“Do not choose a e book by its cowl” is an previous saying that needs to be heeded when contemplating high-yield dividend shares. An excellent instance is the almost 15% yield on provide from AGNC Funding (AGNC 0.42%). It’s, in reality, too good to be true in case you want a dependable earnings stream. Most buyers would in all probability be higher off with Realty Revenue (O 0.36%) and its 5.6% yield.
Keep away from AGNC Funding in case you want earnings
There may be nothing inherently fallacious with AGNC Funding. The mortgage actual property funding belief (REIT) has completed a reasonably respectable job of producing complete returns for its shareholders over time. However investing for complete return could be very totally different from investing for earnings.
In case you are investing for earnings, you in all probability wish to gather and spend the dividends that an organization distributes. In case you are investing for complete returns, you will have to reinvest the dividends to maximise your beneficial properties. That distinction is vital as a result of AGNC Funding does not behave like a conventional REIT that owns properties. Consider it extra like an entity that invests in mortgage securities, that are pretty advanced funding merchandise. Simply take a look at the graph under and you will see why spending the lofty earnings stream AGNC Funding has supplied would have been a nasty choice.
The blue line is the dividend, which rose sharply after the REIT’s IPO after which began to say no. The purple line is the inventory value, which mainly tracked the dividend. In the event you spent your dividends alongside the way in which, you’d now be amassing much less earnings and have a place that was value much less too. However the complete return line has risen materially as a result of the big dividends have greater than made up for the falling share value as AGNC Funding has purchased and bought mortgage securities over time. However you solely acquired that return in case you reinvested the dividends.
There may be an argument to be made that the dividends collected over time have made up for the decline within the worth of the shares, for the reason that cumulative dividends plus the ending share value worth would have left buyers with roughly $30,000 on an preliminary $10,000 funding. Nonetheless, in case you spent the dividends on dwelling bills you continue to ended the interval with a smaller earnings stream because of dividend cuts and a cloth loss in your preliminary funding. That is not a win for an income-focused investor.
AGNC Funding is suitable for a small group of buyers, however that group does not embody folks searching for dependable earnings streams.
Realty Revenue is a dividend investor’s dream
On the different finish of the reliable-income-stream spectrum is Realty Revenue. This web lease REIT has elevated its month-to-month payouts yearly for 30 consecutive years. It has even elevated its dividends each quarter for over 100 quarters in a row. It’s in all probability as shut as you will get to a inventory that may change a paycheck. Add in its enticing yield — 5.6% on the present share value — and it is clear why dividend buyers needs to be digging in deep right here.
Web lease REITs usually personal single-tenant properties for which the tenants are chargeable for most property-level working prices. Whereas any particular person property may carry some threat that the occupant will fall behind on their lease, throughout a big portfolio, the dangers are fairly low. With a portfolio of over 15,400 properties, Realty Revenue is the most important web lease REIT. It additionally has an investment-grade-rated stability sheet. Due to that, it usually has simpler entry to capital markets at extra enticing prices than its smaller friends. That, in flip, permits Realty Revenue to be extra aggressive relating to acquisitions.
There are drawbacks to being the web lease sector’s largets participant. Most notably, it takes loads of transactions to meaningfully increase Realty Revenue’s prime and backside strains. Nonetheless, with a portfolio that’s unfold throughout the US and Europe, and with an more and more broad checklist of property sorts in that portfolio (administration not too long ago added casinos and information facilities to the chance set), Realty Revenue has loads of development levers to drag. So buyers ought to in all probability anticipate its gradual and regular development to proceed.
Purchase Realty Revenue, keep away from AGNC Funding
In case you are an earnings investor in search of a dependable long-term dividend inventory, you will wish to contemplate including Realty Revenue inventory to your portfolio, even though it has underperformed greater yielding AGNC Funding over the previous few months. It will not excite you, however it can present a lovely stream of payouts whereas permitting you to sleep effectively at night time. AGNC Funding, then again, is not actually designed to supply dependable dividends over time. Shopping for its super-high yield will possible depart you tossing and turning due to the very actual threat that one other dividend minimize will come alongside sometime and upend the earnings story.
