Is AGNC Investment the Right Dividend Stock for You? Here's a Better Question to Ask.

A huge yield can be a siren call to dividend-focused investors. AGNC Investment's (NASDAQ: AGNC) huge 17% dividend yield is more like a rock opera, given that the S&P 500 index (SNPINDEX: ^GSPC) is only yielding 1.3% or so and the average real estate investment trust (REIT) is yielding just 4%. If you are trying to live off of your dividends, here's why there are better dividend choices available to you.

What does AGNC Investment do?

AGNC Investment is a mortgage REIT, which means it buys mortgages that have been pooled into bond-like assets. That's very different from a property-owning REIT, which buys physical assets and rents them out to tenants (just like you would do if you owned a rental property). Mortgage REITs are more like mutual funds because their value is, basically, the net value of the portfolio or mortgage assets they own. AGNC Investment buys and sells these assets in an attempt to maximize total return.

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That last bit is important because AGNC Investment's goal is total return, not a reliable and growing dividend. The huge dividend is a component of total return, for sure, but total return assumes you reinvest the dividend. If you plan to spend that cash, your outcome may not be what you expect. The graph below shows you what you need to know.

AGNC data by YCharts

The total return isn't bad, so AGNC Investment has lived up to its goal. However, the dividend has been falling for more than a decade, and the stock price has followed it lower. In other words, if you spent the dividend, you would be left with less capital and less income, which is not the outcome most dividend investors want.

Trade down on yield to trade up on dividend reliability

If you are attempting to live off of your dividends, you will likely be better off if you take a different approach and focus on reliable dividend growers. Some good options include fellow REITs Realty Income (NYSE: O), NNN REIT (NYSE: NNN), and Federal Realty (NYSE: FRT). All three are focused on retail properties, with Realty Income and NNN REIT owning single-tenant net lease assets (net leases require tenants to pay most property-level operating costs). Federal Realty owns strip malls and retail-focused mixed-use properties.

The yields are attractive across the board. Realty Income and NNN REIT both have roughly 5.7% dividend yields, with Federal Realty coming in a bit lower at 4.7%. That said, Realty Income has increased its dividend annually for about 30 years. NNN REIT's streak is just over 35 years. And Federal Realty tops the list with more than 50 annual increases, making it the only Dividend King REIT. If dividend consistency is important to you, these are all better choices and AGNC Investment.

But they aren't the only high-yield choices. You could also shift gears and look at midstream businesses like Enterprise Products Partners (NYSE: EPD) or Enbridge (NYSE: ENB). Midstream companies own energy infrastructure, like pipelines, and charge fees for the use of the assets they own. It's a toll-taker model that tends to generate reliable cash flows throughout the energy cycle. Indeed, energy demand is robust even when oil and gas prices are low.

Enterprise and Enbridge are two of the largest midstream players in North America. They are both financially strong and have long histories of annual dividend increases. Enterprise, a master limited partnership, has increased its distribution for 26 consecutive years. Enbridge, a Canadian corporation, has increased its dividend in Canadian dollars for 30 years and counting. Enbridge has a 5.7% yield, while Enterprise's lofty 6.9% distribution yield tops the list of alternatives presented here.

Step down on yield and step down on risk

It is easy to get sucked into a high yield and ignore the risks that you might be taking on. With AGNC Investment the big risk is that total return is the company's goal, not a reliable and growing dividend. If what you really want is a reliable and growing dividend you will be better served stepping down on the yield front and looking at attractive dividend growers like Realty Income, NNN REIT, Federal Realty, Enterprise, and Enbridge.

Reuben Gregg Brewer has positions in Enbridge, Federal Realty Investment Trust, and Realty Income. The Motley Fool has positions in and recommends Enbridge and Realty Income. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.