3 Simple Reasons Why Real Estate Income Is A Better Investment Than AGNC Dividends

The math is pretty simple for investors who want to live off the dividend income generated by their portfolios: more income means more income. But huge profits like 14.5% offered by AGNC Investment (AGNC), cannot be undertaken without a deeper look at the risks involved. Sometimes a lower yield, like 4.8% of Income from real estate (O)is the better choice.

Here’s a three-point comparison of these two real estate investment trusts (REITs) to show why simple is better.

1. Property against mortgages

The biggest difference between Realty Income and AGNC is that one owns real estate and the other holds mortgage-backed securities, often in the form of debt known as collateralized mortgage obligations (CMOs).

Image source: Getty Images.

Realty Income’s portfolio of more than 12,000 properties spans a variety of property types (including vineyards) and countries (most of its foreign exposure is in Europe). Still, it doesn’t take much effort to figure out what the company does. He tries to acquire physical properties that he thinks he can rent out on long-term leases to tenants who will reliably pay their rent.

This is the same thing you would do if you bought a second home with the intention of renting it out. You can get into the nuances, like Realty Income’s use of the net lease structure (this requires tenants to pay for most costs at the property level), but they’re still only nuances.

The story is very different with the AGNC Mortgage REIT. This REIT owns a portfolio of REITs and other securities that it purchases with borrowed money in order to maximize the difference, or spread, between the interest rates it pays on debt and the interest it collects on REITs. OOPs are publicly traded, so their values ​​can fluctuate quite quickly, with their prices affected by changing interest rates, housing market dynamics and general investor sentiment.

A mortgage REIT is a sort of bond fund focused on mortgages. Most investors understand how a mortgage works, but that doesn’t really help with understanding how OOPs and the OOP market work—or, perhaps more importantly, how to manage an OOP portfolio in a rapidly changing investment market.

If you want to keep things simple, Realty Income is the clear winner here.

2. The dividend

That said, you may be willing to learn new things to collect a huge 14.5% dividend income. However, this is only an attractive option if you can actually count on that dividend to be maintained over time. In AGNC’s case, the dividend has trended steadily lower over the past decade. In contrast, Realty Income’s dividend has trended steadily upward.

AGNC Dividends per Share (Yearly) Chart

Data Source: YCharts AGNC Dividend Per Share (Annual)

In fact, during that decade, AGNC’s dividend started at a higher absolute level, but ended at less than half of what Realty Income investors are collecting today.

However, a decade isn’t really enough time to evaluate Realty Income’s dividend consistency. This REIT has increased its monthly dividend payout annually for 28 consecutive years. The period’s average annual gain of 4.4% may not sound exciting, but that’s the point for this REIT, which has largely devoted itself to slow, steady growth.

You might argue that today you can get a bank CD yielding 4.4% or better. But you’ll lose out on dividend growth, which accumulates over time and helps you keep up with or outpace inflation. And obviously the growing dividend outweighs the risk of seeing a dividend cut, which is obviously a factor for AGNC.

3. Ups and downs

There’s an interesting thing about dividend yields that’s often overlooked: Like typical valuation tools (the price-to-earnings ratio, for example), a stock’s dividend yield often trades in a range. You can see this with AGNC in a very dramatic way as the chart shows. Although the dividend payout has trended steadily lower over the past decade, yields remain high.

AGNC chart

Data source: YCharts AGNC

The yield and price move in opposite directions, meaning that the high yield has only persisted because the stock price has fallen. Not only did shareholders suffer a diminishing income stream, but also capital losses.

The chart also shows that Realty Income’s yield has been hovering in the mid-single digits for a long time. However, with the dividend increasing over this time period, the only way to achieve this was with an increasing share price. The price increases were not huge because the dividend increases were not huge. But over time, investors saw a growing stream of income and an increase in the value of their investment. Clearly, this is a better result.

Don’t make it complicated

Investing is hard, and the harder you do it, the more likely you are to make a mistake. AGNC is a highly complex investment that is only suitable for highly committed, active investors. Realty Income is a relatively easy-to-understand alternative with a history of solid performance.

Yes, its yield is lower than the yield you would collect from AGNC. But it’s usually better to choose simple and stable over complicated and risky, which makes Realty Income the better choice here.

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