The Hoff took the week off to gloat (you’ll see why tomorrow) so you’re stuck with me and my stock pick today. Don’t worry, I have a great one for you.
What’s the best thing about investing in a real estate during one of the most unpredictable real estate markets in the history of America? More risk means more rewards; ginormous rewards even . And in case you were wondering, “ginormous” has been an official word since 2007.
So how do you invest in real estate if you don’t have hundred of thousands of dollars to buy property? It’s easy, just buy a Real Estate Investment Trust, or REIT. This is truly one of the simplest investments to understand. A REIT buys property, and when it makes money on that property, it is required to pay out at least 90% of that income to shareholders in the form of a dividend.
Very simply, the more money the REIT makes, the more shareholders will earn in a dividend.
Picking the Right REIT
So, now you understand REITs and you’re ready to get involved in real estate investing. How do you pick the right one?
The safest way to go would be investing in a REIT ETF. This will give you exposure to a bunch of different REITs and minimize your risk. However, it also reduces your potential earnings. The Vanguard REIT ETF (VNQ) is the largest REIT ETF by market cap, but they only pay a 3.3% dividend yield. If I want a 3% dividend yield, I’ll invest in Walmart or Proctor and Gamble; not a risky real estate investment.
American Capital Agency Corp
I prefer American Capital Agency Corp. (AGNC). Why? Because they pay a 19.30% yield.
That may seem like a typo. Historically, we’ve been trained to believe that a 7-8% annual return is very good. If you had bought AGNC a year ago at around $26 a share, you would have been paid $5.60 in dividends in the last four quarters. Oh, and did I mention the stock is also up 11% in that timeframe?
You probably have some of the same questions I had when I found this stock.
- Is this massive dividend sustainable, or will the dividends decrease as soon as I buy in? (They have paid at least a $1.40 dividend in each of the last eight quarters)
- What kind of real estate are they investing in? (Residential mortgages, mostly Fannie Mae and Freddie Mac properties)
- How do I know they won’t go out of business tomorrow? (As with any company, you don’t)
The fact is, the only way any company can pay such a massive dividend is if they are taking a large risk. I can’t think of a much bigger risk than investing in Fannie Mae and Freddie Mac properties that absolutely nobody wants. However, it has been paying off for AGNC (and their investors) for almost three years now.
If you can handle the risk and want to add a huge dividend to your stock returns, AGNC might be the right investment for you.
I have a long position in AGNC
Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.