2 Great Dividends Of +8% To Buy Now

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When working on building a portfolio, every choice can have a lasting impact. I liken it to building a home.

Have you ever had a home constructed for you from scratch? If you haven’t, let me tell you something you may not know – you will have a billion choices and questions which you previously never knew you’d need an opinion on.

The type of foundation, the type of concrete, the type of siding, the list goes on and on. You can use a pre-made plan to follow, but even then, you can fine-tune each aspect if you want.

Every choice has a price tag. Every alteration has a cost tied to it.

Likewise, when building a portfolio of investments, every purchase, sale, adjustment, trim, addition, and decision comes with a price. An immediately obvious dollar value, plus an opportunity cost that you can only estimate.

The worst choice you can make is to go into the process completely blind. If you do not have a clear goal for what you want to achieve, you will have no guiding principles to get you there. It would be like building a house without a blueprint.

Who knows what type of portfolio will you create in the end?

This is why so many who are having a home built for them will start with a specific home in mind that they want to mimic and go from there, altering it as needed to suit their needs.

For retirees and income investors, High Dividend Opportunities has its unique Income Method, a means of approaching the market to achieve a specific goal. We offer a Model Portfolio, a blueprint to get you started, which you can alter as needed to suit your risk tolerance and goals.

Today, I want to look deeper into two picks from our Model Portfolio, which can help you achieve a similar goal as our Income Method – financial independence via dividends.

Let’s dive in.

Pick #1: AGNC – Yield 15.7%

For the past two years, I have talked about the need to be “agnostic” toward interest rates. This does not mean avoiding positions that are interest rate sensitive. Rather, it means balancing our portfolios with picks that benefit from higher rates and picks that benefit from lower rates. We are not interested in placing large bets on what the Fed will do, we want to be positioned to benefit regardless of what they do. The one caveat: we want all of our picks to produce high dividends.

As a result of this positioning, some of our largest declines in share price have been among picks that have been negatively impacted by rising rates. AGNC Investment Corp. (AGNC) is a prime example. Over the past year, it has seen significant pressure on its price as its book value has declined.

Why did book value decline? Well, the bulk of AGNC’s assets are agency mortgage-backed securities. Agency MBS is an extremely low-risk investment that historically has a high correlation to U.S. Treasury prices. As Treasury prices have declined, Agency MBS has declined even faster. As a result, AGNC’s book value declined, and the trading price followed. When Treasury prices turn around, AGNC is positioned to rebound strongly.

We saw a hint of this over the past month, as AGNC has bounced 20%.

Chart
Data by YCharts

Prices fall, but they don’t stay down forever. Eventually, the Fed will slow down its pace of hiking. Eventually, the Fed will stop hiking. Eventually, the Fed will cut. At all these points, AGNC is positioned to see its price rocket up. The “biggest losers” during the hiking cycle will become the biggest winners. AGNC has rebounded strongly on a single lower-than-expected CPI report.

The point of having a diversified portfolio is to ensure you benefit no matter what happens. This means some holdings will underperform, and others will outperform at all times. When the macro situation shifts, the “winners” shift as well.

For much of the year, AGNC has been a drag on our overall portfolio “total return” as the price has dropped. Over the past month, it has greatly contributed to the upside. Do you know what hasn’t changed? The dividend.

The market has chased AGNC’s book value, but it has completely ignored the cash flow, which has increased materially. AGNC reported the two strongest quarters it has had in a decade back to back. AGNC has been covering its dividend by 200%+ in a sector where payout ratios historically approach 100%. (Source)

Q3 2022 Stockholder Presentation

Q3 2022 Stockholder Presentation

Our position all along has been that chasing book value is silly. AGNC utilizes significant leverage on their MBS positions, currently at 8.7x equity. When you are using 8x+ leverage, your book value is going to be volatile! We get a glimpse of book value on one day every 3 months, but the reality is that AGNC’s book value moves every single day. Yet despite these swings in book value, AGNC’s earnings have remained high and climbing.

Will the current rally continue? Maybe. Maybe not. It greatly depends on whether the Fed reacts to inflation data the way the market is currently expecting. Any stabilization of interest rates will be greatly positive for AGNC’s book value and will likely cause many book value chasers to move in.

If the Fed remains hawkish and keeps hiking, we could see another downswing. Which will happen? We don’t know, and we don’t care. Our dividends will keep coming in as forward returns on MBS are higher than they have ever been in AGNC’s history. We will collect our dividends while we wait for the market to wake up and smell the cash flow.

Pick #2: EPR – Yield 8.2%

EPR Properties (EPR) was having a wonderful rebound over the summer that suddenly fell flat when Cineworld (OTCPK:CNNWQ) filed for bankruptcy. EPR’s price plummeted.

At earnings, we learned that Cineworld did miss September’s rent payment. However, it resumed paying October and November, including amounts due from COVID-era rent deferral agreements. The ultimate resolution of Cineworld’s bankruptcy remains uncertain, but EPR is collecting rent as the bankruptcy continues. So far, we have not identified any EPR properties in Cineworld’s multiple filings for lease rejections. While EPR is Cineworld’s largest U.S. landlord, they also own some of the highest-performing properties.

Earlier this month, EPR raised guidance from $4.50-$4.60 to $4.50-$4.68. Their dividend payout ratio will be in the low 70% range. This is great news for the potential of a dividend hike next year especially if the Cineworld bankruptcy is resolved. The Cineworld bankruptcy was blamed for the wide range. Presumably, Cineworld stopping all rent payments would result in the low end, while excluding Cineworld, EPR’s performance is improving faster than projected.

EPR’s acquisitions were only $82 million in Q3, with an additional $250 million development investment that will fall into Q4. EPR’s balance sheet remains very defensive, with nothing drawn on their $1 billion revolver and no debt maturing until 2024. This provides significant flexibility to manage whatever happens with Cineworld and to take advantage of investment opportunities.

With their exposure to theaters, EPR has not yet fully recovered from the impact of COVID, but management continues to prove to be extremely capable sailors in these tumultuous seas. We remain very bullish on EPR long-term. In addition to the common shares, EPR-C and EPR-E are very attractive opportunities in preferred shares.

Dreamstime

Dreamstime

Conclusion

With AGNC and EPR, we can enjoy high monthly dividends from our portfolios. Those dividends can be used to meet our monthly needs or reinvested to see higher income pouring in the next month.

I love to diversify my income sources and the timing of when that income arrives. EPR and AGNC give me two more monthly sources to include in my portfolio. They work very nicely alongside my quarterly and semi-annual income-paying investments.

How does your portfolio help you pay your bills? Do you have to cut off pieces of it to pay your bills? You can only cut so many times before the foundation of your portfolio is laid bare and exposed to the elements.

When you’re building your dream home, you want to build something wonderful, beautiful, and tailored to your interests, desires, and needs.

When you’re building your retirement portfolio, you should be doing the exact same thing. It should be designed and built to be a tool to help you achieve your dreams in retirement.

It shouldn’t be holding you back. If it is, it’s time to consider a change of methodology.

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