Better Dividend Stock: AGNC Investment vs. Realty Income

Key Points

• AGNC Investment's monster dividend makes up its entire return.

• Realty Income aims to steadily increase its monthly dividend.

• 10 stocks we like better than AGNC Investment Corp. ›

AGNC Investment (NASDAQ: AGNC) and Realty Income (NYSE: O) focus on paying dividends. These real estate investment trusts (REITs) own income-generating assets, providing cash flow for attractive monthly dividends. AGNC's yield is 15%, while Realty Income's is over 5.5%.

AGNC's high yield catches the eye, but that doesn't guarantee it's the better buy. Here's a closer look at which of these two high-yield REITs is the stronger investment.

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A higher-risk, higher-reward income stock

AGNC is a mortgage REIT that invests in residential mortgage-backed securities (MBS) that are protected from credit losses by government agencies like Fannie Mae and Freddie Mac. These protections reduce credit risk, but the MBS themselves tend to deliver lower fixed-income returns, usually in the low-to-mid-single digits.

Mortgage REITs such as AGNC amplify returns by using leverage, meaning they borrow to buy more MBS. However, this strategy exposes them to increased risks, especially from interest rate fluctuations. When rates change, the returns on their leveraged investments can become quite volatile, leading to potentially unpredictable income.

AGNC's leveraged MBS investment strategy can be very lucrative. The REIT currently achieves over 19% return on equity from new investments, exceeding its cost of capital, which includes dividends and expenses. As long as costs align with returns, AGNC can maintain its dividend, as it has since early 2020.

While AGNC Investment has managed to maintain its dividend in recent years, it has cut its payout in the past when its income did not cover its costs. If rising costs or falling returns reduce AGNC's profit margin in the future, it could cut the dividend again.

Another risk relates to AGNC's stock price, which has steadily declined over time because the company issues more shares to buy new MBS assets. This practice can dilute the value of existing shareholders' shares. Since AGNC's initial public offering (IPO) in 2008, the stock has lost more than 50% of its value. The high dividend has partially compensated for this loss: Total returns, including dividends, have averaged 10.7% annually since the IPO.

Growing its dividend and value

Realty Income is a diversified REIT investing in retail, industrial, gaming, and other properties secured by long-term net leases. These leases require tenants to cover all property operating expenses and often include rent escalations. As a result, they tend to generate steady and growing income.

That provides Realty Income with a solid foundation of cash flow to support its monthly dividend payment. The REIT has never reduced or suspended its dividend. Instead, it has steadily raised its payout. Realty Income has increased its dividend 131 times since its public market listing in 1994, including for the past 111 quarters in a row. Overall, it has grown its payout at a 4.2% compound annual rate over the past three decades.

Driving that steady growth is the REIT's ever-expanding real estate portfolio. Realty Income routinely acquires net-lease properties that produce durable and steadily rising rental income. While Realty Income also routinely issues new shares to fund these investments, it only aims to make new investments that increase its funds from operations (FFO) per share. This focus on growing shareholder value has enabled it to increase its FFO per share at a more than 5% compound annual rate over the past three decades.

This steady growth has paid off. Realty Income has produced an average annual total return of 15.7% since its public listing. It has delivered an average annual share-price increase of 8.9% and growing dividend income.

Higher total returns for less risk

An investment in AGNC is all about collecting its high monthly dividend, which accounts for the entirety of its return and helps offset stock-price declines resulting from dilutive share issuances. If you want a substantial monthly income stream and are willing to accept the declining value of your shares, AGNC is an appealing option.

For higher total returns, Realty Income is the better choice. The REIT grows shareholder value by expanding its portfolio to support a rising dividend. That positions it to deliver superior long-term total returns versus AGNC.

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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.