AGNC Investment (NASDAQ: AGNC) stands out among dividend stocks. The mortgage-focused real estate investment trust (REIT) currently yields more than 13%. That puts its payout 10 times higher than the S&P 500's dividend yield. The REIT pays its investors each month, enabling them to collect a very lucrative passive income stream.
However, if there's one knock against AGNC Investment, it's that it doesn't increase its dividend. The total returns investors earn tend to be limited to the mortgage REIT's monthly dividend.
Those looking for a bit more excitement should check out fellow REIT EPR Properties (NYSE: EPR). It also pays a high-yielding monthly dividend, currently over 7%. That payout should steadily rise as the REIT expands its portfolio and cash flow per share.
All about the income
AGNC currently pays its investors $0.12 per share in dividends each month, or $1.44 annually. It has paid that rate since it reduced its dividend during the pandemic. That wasn't the first time the mortgage REIT cut its payout:
The REIT, which invests in mortgage-backed securities (MBS) backed by government agencies, has had to cut its dividend over the years because of the impact interest rates and other factors have on its earnings. For example, falling rates lead borrowers to refinance their higher-rate mortgages, which impacts the interest income AGNC Investment earns on its portfolio. That's one of the factors that has caused its earnings per share to fall over the years, necessitating the dividend cuts.
Despite those cuts, the REIT has delivered solid total returns. While its stock price has fallen 45% since it came public in 2008, it has delivered a 450% total return, or 11% annualized, solely from its lucrative dividend.
The REIT's payout seems safe for now, especially with the Federal Reserve recently reducing interest rates, which should help lower its borrowing costs. However, it doesn't offer any upside beyond that dividend. So if you're looking for some stock price appreciation potential, AGNC Investment isn't likely to deliver any. Its stock price could keep declining as it issues more shares to fund new MBS investments.
More exciting return potential
EPR Properties is a specialty REIT focused on experiential real estate. It owns movie theaters, attractions, experiential lodging properties, and other entertainment venues. It leases those properties back to operating companies under long-term net leases. Those leases require that tenants cover the property's operating costs, including routine maintenance, building insurance, and real estate taxes. Meanwhile, its leases typically feature rental escalators that generally raise rents by 1.5% to 2% annually, or 7.5% to 10% every five years.
The REIT's leases typically provide it with steady and rising rental income. That rising income foundation puts EPR Properties in a solid position to increase its dividend.
It complements rent growth by making accretive new investments. It plans to spend $200 million to $300 million on new investments this year. It invested $85 million in the first quarter, including $33.4 million for an attraction property and $14.7 million to buy land and finance two build-to-suit eat-and-play developments. It followed that up by spending $46.9 million in the second quarter, primarily on experiential build-to-suit development and redevelopment projects. EPR Properties currently has $180 million in additional projects it expects to fund over the next two years.
These growth drivers have the REIT on track to expand its funds from operations (FFO) as adjusted by 3.2% at the mid-point this year. That growing cash flow enabled EPR to raise its dividend by 3.6% earlier this year.
The company estimates that it has the capacity to internally fund enough new investments with post-dividend free cash flow, capital recycling, and its strong balance sheet to grow its FFO per share at a low-to-mid single-digit annual rate. As interest rates fall and its cost of capital improves, it could grow even faster by securing outside funding to ramp up its investment volume. In the meantime, its modest growth rate should still support a steady rise in its share price. Add in the dividend, and its total returns could exceed 10% annually. Meanwhile, its longer-term total return potential is more robust, evidenced by the more than 1,300% total return it has delivered since coming public in 1997.
AGNC Investment should supply its investors with a stable dividend each month. It's more of a fixed-income investment, since the dividend, as lucrative as it is, will probably make up the entire return, given the REIT's lack of growth.
For those seeking the excitement of more upside potential, EPR Properties is a great option. It, too, pays an attractive monthly dividend. In addition, it should be able to grow its income and dividends in the future, which should enable it to deliver some stock price appreciation along with lucrative dividends. That makes it a better option for those seeking to grow their wealth and income.
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Matt DiLallo has positions in EPR Properties. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
If You Like AGNC Investment's Monster Monthly Passive Income Stream, Then You'll Love This Exciting Dividend Stock was originally published by The Motley Fool