Intrigued by AGNC Investment's Monster Monthly Dividend? Consider This Passive Income Machine Instead.

Key Points

• Main Street Capital pays a stable and steadily growing monthly dividend.

• The company also periodically pays supplemental dividends.

• Its total return has been much higher than AGNC Investment's over the years.

• 10 stocks we like better than AGNC Investment Corp. ›

AGNC Investment (NASDAQ: AGNC) pays a prodigious monthly dividend with a yield over 15%. That's more than 10 times higher than the S&P 500.

While the mortgage real estate investment trust (REIT) offers a high-yielding payout, it hasn't increased its dividend since its first few quarters as a public company more than 15 years ago. Instead, it has cut its payout several times over the years. Because of that, it's not an ideal passive income stock for those seeking a bankable income stream.

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Those desiring to generate durable and growing passive income should consider Main Street Capital (NYSE: MAIN) instead. The business development company (BDC) has routinely raised its high-yielding monthly dividend. It also periodically pays quarterly supplemental dividends. Here's a closer look at this passive income machine.

Image source: Getty Images.

Cashing in on interest income

AGNC Investment and Main Street Capital share several commonalities. They primarily invest in secured loans that generate interest income.

AGNC Investment invests solely in mortgage-backed securities (MBS) protected from credit risk by government agencies like Fannie Mae. Those residential mortgage pools tend to be very low-risk investments that have low returns (low- to mid-single-digit yields). AGNC boosts its returns (and risk profile) by investing in MBS on a leveraged basis.

Main Street Capital provides capital solutions (private debt and private equity) to lower middle market companies (those with revenues between $10 million and $150 million). It also provides debt capital to middle-market companies (those with revenues above $150 million). While these investments have higher risk profiles, they also provide much higher returns (its lower middle market portfolio has a weighted average effective yield of 12.7%). It also makes equity investments, which provide it with dividend income and upside potential as the value of those companies increases.

The BDC takes several steps to limit its risk. It primarily invests in loans with a first lien position backed by collateral. That gives it priority of repayment should one of its portfolio companies file for bankruptcy. Main Street Capital also has a very strong financial profile, including an investment-grade credit rating and a low dividend payout ratio for its monthly dividend payment.

Superior performance

Main Street Capital's conservative approach has served its investors well over the years. The company has never cut its monthly dividend rate since its initial public offering in 2007. Instead, the company has routinely raised its dividend. It has increased its payout by 132% over the years. Main Street has also periodically paid supplemental dividends since 2013, including the past 15 quarters in a row.

For comparison, 25 BDCs (78% of its peer group) have cut their dividend at least once since 2007 or their IPO date. Of that group, 16 BDCs (50% of its peers) have reduced their dividends multiple times. AGNC Investment has also cut its dividend several times since its IPO in mid-2008.

Main Street Capital's ability to pay a growing dividend has contributed to its much higher total returns over the years:

AGNC Total Return Level data by YCharts

As that chart shows, AGNC Investment's stock price has lost 50% of its value since its IPO. While the mortgage REIT's lucrative dividend payment has helped boost its total return to over 10% annually, investors need to factor in some value loss when considering the company's monster dividend. On the other hand, Main Street Capital's stock price has increased by nearly 10% annually, contributing to its higher total return.

One factor driving Main Street Capital's rising stock price is its equity investments, which have increased in value over the years, creating additional value for its shareholders. With its stock price rising, the company can sell additional shares to fund new investments without significantly diluting its existing investors. AGNC often needs to sell its stock at a lower price to fund new investments, diluting value for its existing investors.

Prodigious passive income plus upside potential

AGNC Investment offers a monster monthly dividend. The problem with the REIT is that the payout hasn't grown and could get cut again. Because of that, its total returns could be less than its current income yield over the long term.

That's why investors who are intrigued by AGNC should consider Main Street Capital. The BDC pays an attractive and growing monthly dividend that it supplements with additional quarterly payouts (8% total yield based on its last payment). The rising income stream, combined with the value growth of its equity portfolio, has enabled the company to generate higher total returns over the long term. That makes it a potentially better long-term option for investors seeking to collect passive income.

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Matt DiLallo has positions in Main Street Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.