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Forget AGNC Investment, buy these great high-yield stocks instead

Vaseline 1 month ago

AGNC investment (NASDAQ: AGNC) has a huge dividend yield of 15.7%. For comparison: the 6.5% return on offer Bank of Nova Scotia (NYSE:BNS) seems small. But if you’re trying to find a reliable dividend stock, you should probably go for the lower yielding stocks here. This is why Bank of Nova Scotia is a better income option than AGNC Investment.

AGNC Investment is simply not reliable

There’s one big reason why dividend-oriented investors should stay away from AGNC Investment and its massive returns: dividend cuts. In the chart below, the orange line represents this mortgage real estate investment trust’s (REIT) quarterly dividend. Note that it rises sharply at the beginning of the graph and then falls steadily over the past decade. That’s not great if you’re trying to live off the income your portfolio generates.

AGNC chartAGNC chart

AGNC chart

Even worse, look at the purple line, which is the stock price. That line generally follows the trend of the dividend. Over the past decade, this has led to a fairly steady decline in the value of AGNC Investment’s shares. And yet, if you look at the orange line, the dividend yield has remained attractively high all along, a function of the basic math behind dividend yields. Yet these high yields have long tempted investors, despite the (obvious in retrospect) risk of dividend cuts that income seekers here faced.

To be fair, AGNC Investment is really for institutional investors who focus on asset allocation and total return (which assumes dividends are reinvested and not spent on living expenses). So there is room for shares; it’s just not suitable for investors trying to live off the income their portfolios generate.

But what about the Bank of Nova Scotia and its still impressive 6.5% dividend yield? While it is not a REIT, it does have a financial angle, specifically providing mortgage loans.

Bank of Nova Scotia is unique

For starters, Bank of Nova Scotia, or Scotiabank as it is more commonly known, has paid a dividend every year since 1833. That’s pretty incredible and speaks both to the bank’s ability to reward investors and its ability to survive massive financial disruptions like the crisis. Great Depression and the Great Recession. Notably, Scotiabank did not have to cut its dividend during the Great Recession, as did many of the largest U.S. banks.

But what really sets Scotiabank apart is that it is mainly active in Canada, its home market and South America. Canada’s banking markets are highly regulated, giving Scotiabank an anchored industry position domestically. Those regulations also result in a generally conservative ethos across the company. So there is a strong foundation from which we can grow.

However, unlike most of its Canadian peers, Scotiabank has chosen to focus on South America rather than the United States for growth. This choice entails more risk, but that is why the return is so much higher than the average return of 2.8% for banks, based on the SPDR S&P Bank ETF (NYSEMKT: KBE) as a proxy.

If you’re considering AGNC Investment, taking on a little extra risk probably isn’t a big deal for you. But especially compared to AGNC Investment, the risk of owning Scotiabank is quite low. Scotiabank’s risk is simply higher compared to other large, conservatively managed Canadian banks.

To be fair, Scotiabank is trying to improve its financial performance based on key metrics such as earnings growth, return on equity and return on risk-weighted assets. That said, a key part of the plan is shifting to the most profitable markets it serves, which essentially means Canada, Mexico and, to a lesser extent, the United States. So Scotiabank will become less risky as time goes by.

Meanwhile, the bank has a strong Tier 1 capital ratio, a measure of a bank’s ability to withstand setbacks, of 14.8%. So there is no specific reason to believe that the investment grade bank cannot successfully renew its business even as economic uncertainty increases.

If you want to take a risk, hedge your bets

In short, AGNC Investment is an ultra-high yield REIT with a terrible dividend history. Scotiabank is an ultra-high yield bank with a great dividend history. And Scotiabank’s management has made it clear that it stands behind the dividend even as it works to reposition the company. From a risk/return perspective, Scotiabank will be a much better option than AGNC Investment for most dividend investors.

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Reuben Gregg Brewer has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

Forget AGNC Investment, buy these great high-yield stocks instead, originally published by The Motley Fool