Forget AGNC Investment, buy this great dividend stock instead

By | March 25, 2024

It’s hard to pass up a high yield, but sometimes an ultra-high dividend yield is a sign of risk. That is the case with AGNC investment (NASDAQ: AGNC), which gives a huge yield of 15%. It would be much better to lower your return expectations and buy out of favor Real estate income (NYSE:O). The return of 5.9% is not nearly as attractive, but you can count on it. Here’s why you should forget about AGNC and buy Realty Income instead.

One chart is all you need

There is an old saying that a picture is worth a thousand words. Well, in the case of AGNC Investment, that image is actually a graph, which you’ll see below. To summarize the picture in as few words as possible: the dividend is highly variable and has been steadily lower for at least a decade. The stock price followed the trajectory and also fell lower and lower.

AGNC chart

AGNC chart

What’s interesting is that the dividend yield (the blue line) has remained quite high throughout. That’s just the basic calculation of dividend yields, but it means that AGNC regularly pops up on the dividend yield screen, even though an investment here would have left dividend investors with less income and less capital over the past decade. That’s about as bad as it can be for an investor trying to live off the income his portfolio generates.

Most investors should pass on this stock and instead consider a reliable dividend stock like Realty Income.

Realty Income is a dividend machine

Realty Income and AGNC are both real estate investment trusts (REITs). But AGNC is a unique type of REIT that buys mortgage securities, a complex and risky niche in the REIT space. Real estate income is much more boring; it buys physical properties that it rents to tenants. Almost the entire portfolio consists of net leases, which means that one tenant rents a property and the tenant is responsible for most of the operating costs at the property level. Although each individual property carries a high risk, the risk for a large portfolio is very low. Realty Income is the largest net lease REIT, with a portfolio of more than 15,000 properties.

O Dividend per share (quarterly) chartO Dividend per share (quarterly) chart

O Dividend per share (quarterly) chart

The yield is near its highest level in the past decade at about 5.9%, suggesting now is an attractive time to buy Realty Income stock. The first question to ask yourself is, “Why are returns historically high?” The answer is that interest rates have risen, raising the cost of capital for Realty Income (and other REITs). That’s certainly a headwind, but real estate markets have historically adjusted to interest rate shifts and will likely do so again.

Meanwhile, Realty Income is the largest net lease REIT by a wide margin. It is more than twice the size of its nearest competitor, giving it a size advantage when it comes to buying new assets. In fact, it has been buying up a number of REIT peers in recent years, adding industry consolidation to its growth opportunities. The bullish thesis is supported by an investment-grade balance sheet and an increasingly diversified portfolio, including a growing presence in Europe.

Proof of the company’s success is found in its dividend, which has been rising for 29 years in a row. While annualized dividend growth is modest at about 4.3% over that period, it’s pretty clear that income investors can count on Realty Income to keep paying through thick and thin. If you’re looking for sustainable high returns, Realty Income is a much better choice than AGNC.

Be careful what you wish for

If you just look at a stock’s dividend yield, you risk serious pain. AGNC is a good example of this. The return remained high, even though it regularly reduced the dividend payout. Realty Income will serve dividend investors much better, if history is any guide. And the fact that the REIT is currently out of favor and offering historically high returns is a long-term opportunity that shouldn’t be overlooked.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool has a disclosure policy.

Forget AGNC Investment, buy these great dividend stocks instead, originally published by The Motley Fool

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