If you're looking for stocks that pay you to hold them, now is a great time to look at the telecommunications and specialty finance industries.
Shares of Verizon(NYSE: VZ) offer an attention-getting 6.5% dividend yield at recent prices. AGNC Investment Corp.(NASDAQ: AGNC), a real estate investment trust (REIT) with a huge portfolio of mortgages, offers a giant 14.0% yield.
If all you look at are dividend yields, AGNC seems like the clear choice. The yield it offers is so high that cumulative payments will exceed your initial investment in about seven years. Unfortunately, since forming in 2008, this mortgage REIT (mREIT) hasn't maintained a steady dividend payout for longer than four years or so. Verizon offers a yield that is less than half the size of AGNC's, but it has been able to raise its payout for 18 consecutive years.
Here's a closer look at both high-yield dividend payers to see which one is likely to pay you the most over the long run.
AGNC Investment
As an mREIT, AGNC Investment buys long-term mortgage-backed securities (MBS) with shorter-term capital. When all goes well, it earns a living in the margin between interest paid on short-term borrowings and interest received from its holdings. It doesn't have to worry much about mortgage defaults, because the loans that make up its portfolio are backed by government agencies.
At the same time, AGNC is heavily leveraged, which makes it very sensitive to interest-rate volatility. When prevailing interest rates rise, fixed-income securities like the ones held by AGNC trade for lower prices. This mREIT and its peers use their MBS portfolios as collateral. If MBS prices fall too fast, AGNC may be forced to sell off large portions of its portfolio at fire-sale prices to satisfy its lenders' capital requirements.
Meanwhile, falling interest rates can raise the value of AGNC's MBS portfolio -- but only if rates don't fall too quickly. A rapid rate drop can inspire a wave of mortgage refinancing that negatively impacts MBS returns.
The Federal Reserve recently lowered interest rates by 0.5%, which bodes well for AGNC as long as subsequent reductions don't occur too quickly. The mREIT's bottom line swung from a loss in the second quarter to $0.39 per share worth of net income in the third quarter. That's enough to maintain its present monthly payout of $0.12 per share.
While AGNC's enormous dividend yield is on solid footing now, your portfolio's performance is not the U.S. Federal Reserve's responsibility. If it needs to rapidly raise rates to stifle inflation or lower them to stimulate a weak economy, this stock's returns could quickly evaporate.
Verizon
Verizon was already America's largest telecommunications business by revenue before it announced its intention to acquire Frontier Communications(NASDAQ: FYBR) in September. The $20 billion all-cash acquisition could expand its fiber internet service area by 25 states and 2.2 million subscribers.
Verizon recently reported third-quarter revenue in line with the previous year's period. Flat revenue was impressive when you consider mobile equipment sales were down 8.1% year over year as fewer Americans are eager to upgrade smartphones that improve in tiny increments these days.
Traditional wireline connections are also in decline, but the worst losses are in the rearview. This means rising mobile and broadband internet sales can drive overall growth going forward. Broadband subscriptions are a strong growth driver that can easily offset declining equipment sales.
The third quarter was the ninth consecutive quarter that Verizon added over 375,000 new broadband subscribers. New customers flocking to its fixed wireless service allowed it to blow past the 4 million mark 15 months ahead of schedule.
Frontier will help Verizon compete with AT&T's successful fiber business, but this isn't a great time for Verizon to take on Frontier's $11 billion debt pile. The telecom provider is generating heaps of cash but it hasn't been enough to significantly reduce its debt load.
The better buy now
Buying AGNC stock for its 14% dividend yield is risky. Unfortunately, Verizon might be even riskier in light of its planned Frontier acquisition.
Verizon reported net unsecured debt that fell by less than $1 billion year over year to $121.4 billion at the end of September. Verizon's only raised its payout by 10.2% over the past five years. Taking on Frontier while it's already up to its eyeballs in debt could force the company to reduce or at least freeze its dividend payout.
Right now, the right move for most income-seeking investors is to avoid both stocks. If following monetary policy is already a hobby, though, AGNC could be the better buy.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.