Forget AGNC – These Ultra-High Yield Dividend Stocks Will Make You Even More Money

AGNC Investment (AGNC 0.50%) Pays notable dividends. It is over 14%, almost 10 times higher than the previous year. S&P 500Dividend yield (currently 1.5%).

But as attractive as those dividends may seem, income-focused investors would be better off forgetting these facts. Mortgage REITs. They could make much more money in other high-yield stocks, including: MPLX (MPLX -0.25%). Here’s why the return is 9.3%: Master Limited Partnership (MLP) It’s a better choice for those looking for strong total returns (dividends + stock price appreciation).

Not a very profitable dividend.

Mortgage REITs like AGNC Investments have more in common with banks than traditional REITs. AGNC invests in income-producing real estate instead of owning it. Mortgage-Backed Securities (MBS) Covered by a government agency. Although these guarantees eliminate default risk, REITs face many other risks that can affect their income streams.

The two biggest risks are interest rate risk and reinvestment risk. AGNC Investments, like a bank, uses short-term borrowings to fund long-term investments and takes advantage of the spread between short-term and long-term interest rates.

The problem is that interest rates can be volatile. Unexpected changes in interest rates may increase our financing costs and reduce our profits. Meanwhile, falling interest rates may encourage borrowers to refinance. If that happens, AGNC will have to get its principal back and reinvest it at a lower interest rate.

Although this business model can be highly profitable (hence AGNC’s high earnings payout), these earnings can be highly volatile. This volatility has led AGNC Investments to cut its dividend several times over the years.

AGNC dividend data from YCharts.

If interest rates are expected to fall next year, AGNC may need to cut its dividend again.

Mortgage REITs’ declining dividends have strained their ability to create value for shareholders for several years. The stock has lost nearly 50% of its value over the past decade.

Although the company’s high-yield dividends helped make up some of the lost base, total returns were only 68% (5.3% per year). This was well below the S&P 500’s total return of 213% (12.1% annually).

Fuels to Continue Rising

MPLX has a much more stable business model. MLPs operate midstream assets (pipelines, processing plants and storage terminals) that generate very stable cash flows through government-regulated rate structures and long-term contracts with high-quality customers, including the oil giants that are their parent companies. marathon oil.

The company generated more than $3.9 billion in cash in the first nine months of the year (up 6% year-over-year). It easily covered the large distribution (total cash payout of $2.4 billion). This gave the MLP headroom (adjusted free cash flow of $752 million) to fund its capital expenses ($727 million).

That excess cash strengthened its already fortress-like balance sheet. MPLX ended the third quarter with $960 million in cash and 3.4x earnings. leverage ratio (well below the 4x range that stable cash flow can support).

Meanwhile, the company’s growth-focused investments will help increase steady cash flow. MPLX is currently constructing several expansion projects that will come online over the next two years. This in turn provides significant cash flow growth. It also has the financial strength to enhance organic growth through acquisitions to boost cash flow.

The growth drivers for MLPs should continue to be the driving force behind increased distribution. It recently increased its payout by another 10%, and has increased its payout to investors every year since Marathon founded the company in 2012, increasing its payout overall by more than 200%.

The company’s steadily increasing payouts have helped it generate significantly higher total returns than AGNC Investments. Total returns since inception are over 200% (10.4% per annum). With more earnings and dividend growth ahead, it could continue to make investors more money than AGNC Investments.

Fuel that generates higher returns

AGNC Investments has been steadily cutting its dividend for several years as interest rate fluctuations have strained its cash flow. If interest rate volatility increases in the future, the mortgage REIT could cut its payments again.

MPLX, on the other hand, has steadily increased its distribution over the years while growing its portfolio of cash-generating midstream assets. With several expansion projects currently underway, there should be momentum to continue increasing deployment.

The potential for continued growth makes it a better choice for income seekers. It will provide steadily increasing payouts over the long term and generate higher total returns than AGNC Investments.