The dividend yield is a blind spot that bothers many dividend investors. That may sound like an oxymoron, but it really isn’t. High returns often lure investors to risky companies that they otherwise wouldn’t consider owning. A good example today is AGNC investment (NASDAQ: AGNC) and the huge return of 14.5%. Most investors looking for a reliable income stream would be much better off with investments such as Real estate income (NYSE:O), NNN Real Estate (NYSE: NNN)or Federal Real Estate (NYSE: FRT). This is why.
The problem with AGNC Investment
Without getting too deep into the weeds, AGNC Investment is a mortgage real estate investment trust (REIT). This is a very complex niche of the REIT sector. Before investing in a mortgage REIT, do your homework so you understand what you’re actually buying, which is like a mutual fund that buys mortgage bonds. But the real story is much easier to tell here, and a simple graph will tell the most.
There are three lines in the chart above, but start with the blue line, which is the dividend yield. Note that it has remained high throughout, usually above 10%. Dividend investors are likely to see AGNC Investment popping up on high-yield screens for a long time. But now look at the orange line: the quarterly dividend. It has risen dramatically and has been falling for over a decade now. Dividend yield is a simple mathematical equation, dividing the annualized dividend by the share price. The only way for yields to remain high when the dividend falls is for the stock price (purple line) to fall, and as you can see, that’s exactly what happened.
If you’re trying to live off the income your portfolio generates, AGNC Investment would have been a terrible choice. You would then be left with less income and less capital. There are more reliable dividend stocks.
1. Realty Income has three decades of dividend success
Realty Income is the largest net lease REIT, meaning its tenants pay most of the operating expenses at the property level. It has increased its dividend annually for 30 consecutive years. The company’s balance sheet is investment grade and its portfolio extends from North America to Europe. The vast majority of the portfolio of over 15,400 properties is in the retail sector, but also has exposure to industrial assets to provide some diversification.
The yield today is around 5.6%. That’s near the highest levels of the past decade, so it seems attractively priced at the moment.
2. NNN Realty has had 34 years of dividend increases
NNN Realty is also a net-lease REIT, but it is not nearly as large as Realty Income. The portfolio contains only about 3,500 properties. That’s actually quite big; Real estate income is just huge. However, unlike Realty Income, NNN Realty focuses entirely on US retail assets. But it has a strong relationship approach with its tenants: more than 70% of acquisitions since 2007 have come from existing tenants. Management has clearly done something right, as the dividend has been increased annually for 34 years.
NNN Realty’s dividend yield is currently around 5.3%, which, like Realty Income, is at the high end of the yield range over the past decade.
3. Federal Realty is a dividend king
However, if dividend consistency is the most important criteria for you, there is only one REIT you should look at, and that is Dividend King Federal Realty. It has increased its dividend for a whopping 56 consecutive years, which is longer than any other public REIT. The company owns shopping centers and mixed-use projects, but what sets it apart is the size of its portfolio. Federal Realty only owns about 100 properties!
Management opts for quality over quantity and Activity manages its properties and portfolio. It redevelops assets over time and sells assets when they have reached their full potential (and someone offers a good price). This has been a successful process for a long time, as the dividend history shows.
Unlike Realty Income and NNN Realty, Federal Realty’s 4.3% dividend yield isn’t that attractive historically. It’s been on the high side for the past decade, but it’s significantly lower than the roughly 6% it reached during the coronavirus pandemic. It’s probably a good option for really conservative income investors, but anyone with a value preference will probably put this REIT on their wish list and not on their buy list.
There are better dividend stocks out there than AGNC Investment
To be fair to AGNC Investment, it is not intended for retail investors looking to create an income stream in retirement. It is best suited for institutional-level investors who use an asset allocation model that focuses on total return (which assumes dividend reinvestment). If you’re trying to live off your dividend income, you’re better off with unstoppable dividend payers like Realty Income, NNN Realty, and Federal Realty.
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Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Forget AGNC Investment, These Unstoppable Dividend Stocks Are Better Buys was originally published by The Motley Fool
