Dividend Yield Trap: Why Mortgage REITs Underperform for Income Seekers

The High-Yield Illusion

When hunting for high yield investments, dividend investors often fixate on one metric: the percentage payout. At first glance, AGNC Investment (NASDAQ: AGNC) appears irresistible with its 13% dividend yield. Meanwhile, Realty Income (NYSE: O) limps along at 5.6%. For those chasing income, the choice seems obvious. Yet this logic conceals a critical flaw in income-focused portfolio construction.

The reality is that not all yields are created equal. A 13% payout from a volatile mortgage REIT behaves fundamentally differently from a 5.6% return from a stable property owner. Understanding this distinction separates successful dividend investors from those left with depleted capital.

Why AGNC Investment Falls Short for Income Portfolios

AGNC Investment operates as a mortgage REIT—essentially a portfolio manager holding pooled mortgage securities rather than physical real estate. While this structure excels at generating total returns when dividends are reinvested, it performs poorly for those seeking cash income.

The data tells the story clearly. Over the years, AGNC’s dividend (orange line on performance charts) has experienced wild fluctuations, trending downward over several years alongside the stock price (purple line). Investors who relied on spending those distributions found their income stream shrinking and their capital base eroding simultaneously.

This volatility stems from the mortgage REIT business model itself. Dividend cuts and increases are routine as these firms navigate the volatile intersection of housing markets, mortgage rates, and bond prices. The 13% yield, while eye-catching, masks an unreliable income stream that can tighten significantly when market conditions shift.

Realty Income: Stability Over Excitement

By contrast, Realty Income operates as a traditional REIT, owning over 15,500 single-tenant properties across the United States and Europe. Through net lease structures—where tenants shoulder most operating costs—the company has insulated itself from property-level risk.

The numbers speak clearly: an investment-grade balance sheet, geographic diversification, exposure to industrial and specialized assets (casinos, vineyards), and crucially, 30 consecutive years of annual dividend increases. Though the growth pace averages just 4.2% annually, this slightly outpaces historical inflation, preserving the dividend’s purchasing power.

At 5.6%, Realty Income’s yield substantially exceeds the S&P 500’s 1.1% and the broader REIT sector’s 3.9% average. For those building sustainable income portfolios, this represents a foundational high-yield investment without the volatility trap.

The Core Question: What Are You Really Building?

The choice between these two REITs hinges on investment objectives. Total return seekers—those reinvesting dividends—might tolerate AGNC’s volatility for its impressive long-term track record. But dividend investors prioritizing reliable cash income face a different calculus.

Most income-focused investors share the same goal: a stable, growing stream of cash that sustains their lifestyle without requiring them to liquidate capital. That objective demands examining not just yield percentages, but the sustainability of those payouts. Realty Income’s boring reliability—a 30-year track record of annual increases—outperforms AGNC’s thrilling but unpredictable distributions.

For dividend investors selecting between high yield investments of vastly different risk profiles, the lower-yielding but stable option frequently delivers superior real-world outcomes.