AGNC Investment Corp.: Why I Would Prefer Half the Dividend and 100% More Certainty

I am a dividend investor, which dramatically influences the way I look at stocks. Dividend yield, however, is only one of the important factors I consider.

Another really important issue for me is dividend consistency. Here's a look at two real estate investment trusts (REITs), one with an alluring double-digit yield, to explain why yield shouldn't be the only thing a dividend investor considers.

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What is a REIT?

Real estate investment trusts were specifically created to pass income on to shareholders via large dividend payments. The key is that REITs can avoid corporate-level taxation if they distribute at least 90% of their taxable income to shareholders. In reality, most REITs pay out more than that, but the key is that the REIT structure is all about dividends.

Image source: Getty Images.

REITs own institutional-level real estate related assets. The bigger purpose of the structure is to allow small investors access to income producing assets -- like apartment buildings, malls, and office buildings -- that they wouldn't otherwise be able to own individually because of the cost. In general, REITs are a pretty good option for income investors.

However, not all REITs (just like not all corporations) are created equal. They can get themselves into hot water in many ways, including overexpansion, taking on too much debt, or simply making bad investment choices.

There are also different kinds of REITs. The most common are property owners, like Realty Income (NYSE: O). But there are also mortgage REITs, like AGNC Investment (NASDAQ: AGNC), which owns mortgages that have been pooled into bond-like securities.

AGNC Investment has a massive 13%-plus dividend yield. Realty Income's yield is a far lower, but still attractive at 5.5%. I happily own lower-yielding Realty Income. Here's why.

What does a dividend investor really want?

There are different ways to look at dividend investing, but most who do it are likely trying to find companies with reliable and growing dividends. The most common hope is probably to either live off the income generated today or to live off it in the future while reinvesting the dividends today.

Either way, there are two competing dividend demands. You want the highest yield possible, but you also want the dividend to be, at the very least, sustainable, if not capable of growing. The chart below shows the historical yield trends for AGNC Investment and Realty Income.

AGNC Dividend Yield data by YCharts.

From a pure dividend-yield perspective, AGNC has always been a more attractive investment. But now consider the chart below, which compares the dividend histories of the two REITs.

AGNC Dividend Per Share (Quarterly) data by YCharts.

AGNC's dividend has been cut multiple times, while Realty Income's has trended higher for three decades. In fact, if you bought AGNC Investment a decade ago, the per-share dividend payment would have been higher than that of Realty Income. But 10 years later, the per-share dividend AGNC offers is less than half that of what Realty Income pays. And, to add insult to injury, AGNC's stock has lost half its value while Realty Income's stock is up around 20% or so.

Basically, if you were looking to live off your dividends and chased yield by buying AGNC Investment, you would have been left with less income and less capital. Realty Income would have left you with a larger income stream, and you would have benefited from the growth of your capital. For most income investors, the preferable outcome there is pretty obvious.

AGNC Investment isn't a bad investment, it just isn't an income stock

Realty Income is very clearly an income stock that will be attractive to long-term dividend investors. The entire purpose of the business is to generate a reliable and increasing dividend. Add in a well-above-market yield, and you can see why investors like me own it.

AGNC data by YCharts.

AGNC has a huge yield, but its goal isn't what you might think. It is trying to generate a solid total return, which assumes the reinvestment of dividends. It is meant to provide exposure to mortgage securities, not really a steady income stream. The income it generates is just in service of the total-return goal.

And because it has paid out more in dividends over time than it has lost in stock value, AGNC Investment's total return is attractive. It just isn't an income stock that long-term dividend investors who are looking to actually spend their dividends will want to own.

If you don't look past dividend yield and consider the company behind the dividend, you could end up owning an investment that just doesn't do what you need it to.

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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.