Investment Comparison: AGNC versus W.P. Carey, Delivering High Returns
By default, income investors often place significant emphasis on dividend yield. While this isn't wrong, it shouldn't be the sole consideration. The company behind the dividend is equally significant to ponder over.
This aspect becomes evident through a comparison of AGNC Investment (-0.82%) with its 15%-plus yield and W.P. Carey (-0.41%) with its approximately 6.3% yield. Most investors, focusing on dividends, would likely pick the smaller yield.
What exactly do these REITs do?
Both AGNC Investment and W.P. Carey belong to the category of real estate investment trusts (REITs), a corporate structure designed to distribute income to investors in a tax-beneficial manner. As long as a REIT distributes at least 90% of its taxable earnings to investors, it escapes corporate-level taxation. This is a solid gain on the income front. However, REIT dividends are taxed as regular income.
These two REITs differ significantly in their operations. W.P. Carey is simpler to grasp. It invests in physical properties and rents them out to tenants, much like an individual would if buying an investment property on a larger scale.
W.P. Carey's portfolio is highly diversified, featuring assets in the industrial, warehouse, and retail sectors, as well as investments in North America and Europe. This ensures geographic diversification as well.
AGNC Investment, on the other hand, is a mortgage REIT. It invests in mortgages that have been pooled into bond-like securities, a world most small investors wouldn't typically venture into.
The mortgage securities market can be complex and volatile. Factors like interest rates, property market dynamics, and loan repayment rates can all impact these mortgage bonds. Even the year of a mortgage bond's creation can affect its performance. While it's possible to get some insights into W.P. Carey's business through its portfolio, it's highly unlikely you could do the same with AGNC Investment.
A tale of dividend reductions
Both AGNC Investment and W.P. Carey have reduced their dividends. This contributes to their higher than average dividend yields (around 3.7%) compared to the industry average today, using the Vanguard Real Estate Index ETF as a reference.
W.P. Carey cut its dividend at the beginning of 2024, following 24 years of increases. AGNC Investment's dividend has remained stable recently but has been declining for over a decade.
This situation paints a grim picture for both REITs, but there's a key distinction to note. After W.P. Carey's dividend cut, the REIT swiftly resumed its pattern of quarterly dividend increases, which had existed prior to the cut.
This was a strategic move following W.P. Carey's decision to exit the struggling office sector in one swift move. While this was a challenging decision, it set the REIT up for better long-term performance.
AGNC Investment, however, has become a frequent dividend cutter. This is due to its business model, which revolves around investing in the mortgage market. The value of the REIT is primarily based on the mortgage securities it holds.
The value of these mortgage securities has been decreasing, influenced by the rapid surge of interest rates to combat inflation. Although falling rates will subsequently benefit AGNC Investment, they won't change the underlying business at all. AGNC Investment's dividend will always be unstable.
Which one is best suited for you?
To be fair, AGNC Investment is not a poor mortgage REIT. If you reinvest the dividends it pays out, the total return is reasonably appealing.
However, income investors usually prioritize total return less because they use the dividends from their holdings to fund living expenses. In this context, AGNC Investment becomes a less desirable choice than W.P. Carey, considering W.P. Carey's recent dividend cut and lower dividend yield.
Indeed, W.P. Carey is currently striving to demonstrate its ability to pay a steadily increasing dividend. On the other hand, AGNC Investment is not built to achieve this.
After considering the financial aspects, an investor might decide to allocate their money to both AGNC Investment and W.P. Carey, as they offer diverse investing opportunities in the real estate sector. However, if the investor is primarily focused on dividend income and stability, they might prefer W.P. Carey, which has shown a history of quarterly dividend increases and a lower risk of dividend cuts compared to AGNC Investment. Additionally, an investor might consider diversifying their portfolio by investing in a mix of equity and debt instruments within these REITs, considering their unique financing structures and dividend yields.
