Better High-Yield Financial Stock: AGNC Investment vs. Annaly Capital

Dividend investors often start their search for stocks by looking at dividend yields. That's a logical move given their income focus, but there's a risk that yield becomes more important than other factors that can also have a material impact on an investor's long-term results. Annaly Capital (NYSE: NLY) and AGNC Investment (NASDAQ: AGNC), with their huge double-digit yields, need extra careful vetting.

For reference, the S&P 500 index (SNPINDEX: ^GSPC) is yielding roughly 1.1% today. The average financial stock yields 1.5%. The average real estate investment trust (REIT) yields 3.6%. Mortgage REITs Annaly and AGNC yield 12.9% and 13.9%, respectively. Here are some key things to consider before buying either of these two mortgage REITs, and why you might prefer one over the other.

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What do mortgage REITs do?

A property-owning REIT buys physical assets, such as office buildings, and then leases them to tenants. The core business of mortgage REITs like Annaly and AGNC is owning mortgage securities that have been pooled together into bond-like investments. In some ways, a mortgage REIT, which manages a portfolio of mortgage securities, is similar to a bond fund. Notably, both Annaly and AGNC highlight total return as a key goal.

This is important for dividend lovers. While most property-owning REITs focus on providing reliable, and often steadily growing, dividends, the dividend histories of Annaly and AGNC have been highly volatile. There have been long periods where dividends have steadily declined.

AGNC data by YCharts

If you are trying to live off the income your portfolio generates, neither of these two mREITs will be good choices for you, despite their massive yields. Worse, the stock prices of these mREITs have tended to follow their dividends both higher and lower. Overall, investors who spent the dividend have been left with less income and less capital. However, that does not mean that these companies are poorly run.

Investors that reinvested their dividends, focusing on total return, have been well rewarded. Both Annaly and AGNC have delivered total returns similar to those of the S&P 500 index. Notably, the return profiles of both mREITs differ from that of the S&P 500, so they may provide valuable diversification benefits for investors focused on asset allocation.

Which is the better mREIT: Annaly or AGNC?

Assuming you focus on total return rather than a consistent income stream, your choice between Annaly and AGNC will likely come down to one key preference. AGNC is fully focused on owning and managing its portfolio of agency mortgage securities. The term "agency" indicates that these mortgages are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. The key is that there is no credit risk associated with such loans. That said, the portfolio's value fell 5.6% in the first quarter of 2026. That resulted in a negative 1.8% economic return for investors, as the $0.50 per share drop in book value more than offset the $0.36 in dividends paid in the quarter. Diversification has its benefits.

Annaly's business is heavily focused on its portfolio of agency mortgage securities, but it also operates two other lines of business. Annaly's residential credit business oversees a portfolio of non-agency mortgages. It makes loans, securitizes loans, and manages a portfolio of loans. Annaly also operates a mortgage servicing business, which simply collects fees for processing mortgage payments. It is a fairly consistent cash flow generator and provides some offset for the increased risk associated with the company's non-agency mortgage operation. In the first quarter, Annaly's economic return was 1.5%, with a book value decline of $0.39 per share more than offset by dividends of $0.70.

At the end of the day, investors seeking exposure to agency mortgage-backed securities will likely prefer AGNC Investment. Investors that focus on diversification, however, will probably lean toward Annaly and its more diverse business model.

Make sure you know what you own

Annaly and AGNC have double-digit yields, but neither is a particularly reliable dividend stock. That should keep most dividend investors on the sidelines. However, they both have solid total return histories, with AGNC being the more focused business and Annaly the more diversified operation. If you are using an asset allocation approach, either of these two mREITs could be a good fit for your portfolio. Your choice between them will likely boil down to your diversification preferences.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.