Better Dividend Stock: Omega Healthcare Investors vs. AGNC Investment

Investing in real estate can pay big dividends. The average real estate investment trust (REIT) currently offers a dividend yield of around 4%. That's more than three times higher than the S&P 500's 1.2% dividend yield.

Several REITs offer even bigger dividend payments. For example, AGNC Investment (NASDAQ: AGNC) has a monster 13.7% yield, while Omega Healthcare Investors (NYSE: OHI) payout is 7.5%. Here's a look at which of these two high-yielding REITs is the better dividend stock to buy right now.

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Higher risk and higher reward

AGNC Investment is a mortgage REIT focused on investing in residential mortgage-backed securities (MBSes) protected against credit risk by government agencies such as Freddie Mac. These investments are very low risk. However, they also produce relatively low returns, with low- to mid-single-digit yields.

The REIT can boost its returns by using debt to invest in additional MBSes. That strategy also increases its risk profile a bit.

AGNC Investment currently generates a high enough return to cover its operating expenses and dividends, including a monthly common dividend and preferred stock dividends. The REIT has done that nearly 60 months in a row. The company believes it can continue earning a high enough return to cover its monthly dividend in the current operating environment. CEO Peter Federico stated on its fourth-quarter conference call: "As we begin 2025, the supply and demand outlook for Agency MBS appears to be well balanced. In addition, and most important to our business, we expect Agency spreads to benchmark rates to remain in the same well-defined trading range, thus providing levered and unlevered investors very attractive return opportunities. "

However, while market conditions are positive right now, they can change unexpectedly. If there's a significant policy shift by the Federal Reserve or if credit market conditions deteriorate, AGNC Investment might not be able to earn a high enough return to cover its dividend and operating costs. That has happened several times in the past, causing the REIT to cut its dividend many times:

AGNC Dividend data by YCharts

Still, for investors willing to take on some risk, AGNC Investment offers a very high-yielding monthly dividend that should be sustainable in the near term.

Getting healthier

Omega Healthcare Investors is a healthcare REIT focused on owning skilled nursing and skilled living facilities in the U.S. and UK. It leases these properties to operating companies under triple-net leases (NNN). Triple net leases generally supply very stable rental income because the tenant covers all operating expenses, including routine maintenance, real estate taxes, and building insurance.

The REIT produced $2.73 per share in funds available for distribution (FAD) last year, which was enough to cover its dividend outlay of $2.68 per share. However, at 98%, it has a very high dividend payout ratio.

On a positive note, Omega Healthcare Investors' payout ratio has improved from 2023, when it produced only $2.62 per share of FAD. It benefited from $1.1 billion of new investments made over the past year, which helped grow its revenue and FAD. The REIT funded those new investments by issuing $1.2 billion of stock, which also allowed it to repay some debt and strengthen its balance sheet. Its leverage ratio has fallen from around 5.0 to below 4.0.

Those new investments have helped offset some tenant issues that have had some impact on its rental income. For example, Maplewood Senior Living's rental payments have fluctuated over the past few months. Its $12.3 million in the fourth quarter compares with $12.1 million in the third quarter and $4.5 million in January. It has also had to provide additional financing to help LaVie Care Centers through its bankruptcy.

Despite those tenant issues, Omega expects its financial metrics to continue improving this year. It anticipates that its recent investments will increase its FAD while non-core asset sales and last year's stock sales will enable it to continue strengthening its balance sheet. Meanwhile, since it has the financial flexibility to continue making accretive new investments, its high-yielding dividend looks sustainable. That could eventually put the REIT in the position to start increasing its dividend again.

Big-time income streams

AGNC Investment and Omega Healthcare Investors both offer monster dividend yields. However, the REITs will probably appeal to different investors. AGNC is best for those willing to take on a bit more risk for a very lucrative monthly income stream that should be sustainable in the near term. Meanwhile, Omega Healthcare Investors is the better dividend stock for those seeking a more sustainable dividend that could grow in the future. That growth could enable Omega to produce higher total returns over the long run.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.