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Income-seeking investors might be enticed by stocks offering payouts of 13% or more. However, sky-high yields can often be a red flag, signaling unsustainable dividends and potential share price declines that outpace the income received. Let’s take a closer look at three stocks currently offering tempting yields and why investors should approach with caution.

AGNC Investment Corp (NASDAQ:AGNC): The Perils of Leverage

Mortgage real estate investment trust (mREIT) AGNC Investment Corp sports a jaw-dropping 15.58% dividend yield, but its 5-year total return of -5.52% highlights the risks. The company primarily invests in agency mortgage-backed securities, using short-term leverage to boost returns. However, as interest rates have climbed, AGNC has seen its debt servicing costs surge while its interest income has stagnated.

To navigate this challenging environment, AGNC has relied heavily on derivatives like interest rate swaps and shorting U.S. Treasuries to hedge against higher rates. But as these hedges begin to expire, the company’s ability to sustain its dividend is in question. AGNC’s tangible book value per share has plummeted from nearly $18 to under $9 in just over four years, underscoring the toll the high-rate environment has taken.

In its recent Q1 2024 earnings release, AGNC reported comprehensive income of $0.48 per share and a slight 1.6% increase in tangible book value quarter-over-quarter. While management expressed optimism that the difficult transition period for agency MBS is nearing its conclusion, the macroeconomic picture remains murky. The company’s dividend has been cut from $0.16 per share in early 2020 to $0.12 currently – a concerning trend for yield-seekers.

Brandywine Realty Trust (NYSE:BDN): Crumbling Under Pressure

Office REIT Brandywine Realty Trust currently offers a 13.64% yield, but its -55.07% 5-year total return is a glaring red flag. The company, which owns and manages office properties primarily in the Philadelphia and Austin markets, has been grappling with the widespread shift to remote and hybrid work arrangements.

In its Q1 2024 earnings release, Brandywine reported a net loss of ($0.10) per diluted share and FFO of $0.24 per diluted share, down from $0.29 in the prior year quarter. Same-store net operating income grew a meager 1.9% on an accrual basis, while occupancy dipped to 87.7%. The company narrowed its 2024 FFO guidance midpoint from $0.95 to $0.94 per share, painting a less-than-rosy picture for the remainder of the year.

Brandywine has cut its dividend from $0.19 per share in Q1 2023 to $0.15 currently, but with a payout ratio of 62.5%, the REIT should be able to handle paying this reduced dividend. The company is facing significant headwinds as office demand remains muted and older properties require substantial capital investments to compete with newer, amenity-rich developments.

ARMOUR Residential REIT (NYSE:ARR): Drowning in a Sea of Red

Another mREIT, ARMOUR Residential REIT, tempts with a 15.82% yield but has delivered a dismal -61.09% total return over the past five years. Like AGNC, ARMOUR primarily invests in agency MBS and has been hit hard by the rising rate environment.

For Q1 2024, ARMOUR reported core income of $40.4 million or $0.82 per common share, which it calls “Distributable Earnings.” However, this non-GAAP measure excludes the impact of significant realized and unrealized losses on the company’s investment portfolio. Under GAAP accounting, ARMOUR actually posted a net loss of ($16.2) million for the quarter.

ARMOUR’s book value per common share has declined from $27.22 at the end of Q1 2022 to $22.07 as of March 31, 2024. The company has slashed its monthly dividend from $0.10 in early 2022 to just $0.0375 currently, and there may be more pain ahead for shareholders. With the Fed signaling that rates will remain higher for longer, mREITs like ARMOUR are sailing into an increasingly perilous storm.

A More Stable Path to Attractive Yields

For investors seeking high yields without the extreme risks, the real estate sector offers some intriguing alternative options:

Arrived: This platform allows individuals to invest in shares of rental properties for as little as $100, making real estate investing accessible to a broader audience. With an average dividend yield of 4.2%, Arrived offers a more stable income stream than the double-digit yields of the aforementioned REITs. Plus, the platform handles all property management responsibilities, making it a truly passive investment. Click here to explore available properties on the platform.

Cityfunds Yield Fund: For those looking to tap into real estate debt, the Cityfunds Yield Fund targets an 8% annual yield by investing in a diversified pool of collateralized real estate loans. With a low minimum investment of $500 and a strong track record, this fund could be an attractive option for income-focused investors. Click here to learn more about the Yield fund or view other Cityfund offerings.

The Bottom Line

While ultra-high dividend yields can be tempting, they often come with significant risks that can quickly erode principal. REITs like AGNC, Brandywine and ARMOUR may offer tantalizing payouts, but their underlying fundamentals and recent performance suggest caution is warranted.

Income investors would be wise to look beyond headline yield numbers and consider alternative real estate investments that offer a more balanced combination of income and stability. Platforms like Arrived and Cityfunds provide exposure to the real estate sector without the extreme volatility and potential dividend cuts that can plague high-yielding REITs.

As always, it’s crucial to conduct thorough due diligence and consider your individual risk tolerance before investing. But by expanding your horizons beyond the riskiest high-yield plays, you may find more sustainable income streams to power your portfolio for the long haul.

This article High Risk, Low Reward For These REITs With Massive 13%+ Yields originally appeared on Benzinga.com

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