The average real estate investment trust (REIT) has a yield of around 3.9%, which is already quite attractive considering the small 1.2% yield offered by the S&P500 index. But there are some REITs with even higher returns AGNC investment‘S (NASDAQ: AGNC) return of no less than 14.9% today! But don’t jump on that excessive return; you’re probably better off with a 7% return Innovative industrial properties (NYSE: IIPR) or the 5.5% offered from VICI properties (NYSE:VICI). Here’s what you need to know.
AGNC Investment’s yield is a whopping 14.9%, which should probably give you more fear than excitement. The glaring question is: why is the dividend yield so shockingly high? The quick answer is that this mortgage REIT is a total return investment and not an income investment. A single graph is all you need to understand what really matters here.
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The orange line in the chart above is the dividend, which rose quickly but has been steadily declining for years. The purple line is the stock price, which actually followed the dividend: higher and then steadily lower. If you had used the dividend to pay living expenses, you would have had less income and less capital – a terrible outcome. However, look at the blue line, this is the total return. If you had reinvested the excessive dividend, you would have done much better in the end, because reinvesting the dividend more than offset the impact of the falling stock price. This isn’t your typical dividend stock.
Most dividend investors want to one day live off the dividends they receive, so AGNC Investment simply won’t be a good fit for such investors. The high yield simply won’t earn you much if you don’t put it all back into the stock.
If you’re willing to take on a little more risk to earn a higher return, which is reasonable to assume if you’re considering AGNC, you might want to look at Innovative Industrial Properties. Although the name is quite innocuous, this REIT focuses on owning marijuana-related assets. That does not entail low risk, although you can argue that it could be innovative. The REIT owns 108 properties across 19 states, with a heavy emphasis on marijuana cultivation facilities.
The legal status of marijuana is a bit up in the air, and that’s the risky aspect here. But the legal marijuana market has been growing and is expected to overtake the beer and spirits sector in size by 2028. So there is a solid business foundation. Innovative Industrial Properties’ (FFO) adjusted payout ratio was a reasonable 85% or so in the third quarter of 2024. That’s not low, but there’s still plenty of room for adversity before a dividend cut would be appropriate. It is notable that the dividend has been increased every year since 2017 (the REIT was only established in 2016). This appears to be a good risk/reward balance for those who can tolerate a bit of regulatory uncertainty.
A much more boring REIT to own would be VICI Properties, which invests in experiential real estate. While that includes things like gyms and bowling alleys, casinos are the big story. VICI owns some of the largest gaming facilities in North America in some of the largest gaming markets in North America, operated by some of the largest casino companies in North America. As the age-old saying goes: the house always wins. In this case, VICI tenants must pay their rent regardless of what is going on with the economy or their businesses.
This has resulted in surprisingly stable performance, even during the coronavirus pandemic, when casinos were effectively shut down. In fact, the dividend has been rising steadily since the dividend was introduced in 2018. The dividend growth rate has also been quite generous, with the annualized rate of 7% being around twice the historical rate of inflation growth.
While there are only a limited number of casinos the REIT can purchase, the leases it creates are long (41 years on average) and include regular rent increases. So there’s no reason to believe the ‘house’ will stop winning anytime soon, noting that the adjusted FFO payout ratio in Q3 2024 was a healthy 75%.
It’s actually quite easy to find high-yield stocks. The hardest part is finding high-yield stocks worth owning. While AGNC isn’t a bad company, it’s just not a return investment (it’s all about total returns) no matter how high the returns get. You’ll probably be better off with high-yield alternatives like Innovative Industrial or VICI, which back their high returns with strong and growing businesses.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties and Vici Properties. The Motley Fool has a disclosure policy.
2 High-Yield REIT Stocks to Buy By Hand and 1 to Avoid was originally published by The Motley Fool
