Real estate can be a gold mine for investors aiming to rake in substantial steady income streams. In a world where dividends reign supreme, many real estate investment trusts (REITs) stand out by offering ultra-high dividend yields, allowing income-focused investors to squeeze every drop of income from their invested dollars.
Realty Income (NYSE: O) and Vici Properties (NYSE: VICI) currently flaunt dividend yields hovering around 6%, which is poles apart from the S&P 500’s measly 1.3% dividend yield. These REITs emerge as prime candidates for income-seeking investors to consider.
However, not every high-yield offering in the real estate sector is a jackpot worth chasing. One such cautionary tale is AGNC Investment (NASDAQ: AGNC) – a company where the siren call of its almost 15% dividend yield might be a fleeting illusion.
A Steady Income Titan: Realty Income
Realty Income stays true to its name. This REIT has consistently paid out dividends every month for a staggering 55 years. Since its public debut in 1994, the company has upped its dividend 124 times, including for the last 106 consecutive quarters. Its dividend has been on a steady climb, growing at a 4.3% compound annual rate, and remarkably, the company has never slashed its payment.
These upward strides are forecasted to persist. Realty Income anticipates a 4% to 5% annual growth rate in its adjusted funds from operations (FFO) over the long haul.
Several factors fuel this optimistic outlook:
- Durable Income: Realty Income leases its properties to top-tier tenants in industries that are relatively immune to economic downturns and the online retail wave.
- Long Growth Runway: With a total addressable market opportunity of almost $14 trillion, the REIT is expanding its portfolio into new property types and geographical locations, including a foray into European markets and a new real estate credit platform.
- Strong Financial Foundation: Realty Income boasts a low dividend payout ratio (roughly 75% of its adjusted FFO) and one of the highest credit ratings in the REIT sector.
The company’s financial robustness paves the way for further portfolio expansion in lucrative real estate sectors, promising cash flow growth, and a hefty dividend (currently yielding close to 6%).
A Low-Risk Bet: Vici Properties
Vici Properties also sports a dividend yield hovering around 6%, focusing on gaming properties and experiential real estate. Since its inception, this REIT has increased its dividend every year, registering a leading 7.6% compound annual growth rate since late 2018.
The foundation of this substantial dividend is rock-solid. Vici Properties generates consistent cash flow underpinned by long-term net leases, maintaining a prudent dividend payout ratio (approximately 75% of its adjusted FFO) and boasting a robust investment-grade balance sheet.
The company’s sound fiscal health empowers it to continue investing in experiential real estate, exploring new avenues for expansion and growth, both domestically and internationally, indicating a promising growth trajectory ahead.
The Looming Risk of a Dividend Cut: AGNC Investment Corp.
While Realty Income and Vici Properties have consistently hiked their robust dividends, AGNC Investment has treaded a different path, evident in its fluctuating dividend history:
AGNC Dividend data by YCharts
The mortgage REIT has grappled with several dividend cuts over the years, influenced by changes in interest rates impacting its revenue. Primarily investing in government-protected mortgage-backed securities (MBS), AGNC faces a conundrum of reinvestment risk despite insulated credit losses.
As borrowers repay mortgages, AGNC must reinvest the proceeds into new MBS investments. Fluctuating interest rates can force reinvestment in lower-yielding MBS, affecting the REIT’s earnings. Moreover, rising interest rates inflate borrowing costs for AGNC, squeezing margins on new investments.
In a testament to market volatility, the company acknowledged during its fourth-quarter call that its current investments cover operating expenses and dividends. However, shifting market conditions might render it incapable of sustaining dividends, threatening income-focused investors with the specter of another round of dividend reductions.
Focus on Stability: Embrace Sustainable Dividends
Realty Income and Vici Properties epitomize income sustainability, a trait that eludes AGNC Investment. While the former duo appears set to drive dividend growth, the latter’s high-yield dividend remains vulnerable to future cuts. Thus, prudent income-centric investors would be wise to sidestep the risk inherent in AGNC Investment and instead opt for the reliability offered by Realty Income and Vici Properties.
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Matt DiLallo has holdings in Realty Income and Vici Properties. The Motley Fool holds positions in and endorses Realty Income and Vici Properties. The Motley Fool adheres to a disclosure policy.
The expressions and viewpoints presented here reflect the author’s perspective and do not necessarily align with those of Nasdaq, Inc.