The big reason investors should be looking at Innovative Industrial Properties (NYSE: IIPR) and AGNC Investment (NASDAQ: AGNC) today are their dividend yields. Innovative Industrial's yield is a huge 10%, while AGNC Investment's yield is an even loftier 13%!
However, high yields like this usually come with added risk. Dividend investors need to go in with their eyes wide open when considering these ultra-high-yield real estate investment trusts (REITs).
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What does Innovative Industrial Properties do?
Innovative Industrial owns industrial properties and largely uses a net lease approach, which means that its tenants are responsible for most property-level expenses. However, this overlooks what's perhaps the most important fact, since Innovative Industrial is focused on owning marijuana-related properties. That largely means grow houses, which are a highly specialized property type.
Given the still somewhat murky legal status of pot, Innovative Industrial has been a key source of capital for legal marijuana growers. There was something of a land grab early on in the industry, and now there appears to be a shakeout taking place.
This has left Innovative Industrial dealing with tenants that are having trouble paying the rent. Clearly, that's not a good thing, but the REIT has thus far managed to deal with the headwinds in relative stride.
One of the key positives here is the company's strong balance sheet. For example, net lease REIT giant Realty Income and industrial REIT giant Prologis both have debt-to-equity ratios over 0.5, while Innovative Industrial's ratio is just 0.15. Low leverage provides Innovative Industrial a material opportunity to continue growing the portfolio and a lot of breathing room when it comes to supporting the dividend.
IIPR Debt to Equity Ratio data by YCharts.
Given the tenant issues, the safety of the dividend is an important consideration. In the fourth quarter of 2024, the adjusted funds from operations (FFO) payout ratio was roughly 86%. That's a bit high, even for a net lease REIT. However, the recent reworking of a lease with a large tenant is expected to be a $0.16-per-share headwind to FFO going forward.
Taking that into consideration, it looks like the adjusted FFO payout ratio could rise to a touch over 90% in 2025. Innovative Industrial may need the extra breathing room that its strong balance sheet affords, which helps explain the 10%-plus dividend yield.
What does AGNC Investment do?
AGNC Investment, while a REIT, doesn't own physical properties -- it owns mortgages that have been pooled into bond-like securities. This is a complicated niche of the REIT sector with pricing dynamics that are impacted by things such as interest rates, the housing market, and mortgage repayment rates, among many other things. To make matters even more complex, leverage is a key tool used by mortgage REITs like AGNC Investment, and the securities they own trade daily, which isn't the case for most physical properties.
Since the value of AGNC Investment is, effectively, the value of its portfolio, the stock can be very volatile. And the lofty dividend yield is actually a fairly complex thing to analyze, too.
On the one hand, the dividend has been in decline for years, with the stock price following it lower. However, the REIT has paid out more in dividends than it has lost in stock value, leading to a positive total return. This total return assumes that dividends are reinvested, which is where the problem comes in for income investors salivating over the 13% dividend yield.
Which REIT is better for income investors?
If you're looking to spend the income your portfolio generates, AGNC Investment probably won't be a great fit for you. A falling dividend and stock price would mean less income and less capital, which is pretty much the opposite of what most dividend investors are looking to achieve over time. Innovative Industrial, which has increased its dividend for several years, appears more attractive in some important ways.
However, given the high payout ratio, dividend investors need to step back and consider the risks posed by Innovative Industrial. While it looks like a dividend cut is already priced into the stock price, buying today could leave you with less income if the marijuana shakeout continues. But if Innovative Industrial can navigate that well, it could muddle through this difficult period while continuing to support its dividend. Note that the marijuana market is still growing, so there is opportunity here, but that's a bet that's probably best left to more aggressive investors.
All in, if you're a conservative dividend investor, neither of these high-yield REITs is likely to appeal to you. If you're willing to take on some risk, Innovative Industrial has a better dividend track record than AGNC Investment, which will probably be more appealing to most dividend investors. But the stock will require close monitoring, given the dynamics of the niche market it serves.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Prologis and Realty Income. The Motley Fool recommends Innovative Industrial Properties and recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
