Income investors pay a lot of attention to dividend yield, which makes a fair amount of sense. However, very often, the stocks with the highest yields aren't the best investment choices. That disparity has been on clear display with AGNC Investment (AGNC 0.89%). If you need reliable dividends to help you pay for living expenses, a lower-yielding but steadier dividend payer like Federal Realty (FRT 0.63%) will likely be a better choice.
The number that counts
Since real estate investment trusts (REITs) such as AGNC and Federal Realty must by law pass on to shareholders almost all their taxable income, the perfect place to start a discussion about their investment theses is with their dividends. At its current share price, AGNC has a towering 15% dividend yield. That's a figure that would catch the eye of almost any investor, but considering how much higher it is than the average for the broader market (an S&P 500 index ETF only yields about 1.7% now), it should probably make you question what's going on. If that isn't the first question on your mind when you see a yield that high, you might end up buying a yield trap.
A yield trap is a stock with a high yield that is unsustainable, and which will eventually fall because the dividend gets cut. During the past decade, AGNC's payouts have, in fact, steadily declined. Investors have reacted by pushing the share price steadily lower, too. But dividend yields and stock prices move in opposite directions. So the yield, despite the dividend cuts, has remained at eye-catching levels as the shares declined. If you had gotten lured into that yield trap, you would have suffered both a decline in the income you collected and a loss of capital. Not many dividend investors would want to sign up for that.
One of the important factors here is that AGNC is a mortgage REIT. That means it owns loans, not physical properties. It is a specialized business model that often uses leverage to enhance returns, owns tradable assets such as collateralized mortgage obligations (CMOs) that are often volatile, with valuations that fluctuate with interest rate changes, housing market conditions, and general investor sentiment. Before investing in the mortgage REIT sector, you really need to do a lot of homework.
A record that's a record
Things probably will turn out much better for dividend investors if they stick to property-owning REITs with proven track records. On that score, there is none better than Federal Realty. It has increased its dividend annually for 55 consecutive years. Not only is it a highly elite Dividend King, but it also lays claim to the longest streak of annual increases of any public REIT.
Think about the past 55 years. That time frame included the coronavirus pandemic, the Great Recession, and the 2000 dot-com bust, just to name some of the more recent periods of financial turmoil. Federal Realty also lived through the OPEC oil embargo, the shocking inflation of the 1970s, and the Black Monday stock market crash of 1987. Through it all, it never missed a beat on the dividend front, which shows an amazing level of consistency.
A key factor supporting that consistency is the simplicity of its business model, which focuses on location, location, location. Basically, Federal Realty wants to own retail and mixed-use assets in places where tenants want to be located. Although it only owns about 100 properties, the average size of the population in the three miles surrounding its portfolio properties is higher than any of its peers and -- here's the vital stat -- the population in those areas is wealthier. It looks very much like quality beats quantity when it comes to sustaining and increasing a dividend.
The portfolio, however, isn't static. Federal Realty likes to buy assets that are well-located but need a little love. That generally leads to assets increasing in value once the REIT makes some upgrades. When there's little more that can be done to improve things, the company will sell those assets if it can get fair prices for them. The proceeds go toward repeating the process. Notably, Federal Realty used the coronavirus pandemic to expand into Arizona, adding a new market to its portfolio. So this is still an approach that is central to the REIT's long-term future.
Know what you own
AGNC isn't a bad REIT, but it's a mortgage REIT, and that makes it complex and inappropriate for many investors. Its dividend trends should be particularly troubling to you if you are relying on your dividend income to help pay your bills. Far better would be to focus on a simple REIT such as Federal Realty that has proven its mettle over time with an easy-to-understand business approach and a steadily increasing payout. Although at the current share price, the dividend yield on offer from Federal Realty is a comparatively modest 4.7%, the safety it offers is probably worth the yield difference.
