2 High-Yield REIT Stocks to Buy Hand Over Fist and 1 to Avoid

The average real estate investment trust (REIT) has a yield of around 3.9%, which is already pretty compelling, given the tiny 1.2% yield on offer from the S&P 500 index. But there are some REITs with even higher yields, with AGNC Investment's (NASDAQ: AGNC) yield at a massive 14.9% today! But don't jump at that outsized yield; you'll probably be better off with the 7% yield from Innovative Industrial Properties (NYSE: IIPR) or the 5.5% on offer from VICI Properties (NYSE: VICI). Here's what you need to know.

AGNC Investment: The biggest yield isn't always the most attractive

AGNC Investment's yield is a huge 14.9%, which should probably scare you more than excite you. The glaring question is, why is the dividend yield so shockingly high? The quick answer is that this mortgage REIT is a total return investment, not an income investment. A single graph is all you need to understand what really matters here.

AGNC data by YCharts

The orange line in the graph above is the dividend, which rose quickly out of the gate but has been heading steadily lower for years. The purple line is the stock price, which basically tracked along with the dividend -- higher and then steadily lower. If you used the dividend to pay for living expenses, you would have ended up with less income and less capital -- a terrible outcome. However, look at the blue line, which is the total return. If you reinvested the outsized dividend, you would have ended up doing much better, as reinvesting the dividend more than offset the impact of the declining stock price. This is not your typical dividend stock.

Most dividend investors are looking to someday live off of the dividends they collect, so AGNC Investment just isn't going to be a great fit for such investors. The lofty yield simply won't do you much good if you don't plow it all back into the stock.

Two better high-yield REITs to consider

If you are willing to take on a bit more risk to get a higher yield, which is a reasonable thing to assume if you have been considering AGNC, you might want to look at Innovative Industrial Properties. Although the name is pretty innocuous, this REIT is focused on owning marijuana-related assets. That's not low-risk, though you can argue that it might be innovative. The REIT owns 108 properties across 19 states, with a heavy leaning toward marijuana growing facilities.

The legal status of marijuana is a bit up in the air, which is the risky aspect here. But the legal marijuana market has been growing and is actually projected to overtake the beer and spirits sectors, size-wise, by 2028. So, there's a solid business foundation here. Innovative Industrial Properties' adjusted funds from operations (FFO) payout ratio was a reasonable 85% or so in the third quarter of 2024. That's not low, but there's still ample room for adversity there before a dividend cut would be in order. Notably, the dividend has been increased each year since 2017 (the REIT was only founded in 2016). This appears to be a good risk/reward balance for those who can handle a little regulatory uncertainty.

A far more boring REIT to own would be VICI Properties, which invests in experiential properties. Although that includes things like gyms and bowling alleys, the big story here is casinos. VICI owns some of the largest gaming facilities in North America in some of the largest gaming markets in North America that are operated by some of the largest casino companies in North America. As the age-old saying goes, the house always wins. In this case, VICI's lessees have to pay their rent no matter what is going on with the economy or their businesses.

This has resulted in surprisingly steady performance even through the coronavirus pandemic when casinos were effectively shut down. In fact, the dividend has risen steadily since the dividend was initiated in 2018. The dividend growth rate has been fairly generous, too, with the annualized rate of 7% coming in at around twice the historical rate of inflation growth.

Although there are only so many casinos for the REIT to buy, the leases it creates are long (an average of 41 years), and they include regular rent bumps. So, there's no reason to believe that the "house" will stop winning anytime soon, noting that the adjusted FFO payout ratio was a healthy 75% or so in the third quarter of 2024.

If you like high yields, make sure you buy the right high yields

It's actually pretty easy to find high-yield stocks. The hard part is finding high-yield stocks that are worth owning. While AGNC isn't a bad company, it just isn't a yield investment (it's all about total return), no matter how high its yield gets. You'll likely be better off with high-yield alternatives like Innovative Industrial or VICI, which back up their high yields with strong and growing businesses.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties and Vici Properties. The Motley Fool has a disclosure policy.