1 Magnificent High-Yield Stock Down 25% to Buy and Hold Forever

Dividend investors have to balance risk and reward when looking for income stocks. Huge yields, like the 16% on offer from AGNC Investment (NASDAQ: AGNC), are enticing, but they often come with huge risks. A more modest yield, like the 4.7% on offer from one giant North American bank, will likely be more appropriate for most. The bank is currently down 25% from its highs, so it looks like it is on sale.

AGNC Investment is not the dividend stock you think it is

AGNC Investment is not a bad company. In fact, it lives up to its stated goal, which is to provide investors with a strong total return. Supporting that total return is a "substantial yield component." Given the 16% yield, the word "substantial" seems like something of an understatement. However, it actually isn't. The chart below will be very illuminating for dividend investors drawn to that lofty yield.

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Data by YCharts.

Notice how the mortgage real estate investment trust's (REIT's) dividend (the blue line) spiked after the IPO, but then reversed course and has now been heading lower for years. The stock price (the purple line) basically followed the dividend higher and then steadily lower. If you'd spent your dividends to pay for living expenses, you would have ended up with less income and less capital. Yet the total return (the orange line) is strongly positive, largely thanks to the reinvestment of that huge dividend. Essentially, the massive dividend made up for the stock price declines along the way, but only if you reinvested the dividend.

Despite a massive dividend yield, AGNC Investment is really a total return investment. It won't be appropriate for most dividend investors, who are usually looking to own companies with sustainable, if not growing, dividends.

Image source: Getty Images.

Toronto-Dominion Bank has dividend investors covered

This is where Toronto-Dominion Bank (NYSE: TD) and its generous 4.7% dividend yield come in. The yield is well above the market's paltry 1.3% average yield and the yield of the average bank, which is just 2.6%. The dividend has been paid annually since 1857 and, unlike many of the largest U.S. banks, TD Bank's dividend survived the Great Recession unscathed. In fact, it just increased the dividend by 3%. That sounds tiny, but there's an important story here.

TD Bank's stock has fallen roughly 25% from its 2022 highs. That drop has pushed the yield up near historic highs for the stock. The 3% dividend hike was a vote of confidence from the board and management, suggesting that the issues it faces aren't going to derail the bank, even if they are a near-term headwind. But what happened to cause all this?

Data by YCharts.

The answer is that the Canadian banking giant's U.S. division was used for money laundering. U.S. regulators were not pleased. They hit the bank with a fine, forcing it to upgrade its internal controls, and placing the U.S. division under an asset cap. The dividend increase was made after all this bad news came out.

The big problem is the asset cap, which effectively limits the bank's growth until regulators are appeased. That could take a few years, but investors are being paid very well to wait for this low-risk turnaround story to play out.

Some risks are worth taking for dividend investors

You can run out and buy the highest-yielding stock you can find, which might include a company like AGNC Investment. But that can lead you into investments that won't actually live up to your expectations. If you are a dividend investor looking for a reliable dividend stock, beleaguered TD Bank is one high-yield stock that you can feel far more comfortable buying and holding for the long term.

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Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.