“Don’t judge a book by its cover” is an adage to keep in mind when looking at high-yielding stocks. A good example of this is the offered yield of approximately 15% AGNC Investment (Nasdaq: AGNC). It’s actually too good to be true if you need a reliable source of income. Most investors would probably be better off with Real estate income (NYSE:O) Its return is 5.6%.
There is nothing inherently wrong with AGNC Investment. This mortgage real estate investment trust (REIT) has done a fairly respectable job of generating total returns for its shareholders over time. But investment for Total return Very different from Investing for income.
If you’re investing for income, you’ll probably want to collect and spend the dividends the company distributes. If you invest for total returns, you will need to reinvest dividends to maximize your gains. This difference is important because AGNC Investment does not act like a traditional REIT that owns real estate. Think of it like an entity investing in mortgage securities, which are fairly complex investment products. Just look at the chart below and you’ll see why spending the lofty source of income provided by AGNC Investment was a bad decision.
The blue line is earnings, which rose sharply after the REIT’s IPO and then began to decline. The purple line is the stock price, which primarily tracks dividends. If you spend your profits along the way, you will now have less income and will have a lower value position as well. But the total return line rose meaningfully because the larger dividends more than offset the stock price decline as AGNC Investment bought and sold mortgage securities over time. But you won’t get that return unless you reinvest the dividends.
There is an argument that the dividends collected over time would have more than offset the decline in stock value, as the cumulative dividends plus the value of the final stock price would have left investors with approximately $30,000 on an initial investment of $10,000. However, if you spend the dividends on living expenses, you can still end the period with a lower income stream thanks to dividend cuts and a material loss on your initial investment. That’s not a win for the income-focused investor.
AGNC investing is suitable for a small group of investors, but this group does not include people looking for reliable sources of income.
At the other end of the reliable income stream spectrum is Realty Income. The net lease REIT has increased its monthly payments every year for 30 consecutive years. It has increased its dividend every quarter for more than 100 quarters in a row. This is probably the closest you can get to a stock that can replace your salary. Add to that its attractive yield – 5.6% at the current share price – and it’s clear why dividend investors should dig deeper here.
Net Lease REITs generally own single-tenant properties with the tenants responsible for most of the operating costs at the property level. While any individual property may carry some risk of the occupier defaulting on rent, the risk is very low across a large portfolio. With a portfolio of more than 15,400 properties, Realty Income is the largest net lease REIT. It also has an investment-grade balance sheet. For this reason, they generally have easier access to capital markets at more attractive costs than their smaller counterparts. This, in turn, allows Realty Income to be more aggressive when it comes to acquisitions.
There are disadvantages to being the largest player in the net lease sector. Notably, it would take a lot of transactions to meaningfully boost Realty Income’s top and bottom lines. However, with a portfolio spread across the US and Europe, and with an increasingly broad list of property types in that portfolio (management recently added casinos and data centers to the opportunity pool), Realty Income has plenty of growth levers to realize. He exfoliates. So investors should probably expect its slow and steady growth to continue.
If you’re an income investor looking for reliable long-term dividends, you’ll want to consider adding Realty Income stock to your portfolio, despite the fact that it has underperformed high-yield AGNC Investment over the past few months. It won’t excite you, but it will provide you with an attractive stream of returns while allowing you to sleep well at night. On the other hand, AGNC investing is not designed to provide reliable profits over time. Buying its extremely high yield will likely leave you high and dry because of the real risk that another dividend cut will come one day and turn the income story on its head.
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Robin Gregg Brewer He has positions in real estate income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has Disclosure policy.
1 High Yield REIT Stock to Buy Fisted and 1 to Avoid Originally published by The Motley Fool