Buying The Dip On These +9% Yields
By
Rida Morwa
I'm Buying The Dip On These +9% Yields
Summary
One of the key characteristics of a successful investor is patience.
Being patient is easier when you are compensated to wait.
Two big yields to boost your passive income.
Warren Buffett paid $10.6 million in 1973 to acquire shares of The Washington Post Company. Mr. Buffett's investment saw a 20% fall the very following year, and it took three years for the value to recover. The Oracle of Omaha, however, is more concerned with corporate fundamentals than market value. Washington Post’s business expanded significantly, and the stock price rose gradually in the years to follow. It ultimately proved to be one of Mr. Buffett's most successful investments.
Being patient and making decisions based on business fundamentals are essential for successful investing. We concentrate on our investing objectives, which are to increase dividend-based passive income, as the market travels its hazy course. Now let's talk about two top dividend payers to get paid for your patience through rocky markets.
Pick #1: AGNC - Yield 14%
AGNC Investment Corp (AGNC) is a mortgage REIT that invests in "agency" mortgage-backed securities. These securities are unique in that the investor does not carry any credit risk, as the agencies Fannie Mae or Freddie Mac guarantee the mortgages. If a borrower defaults, the agency buys back the mortgage from the investor at par value.
This creates an unusual situation where investors earn a higher rate of return when defaults rise. Agency MBS prices tend to correlate with U.S. Treasuries since there is no credit risk. However, they differ slightly because borrowers can voluntarily repay or default.
AGNC invests in agency MBS on a leveraged basis, which means that AGNC borrows money to invest in MBS. Currently, AGNC is at 7.2x leverage. For every $1 in book value, AGNC is borrowing $6.20. This allows AGNC to earn a double-digit yield on equity despite coupons being in the low single digits. While leverage creates risks, agency MBS repays $100 par 100% of the time, making it a safer investment.
AGNC's portfolio is currently trading at a discount to par, but there is potential for gains when MBS prices return to par. In the meantime, AGNC's portfolio is generating substantial cash flow and producing earnings that covered the dividend by 194% in Q1.
Pick #2: HQH - Yield 9.3%
Tekla Healthcare Investors (HQH) is a CEF with assets spread among 150 holdings, 80% of which are in the biopharmaceutical and biotechnology industry.
The ~13% discount that HQH trades at to NAV is one of the largest discounts seen in the last 10 years. Keep in mind that HQH does not use leverage in its investment strategy and is in a good position to profit from the market rebound while increasing shareholder dividends.
The fund at HQH distributes 2% of NAV on a quarterly basis under a variable distribution strategy. As a result, investors notice a decrease in payouts when the fund's NAV falls, which naturally safeguards the fund against asset liquidation at low prices. When NAV increases, HQH automatically increases its distributions – the process is transparent and easy to calculate. Investors don’t have to hope for a raise or time the market to realize capital gains.
With the annual yield of 9.3%, you may lock in an even larger income stream at today's reduced pricing.
Conclusion
If Mr. Buffett had abandoned his investments during the course of his 80+ year investing career by caving in to market price fluctuations, he would have suffered losses, missed out on the potential future growth of the stocks, and we would never have heard of him. The Oracle of Omaha's strategies succeeded due to his conviction that the stock market functions as a mechanism for moving money from the hands of patient to those of the patient.
At HDI, we remain committed to the income strategy by efficiently diversifying our income sources across 45+ securities to achieve an overall yield of 9%. This income is intended to support our lifestyle and ensure our financial independence. This way, we don’t worry about what the market will do next. We sit back, collect our big dividends, and let the markets work themselves out.
