The mathematics is fairly easy for buyers seeking to dwell off of the dividend earnings their portfolios generate: Larger yields imply extra earnings. However large yields, just like the 14.5% on supply from AGNC Funding (AGNC -3.45%), cannot be taken on and not using a deeper take a look at the dangers concerned. Typically, a decrease yield, just like the 4.8% from Realty Earnings (O -1.37%), is the higher selection.

This is a comparability of those two actual property funding trusts (REITs) on three factors to point out why easy is best.

1. Property vs. mortgages

The one largest distinction between Realty Earnings and AGNC is that one owns properties and the opposite holds mortgage-backed securities, typically within the type of debt often known as collateralized mortgage obligations (CMOs). 

Realty Earnings’s portfolio of greater than 12,000 properties spans numerous property varieties (together with vineyards) and international locations (most of its international publicity is in Europe). And but, it would not require a lot effort to know what the corporate is doing. It tries to amass bodily properties that it believes it will possibly lease out below long-term leases to tenants that may reliably pay their lease.

It’s the similar factor you’d be doing should you purchased a second residence with the intent of renting it out. You would get into the nuances, like Realty Earnings’s use of the web lease construction (this requires tenants to pay for many property-level bills), however they’re nonetheless simply nuances. 

The story is vastly completely different with mortgage REIT AGNC. This REIT owns a portfolio of CMOs and different securities that it buys utilizing borrowed cash, with the aim of maximizing the distinction, or unfold, between the rates of interest it pays for debt and the curiosity it collects from the CMOs. CMOs commerce overtly, so their values can fluctuate fairly rapidly, with their costs impacted by altering rates of interest, housing market dynamics, and easy investor sentiment.

A mortgage REIT is sort of like a bond fund centered on mortgages. Most buyers perceive how a mortgage works, however that actually would not assist one perceive how CMOs and the CMO market works — or, maybe extra importantly, the right way to handle a portfolio of CMOs in a fast-changing funding market.

In the event you wish to preserve issues easy, Realty Earnings is the hands-down winner right here.

2. The dividend

That mentioned, you would possibly very properly be keen to be taught new issues to gather an enormous 14.5% dividend yield. That, nevertheless, is barely a gorgeous possibility should you can truly depend on that dividend being sustained over time. Within the case of AGNC, the dividend has headed steadily decrease over the previous decade or so. Against this, Realty Earnings’s dividend has headed steadily greater.

Information supply: YCharts AGNC Dividend Per Share (Annual)

In reality, over the course of that decade, AGNC’s dividend began at a better absolute stage however ended at lower than half of what Realty Earnings buyers are accumulating at this time.

Nonetheless, a decade is not actually sufficient time to understand Realty Earnings’s dividend consistency. This REIT has elevated its month-to-month pay dividend yearly for 28 consecutive years. The common annualized enhance over that span of 4.4% might not sound thrilling, however that is sort of the purpose for this REIT, which has just about devoted itself to gradual, regular progress. 

You would possibly argue you could get a financial institution CD with a 4.4% or higher yield at this time. However you may lose out on the dividend progress that provides up over time and helps you retain tempo with, or outdistance, inflation. And clearly, a rising dividend beats the chance that you will see a dividend minimize, which clearly is an element with AGNC.

3. Ups and downs

There’s an attention-grabbing factor about dividend yields that is typically ignored: Like typical valuation instruments (the price-to-earnings ratio, for instance), a inventory’s dividend yield typically trades inside a variety. You possibly can see that with AGNC in a really dramatic trend, because the chart exhibits. Though the dividend payout has headed steadily decrease over the previous decade, the yield has remained at a excessive stage.

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Information supply: YCharts AGNC

Yield and value transfer in reverse instructions, which implies that the excessive yield has been maintained solely as a result of the inventory value has fallen. Not solely have shareholders suffered a declining earnings stream, however capital losses as properly.

The chart additionally exhibits that Realty Earnings’s yield has lengthy hovered within the mid-single digits. With the dividend rising over that point span, nevertheless, the one option to obtain that was with a rising inventory value. The value will increase weren’t large as a result of the dividend will increase weren’t large. However over time, buyers have seen a rising earnings stream and a rise within the worth of their funding. Clearly, that is a greater consequence.

Preserve it easy

Investing is tough, and the harder you make it, the extra probably you’re to make a mistake. AGNC is a extremely advanced funding that’s solely applicable for extremely engaged, energetic buyers. Realty Earnings is a reasonably easy-to-understand various with a historical past of regular efficiency.

Sure, its yield is decrease than the yield you’d gather from AGNC. However normally, it is higher to go together with easy and regular over advanced and dangerous, making Realty Earnings the higher selection right here.