Reuben Gregg Brewer, The Motley Fool
4 min read
In This Article:
-
AGNC Investment currently has a gigantic 15%-plus yield.
-
The Vanguard Dividend Appreciation ETF has a relatively tiny 1.8% yield.
-
Income-focused investors would likely be better off picking the lower yield.
Dividend investors are often drawn to high yields like moths to a flame. When it comes to yields today, there are few that are loftier than AGNC Investment's (NASDAQ: AGNC) 15%-plus dividend yield. Yet if history is any guide, most investors would be better off buying the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) instead, even though it only has a relatively modest 1.8% yield. Here's why.
AGNC Investment is a mortgage real estate investment trust (mREIT). That's a fairly complex niche within the broader REIT sector. AGNC Investment buys mortgages that have been rolled up into bond-like investments, often making use of leverage to do so. Mortgage securities prices can be impacted by interest rates, housing market dynamics, and mortgage repayment trends, among other things. And they trade all day, so stocks like AGNC Investment can be fairly volatile.
The Vanguard Dividend Appreciation ETF is a diversified exchange-traded fund (ETF). It tracks the S&P U.S. Dividend Growers index. That index starts by taking all of the U.S. companies that have increased their dividends for at least 10 consecutive years and then removes the highest yielding 25% of the list. The rest get into the index (and the ETF) based on a market cap weighting. Note that it is specifically avoiding the highest-yielding stocks.
Here's the interesting thing: AGNC Investment is very clear that income is not its primary goal. Management says its goal is "Favorable long-term stockholder returns with a substantial yield component." That means that delivering a strong total return, which assumes dividend reinvestment, is the main goal, and AGNC Investment has done reasonably well at hitting that target.
Looking at the entire span that both AGNC Investment and Vanguard Dividend Appreciation ETF have existed, AGNC Investment has provided a slightly better total return. But take a look at the dividend and price history of each of these investments. After early spikes in the dividend and price of AGNC, it has been all downhill. By contrast, the Vanguard Dividend Appreciation ETF's dividend payouts and share price have both generally risen over time.
