Better Dividend Stock: AGNC Investment vs. Realty Income

It sounds a bit trite, but it is really important for investors to know what they own. A deep understanding of what a company does, why, and how it fits with your investment approach is vital if you are going to be a long-term investor. That's particularly true if your chosen approach is dividend investing. A big yield doesn't always translate into a good investment.

That's the big takeaway when you compare AGNC Investment (NASDAQ: AGNC) and its huge 13.4% dividend yield to Realty Income's (NYSE: O) 5.2% yield. If you are using your dividends to pay for daily living expenses, Realty Income's lower yield is likely to be the better choice for you. Here's what you need to know.

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AGNC Investment is good at what it does

AGNC Investment is a mortgage real estate investment trust (REIT). It operates in a highly specialized niche of the broader REIT sector, with management basically focused on managing a portfolio of mortgage securities. Mortgage securities are similar to bonds and are created by pooling individual mortgages. The income AGNC Investment generates from its portfolio of mortgage securities is distributed to investors as dividends.

AGNC Investment has done a good job over the long term. Notably, the REIT's total return has been very similar to that of the S&P 500 index (SNPINDEX: ^GSPC) since its initial public offering. The problem is that total return requires dividend reinvestment, which most income-focused investors aren't likely to do. More often, dividends are used to pay for everyday living expenses.

AGNC data by YCharts

As the chart above highlights, the total return is fine, but the dividend and the stock price have both been trending lower for years. If you spent the dividends, you would have ended up with less capital and less income. That won't be the ideal outcome for most dividend investors, even though AGNC Investment is a well-respected mortgage REIT and sports a huge 13.4% yield.

Realty Income fits the dividend investor model

If you are trying to live off of your dividends, a slow and steady tortoise like Realty Income will likely be a better fit for you. The yield is much lower, at 5.2%, but the dividend has been increased annually for 31 years. Dividend growth is modest, historically in the low to mid single digits, but over time the dividend's growth has slightly exceeded inflation. That means the dividend's buying power has grown.

Realty Income is a traditional REIT, with a portfolio of more than 15,500 properties spread across North America and Europe. Most of its assets are in the retail sector, but it also owns industrial properties and more unique assets such as casinos and data centers. It uses a net-lease approach across its entire portfolio, with tenants responsible for most property-level operating costs. That's a fairly low-risk approach in the REIT space.

Add in an investment-grade rated balance sheet, and a long history of operating in a conservative manner, and Realty Income is a rather boring dividend stock. This will probably make it a great fit for most dividend investors. And while Realty Income's dividend yield isn't nearly as high as that of AGNC Investment, it is far above the 1.1% of the broader market and the REIT average of 3.6%.

Buy stocks that match your investment approach

If all you looked at was dividend yield, you would probably pick AGNC Investment over Realty Income. However, digging into the businesses shows that they are meant for very different types of investors. AGNC Investment is best suited for investors seeking total return. And Realty Income is a better dividend stock for those looking to use their dividends to pay for living expenses.

Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.