“Don’t judge a book by its cover” is an old saying to heed when considering high-yield dividend stocks. A great example is the almost 15% yield it offers AGNC Investment (NASDAQ:AGNC). In fact, it’s too good to be true if you need a reliable income stream. Most investors would probably be better off with Real estate income (NYSE: O) and its profitability of 5.6%.
There is nothing inherently wrong with AGNC Investment. The mortgage real estate investment trust (REIT) has done a pretty respectable job of generating total returns for its shareholders over time. But investing for a total return is very different from investing for income.
If you’re investing for income, you probably want to collect and spend the dividends a company distributes. If you are investing for total returns, you will need to reinvest the dividends to maximize your profits. That difference is important because AGNC Investment doesn’t behave like a traditional REIT that owns property. Think of it more as an entity that invests in mortgage securities, which are quite complex investment products. Just look at the chart below and you’ll see why spending the high income stream that AGNC Investment has provided would have been a bad decision.
The blue line is the dividend, which increased sharply after the REIT’s IPO and then began to decline. The purple line is the share price, which basically follows the dividend. If you spent your dividends along the way, you would now be collecting less income and would have a position that was also worth less. But the total return line has risen materially because the large dividends have more than offset the share price decline as AGNC Investment has bought and sold mortgage securities over time. But you only got that return if you reinvested the dividends.
It can be argued that the dividends collected over time have offset the decline in share value, as the cumulative dividends plus the value of the final share price would have left investors with approximately $30,000 on an initial investment of $10,000. However, if you spent the dividends on living expenses, you still ended the period with a smaller income stream thanks to dividend cuts and a material loss on your initial investment. That’s not a win for an income-focused investor.
AGNC Investment is appropriate for a small group of investors, but that group does not include people looking for reliable income streams.
At the other end of the spectrum of reliable income streams is Realty Income. This net lease REIT has increased its monthly payments every year for 30 consecutive years. It has even increased its dividend every quarter for over 100 quarters in a row. It’s probably the closest thing to a stock that can replace a paycheck. Add to that its attractive yield (5.6% at the current share price), and it’s clear why dividend investors should look deeper into this.