“Don’t judge a book by its cover” is an old saying that should be heeded when considering high-yield dividend stocks. A good example is the return of almost 15% that is offered 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 that Real estate income (NYSE:O) and the yield of 5.6%.
There is nothing wrong with AGNC Investment per se. The mortgage real estate investment trust (REIT) has done a fairly respectable job of generating total returns for its shareholders over time. But investing for 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 pays. If you invest for total return, you should reinvest the dividends to maximize your profits. That difference is important because AGNC Investment does not behave like a traditional REIT that owns real estate. Think of it more as an entity that invests in mortgage securities, which are fairly complex investment products. Just look at the chart below and you’ll see why spending the high income stream that AGNC Investment provided would have been a bad decision.
The blue line is the dividend, which rose sharply after the REIT’s IPO and then started to fall. The purple line is the share price, which actually followed the dividend. If you spent your dividends as you went along, you would now receive less income and have a position that was also worth less. But total returns have risen significantly because high dividends have more than offset the declining share price as AGNC Investment has bought and sold mortgage bonds 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 the value of the stock, as the cumulative dividends plus the terminal value of the stock price would have earned investors 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 significant loss on your initial investment. That’s not a win for an income-oriented investor.
AGNC Investment is suitable for a small group of investors, but that group does not include those 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 payouts every year for 30 consecutive years. It has even increased its dividends every quarter for more than 100 quarters in a row. It’s probably as close as you can get to a stock that can replace a salary. Add to that the attractive yield – 5.6% at the current share price – and it’s clear why dividend investors should take a deep look.