It is tempting to reach for yield if you are a dividend investor. I know, I’ve done it. And I’ve ended up sorry for making the decision more times than I care to admit. Which is why I own Federal Realty Investment Trust(NYSE: FRT) and not AGNC Investment(NASDAQ: AGNC), despite the fact that the latter’s dividend yield is over three times larger! Here’s why it is so important to know what you want when you are looking at ultra-high-yield dividend stocks like AGNC Investment.
From a high-level view, AGNC Investment is a real estate investment trust (REIT). REITs are designed to pass income on to investors and generally have large dividend yields. I like REITs a lot and own a few of them. That said, AGNC Investment isn’t any old REIT. It is a mortgage REIT, which is a specialized niche in the broader REIT sector.
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Mortgage REITs (mREITs) are relatively complex investments compared to property-owning REITs. While you would do the same basic thing as a property-owning REIT if you invested in a rental property, mortgage REITs like AGNC Investment own portfolios of securities that have been created by pooling together mortgages. It is likely that you couldn’t do the same thing as this REIT, which is best looked at as being similar to a mutual fund.
The complexity is one issue, which I could get over in time. But the real problem is that AGNC Investment’s priorities as an mREIT are different from mine as a dividend investor. Take a look at the chart below. Total return has been strong, but that assumes dividend reinvestment. The dividend, meanwhile, has been highly volatile and the stock price has basically tracked along with the dividend over time. The most recent trend for both is down.
There’s nothing wrong with AGNC Investment. In fact, it does a pretty solid job of creating value for investors over time, assuming you reinvest dividends. It’s just that the value being created is in the form of total return, not a reliable income stream. I’m not looking for stocks which require me to dividend reinvest to achieve strong returns. I want to own stocks that have reliable and growing dividends that I can use to pay for living expenses when I retire. A growing business, which will likely lead to a slowly rising stock price over time, is a secondary positive. That’s what Federal Realty provides me.
Federal Realty is a strip mall and mixed-use development landlord. It has long focused on quality over quantity, looking to own a small number (around 100) of properties in highly attractive regions (its properties are industry-leading assets). This model has worked out very well for dividend investors like me who prize dividend consistency. Federal Realty has the longest dividend streak of any REIT, with over five decades of annual increases. It is the only REIT that has achieved Dividend King status.
I could go into the fine details, but it really isn’t necessary to get the point across here. AGNC Investment has a history of cutting its dividend. Federal Realty has a history of raising it. If you are trying to live off of your dividend income, Federal Realty will be a better choice. That’s true even though AGNC Investment’s dividend yield is over 14% while Federal Realty’s yield is a much lower 4.5%. In the end, a massive yield that you can’t count on isn’t going to help you create a retirement budget.
There’s nothing wrong with investing for total return. And AGNC Investment could be a valuable part of an asset allocation plan built around total return. But I’m not focused on total return; I’m focused on creating a sustainable and hopefully growing income stream. That makes Dividend King Federal Realty a much better dividend stock than AGNC Investment for me, despite the substantial yield difference.
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Reuben Gregg Brewer has positions in Federal Realty Investment Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
