High-Yield Showdown: AGNC Investment vs. W.P. Carey

Almost by definition, income investors pay a lot of attention to dividend yield. There's nothing wrong with that, but it shouldn't be the only thing that an investor considers. The company behind the dividend is equally important to think about.

This fact is highlighted by a comparison of AGNC Investment (NASDAQ: AGNC) and its 15%-plus yield and W.P. Carey (NYSE: WPC) and its roughly 6.3% yield. Here's why most dividend investors will probably prefer the lower yield.

What do these REITs do?

AGNC Investment and W.P. Carey are both real estate investment trusts (REITs), a corporate structure that is designed to pass income to investors in a tax-advantaged manner. So long as a REIT distributes at least 90% of its taxable earnings out to investors, it will avoid corporate-level taxation. That's a huge benefit on the income front, but investors need to recognize that REIT dividends are taxed like regular income. So this is a good deal for investors, but perhaps there are some drawbacks, too.

That said, AGNC Investment and W.P. Carey are vastly different kinds of REITs. W.P. Carey is the easier one to explain. It buys physical properties and rents them out to tenants. This is what you would do if you bought an investment property -- just on a much larger scale.

It is worth noting that W.P. Carey's portfolio is highly diversified, with assets in the industrial, warehouse, and retail sectors. It also invests both in North America and Europe, so there's geographic diversification, too.

AGNC Investment is what's known as a mortgage REIT. It buys mortgages that have been pooled into bond-like securities. That's not something that most small investors would ever be involved in.

The mortgage securities market is complex and often volatile. It can be affected by things like interest rates, property market dynamics, and loan repayment rates, among other factors. Even the year in which a mortgage security is created can have an impact on that mortgage bond's performance. You might be able to get a read on W.P. Carey's business by looking at its portfolio, but it is highly unlikely that you could do the same thing with AGNC Investment.

A story about dividend cuts

Here's the thing: AGNC Investment and W.P. Carey are both dividend cutters. That's part of the reason for their lofty dividend yields versus the average REIT yield of about 3.7% today, using Vanguard Real Estate Index ETF as an industry proxy.

After 24 years of increases, W.P. Carey cut its dividend at the start of 2024. AGNC Investment's dividend has been stable of late, but has been in a general downtrend for more than a decade.

WPC data by YCharts

That paints a bad picture for both REITs, but there's an important difference to highlight. After W.P. Carey's dividend cut, the REIT got right back to the pattern of quarterly dividend increases that existed before the cut.

That's because the cut was really a reset after the company chose to exit the struggling office sector in one quick move. It was a tough call, but one that sets the REIT up for better long-term performance. It was, in the end, a strategic move.

AGNC Investment, on the other hand, has been a serial dividend cutter. That's driven by its business model, which is to invest in the mortgage market. In fact, the value of the REIT is basically the value of the mortgage securities it owns.

That value has been heading lower, thanks to the rapid increase of interest rates to tame inflation. Although something of a simplification, a shrinking portfolio value means there are fewer assets to generate income. Although falling rates now will benefit AGNC Investment, they don't change the underlying business at all. AGNC Investment's dividend is always going to be volatile.

Which one is best for you?

To be fair, AGNC Investment is not a bad mortgage REIT. In fact, if you reinvest the dividends it spits out, the total return is fairly attractive.

But income investors normally don't focus on total return because they want to use the dividends their holdings throw off to pay for living expenses. In this scenario, AGNC Investment is a much less desirable choice than W.P. Carey, even taking into consideration W.P. Carey's recent dividend cut and lower dividend yield.

Indeed, W.P. Carey is quickly trying to prove that it is designed to pay a steadily growing dividend. That's something that AGNC Investment simply isn't designed to do.

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