AGNC Investment vs. Ares Capital: Which Ultra-High-Yield Financial Stock Is the Better Long-Term Buy?

As a dividend investor, I know how hard it is to resist a double-digit yield. Indeed, AGNC Investment (NASDAQ: AGNC) and its 13% yield are very attractive. However, Ares Capital (NASDAQ: ARCC) and its still-impressive 10% yield are probably a better choice for more aggressive income-focused investors. Here's what you need to know if you are comparing these two ultra-high-yield stocks today.

AGNC Investment has a great performance record

Since holding its initial public offering, AGNC Investment's total return is basically right in line with that of the S&P 500 index (SNPINDEX: ^GSPC) over the same span. Given that AGNC is a real estate investment trust (REIT), that is actually a pretty impressive feat. And the huge yield is a key part of the total return equation. There's just one problem for dividend investors: total return assumes dividends are reinvested.

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If you spent the dividends you collected from this mortgage real estate investment trust (REIT), you would probably be much less pleased with the outcome. Notably, the dividend has been highly volatile and has declined for over a decade. The stock price has followed the dividend both up and, unfortunately, down. If you bought AGNC Investment a decade ago and used the dividends to pay for living expenses, you would have less income and less capital today.

AGNC data by YCharts

That is not the outcome that most dividend investors are looking for as they use their dividends to supplement Social Security in retirement. This is an investment most appropriate for total return investors.

Ares Capital's dividend is variable, but the business has a growth bias

Ares Capital is a business development company (BDC). Like a REIT, it is designed to pass income on to shareholders in a tax-friendly manner. However, the business model is completely different, since it doesn't revolve around property. Ares Capital makes loans to smaller companies that don't have easy access to other forms of capital. It is also supposed to help those companies by offering guidance and advice as they grow.

Ares Capital's dividend tends to rise and fall over time, notably dropping during each of the last two recessions. That makes logical sense, given the focus on small businesses that are likely to have a harder time navigating economic downturns. And Ares Capital's stock price also tends to track along with its dividend. But there's an inherent growth bias in Ares Capital's business model, since it invests in what amounts to business start-ups. AGNC's mortgage investments are just collections of self-amortizing loans. That's not a knock on AGNC; it does a fine job as a business, but the value of the loans it owns is designed to shrink over time.

ARCC data by YCharts

If you spend the dividends you collect from Ares Capital, you would need to account for the payment's variability. However, the dividend has basically recovered after each cut, as the BDC has continued to grow alongside its investments. That will be a far better outcome for most income seekers than what has transpired with AGNC Investment's share price and dividend.

Two high-risk yields, but one is a better dividend investment

Neither AGNC Investment nor Ares Capital are appropriate for risk-averse investors. Their high yields come with complex, volatile business models, as their highly variable dividends highlight. That said, there is a clear winner if you are focused on maximizing the income your portfolio generates.

While AGNC Investment is a well-respected mortgage REIT, it is most appropriate for investors focused on total return. In the end, Ares Capital is likely to be a better choice for dividend lovers despite its lower yield. The business is basically designed to grow by investing in a portfolio of small companies. To be fair, the dividend is variable, but both the dividend and the share price have held up much better over time.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.