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

"Don't judge a book by its cover" is an old saying that should be heeded when considering high-yield dividend stocks. A great example is the nearly 15% yield on offer from AGNC Investment (NASDAQ: AGNC). It is, in fact, too good to be true if you need a reliable income stream. Most investors would probably be better off with Realty Income (NYSE: O) and its 5.6% yield.

Avoid AGNC Investment if you need income

There is nothing inherently wrong with AGNC Investment. The mortgage real estate investment trust (REIT) has done a fairly respectable job of generating total returns for its shareholders over time. But investing for total return is very different from investing for income.

If you are investing for income, you probably want to collect and spend the dividends that a company distributes. If you are investing for total returns, you'll need to reinvest the dividends to maximize your gains. That difference is important because AGNC Investment doesn't behave like a traditional REIT that owns properties. Think of it more like an entity that invests in mortgage securities, which are fairly complex investment products. Just look at the graph below and you'll see why spending the lofty income stream AGNC Investment has provided would have been a bad decision.

AGNC data by YCharts.

The blue line is the dividend, which rose sharply after the REIT's IPO and then started to decline. The purple line is the stock price, which basically tracked the dividend. If you spent your dividends along the way, you would now be collecting less income and have a position that was worth less too. But the total return line has risen materially because the large dividends have more than made up for the falling share price as AGNC Investment has bought and sold mortgage securities over time. But you only got that return if you reinvested the dividends.

There is an argument to be made that the dividends collected over time have made up for the decline in the value of the shares, since the cumulative dividends plus the ending share price value would have left investors with roughly $30,000 on an initial $10,000 investment. However, if you spent the dividends on living expenses you still ended the period with a smaller income stream thanks to dividend cuts and a material loss on your initial investment. That's not a win for an income-focused investor.

AGNC Investment is appropriate for a small group of investors, but that group doesn't include people in search of reliable income streams.

Realty Income is a dividend investor's dream

At the other end of the reliable-income-stream spectrum is Realty Income. This net lease REIT has increased its monthly payouts every year for 30 consecutive years. It has even increased its dividends every quarter for over 100 quarters in a row. It is probably as close as you can get to a stock that can replace a paycheck. Add in its attractive yield -- 5.6% at the current share price -- and it's clear why dividend investors should be digging in deep here.

Net lease REITs generally own single-tenant properties for which the tenants are responsible for most property-level operating costs. While any individual property might carry some risk that the occupant will fall behind on their rent, across a large portfolio, the risks are pretty low. With a portfolio of over 15,400 properties, Realty Income is the largest net lease REIT. It also has an investment-grade-rated balance sheet. Because of that, it generally has easier access to capital markets at more attractive costs than its smaller peers. That, in turn, allows Realty Income to be more aggressive when it comes to acquisitions.

There are drawbacks to being the net lease sector's largets player. Most notably, it takes a lot of transactions to meaningfully boost Realty Income's top and bottom lines. However, with a portfolio that is spread across the United States and Europe, and with an increasingly broad list of property types in that portfolio (management recently added casinos and data centers to the opportunity set), Realty Income has a lot of growth levers to pull. So investors should probably expect its slow and steady growth to continue.

Buy Realty Income, avoid AGNC Investment

If you are an income investor looking for a reliable long-term dividend stock, you'll want to consider adding Realty Income stock to your portfolio, despite the fact that it has underperformed higher yielding AGNC Investment over the past few months. It won't excite you, but it will provide an attractive stream of payouts while allowing you to sleep well at night. AGNC Investment, on the other hand, isn't really designed to provide reliable dividends over time. Buying its super-high yield will likely leave you tossing and turning because of the very real risk that another dividend cut will come along someday and upend the income story.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.