Better Dividend Stock: Federal Realty vs. AGNC Investment

If you are a dividend investor, then a stock's dividend yield is of high importance to you. The higher the yield, the better, of course, but that is only assuming that risk is kept constant.

If risk rises along with yield, there is a very clear trade-off that has to be addressed. This is exactly the balancing act that dividend investors have to consider when looking at ultra-high-yield AGNC Investment (NASDAQ: AGNC) and a fellow real estate investment trust (REIT) like Federal Realty (NYSE: FRT).

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AGNC wins the yield contest hands down

AGNC Investment has a dividend yield of more than 15%. That's huge by just about any standard and is multiples of the 3.9% yield that Federal Realty is offering shareholders.

But to really put that yield into perspective, it is more than 10 times the slightly less than 1.2% of the S&P 500 index and far above the 3.7% yield of the average REIT, using the Vanguard Real Estate Index ETF (NYSEMKT: VNQ) as an industry proxy. Without a doubt, AGNC Investment is the highest-yielding option here.

Image source: Getty Images.

That said, it is worth noting that Federal Realty's 3.9% yield, while modest in comparison to AGNC's lofty yield, is still notably above the market average. And it is a touch higher than the average REIT. So it is hardly the case that Federal Realty's yield isn't desirable. It just isn't as desirable on an absolute level as that of AGNC Investment.

The risk of chasing AGNC Investment's ultra-high yield

This is where things get interesting. As it turns out, Federal Realty beats AGNC Investment in a different way when it comes to dividends. Federal Realty, a strip mall and mixed-use landlord, has increased its dividend annually for 57 consecutive years. That puts it onto the highly elite list of Dividend Kings.

And that's not all: The company's streak is the longest of any publicly traded REIT. In other words, Federal Realty wins hands down on the dividend reliability front.

How does AGNC stack up on this front? Not too well. The mortgage REIT's dividend has been static at $0.12 per share per month since April 2020. That was the month that it was reduced from $0.16. It was reduced to $0.16 in May 2019. It fell to $0.18 (from $0.20 previously) in August 2016.

You get the idea: AGNC Investment's dividend has been trending downward. If you care about dividend consistency, buying AGNC and its lofty yield probably won't be a good fit for you.

AGNC and Federal Realty are very different REITs

Part of the story here is really about the purpose of each of these REITs. Federal Realty is fairly simple to understand: It owns strip malls and mixed-use developments. It then leases out the properties to tenants and collects rents.

It basically does the same thing you would do if you owned a rental property. It is small, with just around 100 properties, but its assets tend to be large and very well located.

AGNC Investment is a mortgage REIT. It owns mortgages that have been pooled into bond-like securities, collecting the difference between its costs (for example, operating costs and interest expenses) and the interest it earns on the mortgage securities it owns.

In some ways, it is more like a mutual fund, and what it does is not something that most investors would do. Notably, the benchmark for performance is a bit different as well. AGNC's goal is to provide investors with a high total return, something that it has successfully achieved over time.

However, as AGNC's dividend history highlights, that is very different from providing investors with a reliable and growing income stream.

AGNC is fine, but own it for the right reasons

There is nothing wrong with AGNC Investment when you think of it as a mortgage REIT striving to provide investors with a desirable total return. However, if you look at the lofty yield and think that you have found a reliable dividend stock, well, history suggests that you could be let down.

A far better option for investors who need dividend consistency would be a Dividend King like Federal Realty. Yield is, after all, just one part of the dividend investing story (and maybe not even the most important part).

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Reuben Gregg Brewer has positions in Federal Realty Investment Trust. The Motley Fool has positions in and recommends Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.