Summary
- The wealthiest among our society generate high levels of income year in and year out.
- We shouldn't emulate their lifestyles until we learn to emulate their investing.
- I don't want to copy those simply "maintaining" their wealth but those who are growing it.
Co-produced with Treading Softly.
Greed and envy are exceptionally powerful emotions. Throughout history, greed has led individuals to mistreat others, lie, cheat, and steal. Likewise, envy can lead us to make poor choices in an effort to appear better off than we really are - going deep into debt to "keep up with the Joneses."
I have learned it's foolish to envy the rich. Being rich simply means you have stockpiled a large net worth. Many of "the rich" have built up their fortunes through years of hard work, dedication, and effort. Others inherit it or win the lottery. Regardless of how cash is initially obtained, if the rich do not build it further, they often squander it. Those who are rich and earn no additional income will slowly or rapidly erode their base set of assets over time.
Sometimes, we assume that people who are "rich" are necessarily good with money. This isn't true. More than one movie star, sports star, lottery winner, or trust fund baby has squandered millions.
If you want to emulate someone, copy the actions of the wealthy. Some of you may be confused here. For too many of us, we equate wealthy and rich as being synonymous, yet they are not. Being wealthy means owning assets that are producing income that exceeds their expenses. You can become rich by being great at sports. But the wealthy one is the person who owns the team.
My goal is not to "be rich." My goal is to own assets that produce an income and use the income from those assets to buy more income-producing assets. Growing my passive income, generated by the assets I own, allows me to live my life the way I want.
Whether you are starting out with the latest Powerball winnings, or modest savings you stowed away from working hard and living within your means, dividend stocks can provide you access to passive income. Reinvest a portion of this passive income, and you will benefit from the magic of compounding. Watch as your income stream grows into a raging river of dividends.
Let's dive into a couple of investments offering double-digit yields that will supercharge your passive income stream.
Pick #1: AGNC - Yield 12.6%
AGNC Investment Corp. ( AGNC ) released their Q4 earnings January 30th and reported a net spread and dollar roll income of $0.74/share. Easily exceeding their $0.36 in dividends for the quarter. You rarely find a double-digit yielding stock with dividend coverage north of 200%!
This high level of earnings is due to AGNC's average asset yield climbing up to 3.68%, while their cost of funds remains relatively low at 0.94%. Source .
The cost of funds remains low thanks to a large portfolio of interest rate swaps. AGNC pays a fixed rate and receives a variable rate. Currently, AGNC is paying an average of 0.37% on $47.8 billion and receiving 4.31% on $47.8 billion. This gain is reported as a decrease in interest expense. The great news is that AGNC's swaps don't mature for an average of 3.2 years. So we can expect that their cost of funds will continue to climb slowly.
Where will interest rates be in 3 years?
We don't have a clue either.
Tangible book value climbed 8.4% to $9.84/share, breaking the four-quarter streak of declining book value. As we've discussed before, we don't put much weight on book value because it changes daily and has little to do with whether or not the company can maintain the dividend. Yet, we know some investors do, and AGNC is trading at a material premium to book value. Currently, the price of AGNC is rallying, so those who worship at the altar of book value are not in control of the price. That might change, or it might not.
AGNC's book value will continue to climb as spreads tighten back up to historical averages, and if interest rates start declining, that will be a tailwind as well. There is a lot of room for upside in book value.
The idea that agency mREITs should trade near tangible book value is a relatively modern one that started over the past decade. From 2000-2013, agency mREITs spent most of their time trading at a significant premium to tangible book value.
We included Annaly Capital Management, Inc. (NLY) in the chart below because it has a much longer history. As you can see, it was 2013 when premiums disappeared, and they started trading at 0.8-1.1x tangible book value. Before that, the 3-year median price to book value spent a significant amount of time over 1.2x.
Since profitability declined, it made sense for most of the decade to be generally bearish. Agency mREITs were seeing declining earnings and declining dividends. However, today earnings are high and the future outlook is very bullish. We are confident that, in time, consistent premiums will return.
On a fundamental note, the largest change that AGNC made throughout the quarter was rotating from low coupon to higher coupon MBS. AGNC rotated into higher coupons while keeping the par value roughly the same.
Coupons over 4.5% now make up approximately half of AGNC's portfolio. This has the impact of increasing current cash flow. As a REIT, AGNC is required to pay out most of its taxable income . We noted above that AGNC has been out-earning its dividends by 200%. This is possible because taxable income is not the same as earnings.
However, AGNC's taxable income has been climbing, and in Q4 reached $0.35/share.
This is the number that will force AGNC to raise its dividend if it consistently exceeds the current $0.36 dividend.
The future is bright for agency MBS.
Pick #2: CSWC - Yield 11.3%
Capital Southwest Corp. ( CSWC ) came right out of the gate with its FQ3 earnings report on January 30th. CSWC announced an increase of its "regular" dividend from $0.52 to $0.53. It also announced it will continue its $0.05 supplement. So in March, we look forward to combined dividends of $0.58.
CSWC has been making a habit of hiking the dividend. This is the fourth raise in as many quarters. Additionally, CSWC has had a supplemental or special dividend more often than not. Source .
CSWC has taken advantage of a favorable investment environment to scale up its business. Over the past year, its portfolio has grown from $936 million to $1.15 billion.
At the same time, the average yield on investments has risen from 9.01% to 11.7%.
It is also worth noting that the number of "non-accruals" in its portfolio have declined from 1.5% to 0.3%.
Last quarter, CSWC originated $164 million in new investments, with an average yield to maturity of 12.61% on the debt. CSWC has been able to grow by issuing equity at a premium to NAV. As a result, CSWC ended the quarter with leverage at only 0.91x equity.
The bottom line is that CSWC was able to produce their highest earnings ever with a very low level of leverage. It has cash on hand to invest and room to leverage up back to 1.1x.
It is a fantastic environment for business development companies, or BDCs, which borrow debt at fixed rates and lend at floating rates. CSWC has taken advantage of this and is firing on all cylinders - growing its asset base while decreasing leverage and increasing earnings. Eventually, interest rates will come back down. That's why CSWC is paying $0.05 of the dividend as a "supplement," which is a signal to investors that part of the dividend isn't permanent. However, CSWC has been able to consistently increase its "regular" dividend, which is the part management expects to be maintained as the interest rate cycle shifts.
How has CSWC been able to increase the regular dividend so much?
As CSWC has grown its scale, operating expenses have become smaller as a percentage of assets. These are permanent efficiencies that CSWC will continue to have in any rate environment.
CSWC is a keeper!
Conclusion
With CSWC and AGNC, we can claim double-digit yields and extremely well-covered income for years to come. To reach the highest echelons of wealth, one must take on some risks. Knowing where to take on risks is a major part of the battle.
We help mitigate the risk of any single holding by recommending you hold no less than 42 individual holdings - our Rule of 42 - and provide regular updates and insights to our High Dividend Opportunities members. Whether you use HDO or another tool to keep tabs on your holdings and ensure a healthy stream of high-yield income flowing into your account - you can definitely do so.
You may have never reached the wealthiest levels in our society, and that's entirely fine. Still, you can have an exceptionally comfortable and enjoyable retirement by having your retirement portfolios produce high levels of income for you to enjoy.
Let your income stream be so powerful it floods your expenses and grows your net worth rapidly. The longer the stream flows, the larger it can expand the borders of your net worth.
That's a retirement worth dreaming about. That's what our Income Method can help you achieve.
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