carey’s portfolio is highly diversified, with assets across the industrial, warehouse and retail sectors. It also invests in both North America and Europe, so there is also geographic diversification.
AGNC Investment is a so-called mortgage REIT. It buys mortgages that are combined into bond-like securities. That’s not something most small investors would ever be involved in.
The mortgage bond market is complex and often volatile. It can be influenced by things like interest rates, real estate market dynamics and loan repayment rates, among other things. Even the year in which a mortgage bond is created can affect the performance of that mortgage bond. You might be able to gain insight into WP Carey’s business by looking at its portfolio, but it’s highly unlikely you could do the same with AGNC Investment.
The point is: AGNC Investment and WP Carey are both dividend cutters. That’s part of the reason for their high dividend yields compared to the average REIT yield of about 3.7% today, based on Vanguard Real Estate Index ETF as a sector proxy.
After 24 years of increases, WP Carey cut its dividend in early 2024. AGNC Investment’s dividend has been stable lately, but has been in a general downward trend for more than a decade.
That paints a bad picture for both REITs, but there’s an important difference that needs to be highlighted. After the WP Carey dividend cut, the REIT immediately returned to the pattern of quarterly dividend increases that existed before the cut.
That’s because the cut was actually a reset after the company chose to exit the struggling office sector in one swift move. It was a difficult task, but one that allows the REIT to deliver better long-term performance. It was ultimately a strategic move.
AGNC Investment, on the other hand, has been a serial dividend cutter. This is driven by the business model, namely investing in the mortgage market. In fact, the value of the REIT is essentially the value of the mortgage securities it owns.
That value has fallen, thanks to the rapid rise in interest rates to curb inflation. Although somewhat simplistic, a shrinking portfolio value means there are fewer assets to generate income. While falling interest rates will benefit AGNC Investment now, they don’t change the underlying business at all. AGNC Investment’s dividend will always be volatile.
To be fair, AGNC Investment is not a bad mortgage REIT. If you reinvest the dividends paid, the total return is actually quite attractive.
But income investors don’t typically focus on total returns because they want to use the dividends their holdings generate to pay living expenses. In this scenario, AGNC Investment is a much less desirable choice than WP Carey, even taking into account WP Carey’s recent dividend cut and lower dividend yield.
Indeed, WP Carey is quickly trying to prove that it is designed to pay a steadily growing dividend. That’s something AGNC Investment is simply not designed to do.
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High Yield Showdown: AGNC Investment vs. WP Carey was originally published by The Motley Fool
