While AGNC Investment Offers a 13.5% Yield, I Just Bought This High-Yield Dividend Stock Instead

AGNC Investment (NASDAQ: AGNC) currently offers a monster 13.5% dividend yield. As much as I like passive income, I decided to pass on buying shares of the mortgage-focused real estate investment trust (REIT). Instead, I recently bought a different high-yielding dividend stock, fellow mortgage REIT Ladder Capital (NYSE: LADR).

I'm not going to lie, AGNC Investment's dividend is very tempting, as it offers a massive yield and a monthly payment schedule. The mortgage REIT has also put together a solid streak of 75 consecutive monthly dividend payments at its current rate. However, there are a couple of things that Ladder Capital offers that make it a better income investment for me.

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What's preventing me from buying AGNC Investment

AGNC Investment has a singular focus. It invests solely in Agency MBS, pools of residential mortgages guaranteed against credit risk by government agencies such as Fannie Mae. They're low-risk, fixed-income investments. AGNC boosts its returns with leverage, also increasing its risk profile. The REIT ended the second quarter with a leverage ratio of 7.4 times. That's at the high-end of its 7.0-7.5x target range.

That leverage works both ways. It enhances returns in supportive market environments and weighs on them when conditions deteriorate. When its returns fall out of alignment with its costs, it puts AGNC's dividend at risk. While that's not a concern these days, the REIT has cut its payout several times, most recently in 2020.

The safer mREIT

Ladder Capital is a mortgage REIT with a very different investment focus and business model. It finances commercial real estate. The REIT primarily originates senior secured first mortgage loans on commercial real estate (about 49% of its portfolio). Additionally, Ladder invests in AAA bonds backed by senior secured first mortgage loans (CMBS and commercial real estate collateralized loan obligations, or CRE CLOs), which is about 33% of its portfolio. Finally, the REIT has a portfolio of owned real estate, primarily properties secured by long-term net leases (18% of its portfolio).

That much more diversified portfolio helps lower its risk profile. It also gives Ladder the flexibility to invest capital where it sees the best risk-adjusted return opportunities. Additionally, its equity investments provide durable, growing long-term cash flow and upside potential from appreciation.

Ladder also has a much lower leverage ratio (2.3x, toward the lower end of its 2.0x-3.0x target range). Its leverage ratio is low for the sector and backs the company's investment-grade balance sheet (Ladder is the only REIT focused on commercial real estate financing with an investment-grade rating). That reduces risk and provides greater financial flexibility.

Finally, whereas AGNC strives to maintain its dividend, Ladder Capital aims to grow its earnings. That should support dividend growth and share price appreciation, positioning it to produce higher total returns.

Better risk-reward potential

AGNC's big-time monthly dividend really tempts me. However, I want more than a static income stream; I'm still young enough to want some growth (in both income and share price appreciation), which Ladder Capital offers. It provides the income (Ladder yields more than 9.5%) and upside potential while having a lower-risk profile than AGNC. That's why I just added Ladder to my portfolio instead of going with the higher-yielding, higher-risk income stream offered by AGNC.

Matt DiLallo has positions in Ladder Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.