If you are a dividend investor, the market sell-off might have you on the hunt for new investment ideas. With as little as $100, you can add one of these high-yield stocks, but make sure you don’t reach too far for yield. If you do, you might end up with a stock that doesn’t actually do what you want it to.
Here’s why AGNC Investment (AGNC -0.96%) is a high-yield stock you might want to avoid, while Realty Income (O 0.82%) and Toronto-Dominion Bank (TD 0.13%) are two high-yielders worth buying today.
Don’t buy AGNC Investment for its 16% dividend yield
AGNC Investment is a mortgage real estate investment trust (mREIT). This niche of the broader REIT sector is known for offering lofty yields, with AGNC Investment’s 16% yield toward the high end of the range. That high a yield can be a siren’s call to an investor trying to live off of the income their portfolio generates. The company, however, is very clear about its goal: “Favorable long-term stockholder returns with a substantial yield component.”
AGNC data by YCharts
To summarize that in two words, AGNC Investment’s goal is total return. Sure, dividends play a role in that, but the real benefit only comes if you reinvest those dividends.
The chart tells you all you need to know. Notice how the dividend has trended lower for years, with the stock price heading lower with it. If you spend the dividend on living expenses, you would have ended up with less income and less capital. The only reason total return is positive is that the huge dividend has more than offset the price decline, so long as the dividend was reinvested.
There’s nothing inherently wrong with AGNC Investment. It is living up to its objective. But that objective just isn’t the end goal that most dividend investors are attempting to achieve. There are better options available.
Image source: Getty Images.
Realty Income is a slow and steady dividend grower
Sticking with the REIT theme, Realty Income has a yield of 5.6%. The dividend has been increased annually for 30 consecutive years at a rate of around 4% or so a year, annualized. Realty Income is something of an income tortoise, but that’s likely to sound pretty enticing to investors during turbulent times like today.
Adding to the allure here are an investment-grade-rated balance sheet and industry-leading portfolio of over 15,600 properties. Indeed, Realty Income is more than three times the size of its next closet peer. It has the capacity to take on deals that its peers are too small to manage, and it has advantaged access to capital markets, so it can compete aggressively on price when buying properties. On top of that, it has exposure to both North America and Europe, giving it multiple levers for growth.
Realty Income won’t wow you, but it can be a foundational dividend stock for your high-yield portfolio. And, as if all of that weren’t enough, Realty Income pays its dividend monthly, making it something like a paycheck replacement that provides regular annual pay raises.
Toronto-Dominion Bank is an opportunistic buy
Toronto-Dominion Bank, or just TD Bank, has a 4.7% dividend yield. That yield is well above the bank average of around 2.7%. Unfortunately, there’s a good reason for the lofty yield, given that TD Bank’s U.S. division was used to launder money. U.S. regulators found out and hit the bank with a big fine, forced it to upgrade its internal controls, and have placed the U.S. division under an asset cap.
None of this is good, but nor is the situation likely to derail TD Bank over the long term. This is, after all, a bank that has paid a dividend every single year since 1857.
The fact is that investors are shunning the bank because of something that is likely to be a short-term headwind. Yes, growth will be slower than many investors hope. However, the stock price decline that happened, along with the regulatory issue, has resulted in a yield that will compensate you well for sticking it out. And, more the point here, the company’s foundational Canadian business is unaffected.
So the core is still very strong for TD Bank, and there’s likely no reason to be overly concerned about the dividend, given the low-risk turnaround story that’s slowly unfolding.
All it takes is $100 and some prudence
TD Bank and Realty Income can both be had for less than $100 a share, so you can get started with these attractive dividend stocks fairly easily. The key, however, is that they are likely to provide a dividend investor with the outcomes they are looking for. You can buy AGNC Investment for less than $100 a share, too, but reaching for that mREIT’s yield is likely to leave you with a business you don’t really want to own if you are a dividend investor.