Better Dividend Stock: AGNC Investment vs. Realty Income

If you are looking for dividend stocks to buy, the obvious place to start is by examining dividend yields. However, yield alone is not a good reason to buy a stock. That fact is highlighted by comparing AGNC Investment (NASDAQ: AGNC) and its huge 12.9% yield to Realty Income (NYSE: O) and its smaller, but still quite attractive, 4.8% yield.

What does AGNC Investment do?

AGNC Investment and Realty Income are both real estate investment trusts (REITs), but they do vastly different things. That is the big reason why dividend investors will likely be better off with the lower-yielding option here. The issue boils down to AGNC Investment's focus on mortgage securities. It effectively buys bond-like securities created by pooling mortgages together. In many ways, it is similar to a mutual fund, as the company manages a portfolio of mortgage securities.

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This isn't a bad business model, and AGNC Investment has a solid track record as a mortgage REIT. The issue is that mortgage REITs are primarily focused on delivering strong total returns, not reliable dividends. AGNC Investment's dividend has been highly volatile since its initial public offering (IPO) and has been trending lower for over a decade.

While the total return has been strong, if what you really wanted was a reliable and growing dividend, you would have been sorely disappointed. And if you spent the dividend instead of reinvesting it, you would have ended up with less income and less capital.

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Realty Income is a slow and steady tortoise

By contrast, Realty Income's dividend has been increased annually for 31 consecutive years. Over that span, the average annualized dividend increase was 4.2%, which is above the historical inflation rate. Essentially, the buying power of Realty Income's dividend has slowly increased over time. This isn't an exciting dividend stock, but it is a highly reliable one.

That dividend is backed by a globally diversified portfolio of 15,500 net-lease properties. These assets tend to have long leases with built-in rent escalators. While most of Realty Income's assets are retail-focused, retail assets tend to be easy to buy, sell, and release as needed. The other properties it owns, including industrial assets, casinos, and data centers, help provide diversification and additional growth opportunities. The company has also expanded into asset management, allowing it to generate fee income from the investment work it is already doing with its owned portfolio.

Stepping back, Realty Income is a highly reliable business, which should make it a better dividend stock than AGNC Investment for most income lovers despite its lower yield.

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.