Buy Alert: 2 Dividend Stocks To Double Your Retirement Income

Summary

• When your income can double itself in a short time, that's exciting.
• More income means more possibilities are within reach.
• Two picks that you don't want to miss out on.
• Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »

marekuliasz/iStock via Getty Images

Co-produced with Treading Softly

I love to get two items for the price of one. I'm not a big spender or shopper, but getting two for the price of one is great. Assuming the store hasn't jacked up its prices prior to holding the sale, I get double the value for what I'm paying. That's a great temporary win!

But imagine for a moment if I could flip this on its head.

What if... I could have my income double instead? Earning twice as much would be amazing.

I love a good sale, especially one that lets me double the buying power of my money. How much more so would I love the ability to have twice the money to buy with? This would enable me to buy more of whatever I want, instead of just what is on sale at the moment.

What would you do with twice the income? Perhaps you'd give more to a cause you believe in, or help loved ones turn their dreams and passions into a reality. Perhaps you'd eat at that restaurant you've always wanted to try, but couldn’t justify splurging on.

The ability to double your income is an exciting prospect. Today we're going to look at two picks with a combined average yield of 9.5%, which if reinvested for just under 8 years would double their income production.

Twice the income by reinvesting them for 8 years. Twice as nice. Twice as many opportunities to investigate.

Let's dive right into these picks.

Source: Shutterstock

Pick #1: NLY - Yield 10.6%

Agency mREITs pulled back in June, and we have been getting a lot of questions about them. The sell-off started when AGNC Investment Corp. (AGNC) reported a decline in book value. Annaly (NLY) reported that book value declined to $8.37, while earnings remained elevated at $0.30/share despite leverage being only 5.8x, lower than it has been in several years. NLY's dividend payout ratio is only 73%, in a sector where 98-100% payout ratios are routine.

Like AGNC, NLY is storing up capital, waiting for an opportunity to leverage up and buy a lot of MBS. Additionally, NLY has sold its commercial credit business, which will close by the end of the quarter, providing it with more cash.

The reason book values are going down is that agency mortgage-backed securities (MBS) saw prices decline. They have since rallied strongly.

Source: MBS Dashboard

Agency mREITs like NLY hedge against these declines and protect book value by shorting U.S. Treasuries. Treasuries and MBS prices are usually highly correlated, so by shorting Treasuries, when prices go down, NLY would profit from the short position to offset losses on its holdings. In June, we saw a divergence; Treasuries remained strong with yields declining (meaning prices were going up) while MBS dipped and remained below the 50-day moving average.

Despite inflation news, the yield curve got flatter.

U.S. 10-Year Treasury real-time quotes (US10Y)

Source: CNBC.com

As a reminder, NLY profits from a steeper yield curve. We are not concerned about these rate movements for two reasons:

First, while Treasuries and MBS are highly correlated over time, it is not uncommon for them to diverge over short periods. Over the course of a month or even a quarter, it is fairly common to see the prices move in opposite directions. There is no reason to panic when they do so. Eventually, one will move to meet the other. Active traders might seek to profit from these movements by moving in and out, but we prefer to collect the dividends and buy the dips.

Second, lower MBS prices mean higher yields on new investments for NLY. Agency MBS prices have been high, which is one of the main reasons NLY allowed its leverage levels to decline to multi-year lows. For NLY to leverage back up, MBS prices need to come down. NLY has a lot of liquidity to take advantage of price drops and "average down". Declining MBS prices will lead to higher cash flow from new investments, which means higher earnings per share. If book value drops a bit to provide an opportunity for a higher dividend in the future, we can live with that!

In the longer term, Treasury rates will inevitably rise. We can't predict precisely when, but it will happen. When it does, NLY has obtained hedges at fantastic prices, and the gains from those hedges will substantially offset declining MBS prices.

This pullback is an opportunity to add more NLY at prices very close to book value. If you don't have a full position, now is the time to top off before NLY raises its dividend.

Pick #2: CSWC - Yield 8.4%

Capital Southwest Corp. (CSWC) is a BDC (business development company) that has pulled back from recent highs. If you missed adding before the last run-up, now is the time to add it to your portfolio. CSWC just announced its third dividend increase this year.

The macro-environment remains very strong for BDCs. CSWC lends to middle-market companies, the kind of businesses that run successful regional businesses. During periods of economic growth, these small- to medium-sized businesses often expand or are bought out by competitors. CSWC benefits from the opportunity to lend, providing capital for expansion. It also benefits when a portfolio company is acquired, frequently holding an equity position that will be bought in the transaction.

CSWC is a very well-run BDC with a quality portfolio. It has a strong track record to back it up. It has outperformed the vast majority of BDCs over the longer term, including Main Street Capital (MAIN), one of the most respected BDCs.

We love CSWC for its high-quality portfolio, internalized and high-quality management, and strong insider ownership at 15%. With CSWC, we also gain a hedge against inflation since 90% of the loan portfolio is floating rate. In the near term, CSWC will continue to enjoy numerous growth opportunities and it recently received an SBIC license to operate as a "Small Business Investment Company", expanding its borrowing and investment options.

BDCs, in general, have a lot of tailwinds, and CSWC is well-positioned to capitalize on them. We're taking advantage of the recent pullback to average up and add more.

Source: Shutterstock

Conclusion

These two picks are seeing prime environments to perform strongly. If you have the ability to set them aside and reinvest in them for 8 years, you will double their income output to your account.

Even better is that CSWC has raised its dividend three times in 2021 so far, and we expect even more dividend increases looking forward. This will help your dividend income stream double even faster. We also expect a dividend increase from NLY in 2021. More money as you wait on your income to double.

These two picks would make a great addition to an income portfolio. I suggest having at least 40 individual picks to make up a great portfolio. This allows you to benefit from diversification without making your portfolio so large that you cannot easily adapt to market conditions.

What would you do with twice the income? For many, it would make retirement living and finances so much easier. This is why we invest for income. We want income now to enjoy our lives and reinvest to grow our income stream. Many people have low-yield, or no-yield portfolios and they could easily double their income by moving into an immediate income portfolio. If you have a few years before retirement, you have the ability to double that income again through reinvestment and holding great securities like the picks above.

That's something to be excited about. It's even more exciting than a two-for-one sale, and those are hard to beat.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NLY, AGNC, CSWC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities. Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.

Comments

[carnegie]

Do not want to own these securities if the economy hits the skids.

[PendragonY]

@carnegie

While I don't think the economy is going to "hit the skids" anytime soon. I am fine with holding both NLY and CSWC if it does.

[lsuavecito]

@PendragonY

Right on! When they crater you can load your Radio Red Flyer.

[jaybird49]

Have a full position for me 2% in NLY & AGNC and been holding a year...recently re-initiated trade in NRZ, and have ABR and stwd(largest position)...very into balanced portfolio with income (and risk) a major consideration...Anyway concerned if the fed stops buying MBS this could have a devastating effect on mReit's. Could you, or someone else, address this issue.....Thx

[cjk420]

Rida - Is there any reaaon to prefer NLY over AGNC?

In terms of other comments on NEWT, what happened was totally unpredictable and is really just part of the risks associated with investing. A good reason lto keep diversified especially in the high dividend realm.

[Rida Morwa]

@cjk4-63 I hold both with 2% allocations in my portfolio so I like them equally

[PendragonY]

@cjk4-63

I hold both NLY and AGNC. Right now I have a lot more AGNC, so I am buying NLY. I like them about equally, I just liked the monthly dividend of AGNC so I bought it first.

[pyrotechnic67]

CSWC yes, NLY, no way.

[Rida Morwa]

@pyrotechnic67 Sounds like you've made up your mind

[goldwyn]

I read your columns fairly regularly and wonder about your historical record as to successful/unsuccessful recommendations . Thanks for a comment.

[Rida Morwa]

@goldwyn You can see the track record of our portfolio here: www.1hdo.com

[jmcg55]

Hi Rida,
Care to comment about what is going on with NEWT? That was a company that you highly recommended that recently went down 25% in one day. Thanks.

[PendragonY]

@jmcg55

NEWT is changing its structure from a BDC to a Bank Holding Company and the market didn't like the implications of that.

[jmcg55]

@PendragonY
That much I already know. Hold or sell?

[PendragonY]

@jmcg55

Likely the dividend will go down. I am holding for now, but plenty of people have sold.

[Elk Tart]

Have owned NLY before. Thank you, Rida, for highlighting it again for us. Just bought it again, after researching the mistakes that doomed Thornburg Mortgage, compared to steps NLY has taken to avoid that fate. Will watch for Fed increasing rates, as you advise, but if NLY is hedged and if govt agencies back the mortgages in the event of default, what's the concern?
PS-In terms of classic valuation analysis, NLY looks very good. As a financial firm, they aren't held to the normal D:E limits (tho their D:E is better than their peers), and their price per operating cash flow per share is too high, but they are great on nearly every other test. In fact, NLY looks like a no-brainer, which always makes me nervous ;)

[Beyond Saving]

@Elk Tart No agency mREIT has ever gone under and you would be very challenged to come up with a scenario that would result in one going under where the US dollar continues to exist. So I would say there is virtually no existential risk. It is entirely a question of whether NLY is very profitable or not very profitable. Which is measured by the spreads they are able to maintain between the interest received on assets and the interest paid on debt. When the yield curve is flat, that spread can get very low, near zero. In which case, NLY's share price is going to go down and the dividend goes down because even with a lot of assets, you aren't earning much money. When you see news headlines about the yield curve "being inverted" this is when NLY is making the smallest margins and earnings will be down. They hedge using interest rate swaps, which will help ensure that they have a positive spread, but that doesn't prevent it from getting very small.

[PendragonY]

@Beyond Saving

Well, technically they could get into trouble if the yield curve remains inverted long enough that they couldn't renew their hedges profitably. But I don't think that has ever come close to happening, and if it did we'd have a lot more to worry about than whether or not NLY was still profitable.

[RoyalAce]

@Beyond Saving The biggest risk faced and the source of the highest portfolio losses is due to the negative convexity of mortgages. It's a heads I win, tails you lose for the mortgage holder.

Reits are not originators and buy the mortgages at a premium. With no prepayment penalty to the borrower and decreasing mortgage rates it becomes a game of how long the reit can hold the mortgage to get a decent amortization on the premium it paid. Not long enough for many in the recent past which helps in accounting for BVs being generally cut in half in recent years. Still, in many cases the reit shareholder has managed to hold on to acceptable returns due to the dividends.

When rates start to rise again it's an open question in my mind as to whether increased spreads will cover loss of BV due to mark to market in the portfolio. Oversimplified for sure but that's the risk IMO.

[Jeffrey+L+Gray]

I am new to NLY. Only in my portfolio for past two quarters. I will be adding more to my portfolio. Can you tell me why I needn’t be concerned with a negative 9% DGR ?

[PendragonY]

@Jeffrey+L+Gray

The dividend is cyclical and until recently we were in the down part of the cycle.

[RZel]

Hmmm... I see the dividend at 6.55%, not 8%+. Also, I see 3% ownership, not 15%. Overall, it is still attractive and was on my watch list.

[PendragonY]

@zbatia

The dividend when the article was written was $0.53 (it is now $0.54).

In the most recent CSWC article, we include a table of the inside ownership. It depends on who you count as an insider.

[pgallop]

????? Pick #2: CSWC - Yield 8.4%. How the heck do you get 8.4% that is used in you headline. I make it 6.7% currently, and it was only 7.0% a few days ago when the shares were a their recent low of $24.93?

[PendragonY]

@pgallop

The dividend totals 54 cents a quarter or $2.16 a year.

[RoyalAce]

A small nit to pick on the article concerning the tax status of CSWC distributions. Absent a capital gains distribution, the history has been that over 90% of the distribution is taxed as interest and not as a "qualified dividend". That portion gets taxed at full marginal rate in a non qualified account. This might be important to some people. Better held in a qualified account?

NLY, qualifies for a 20% tax reduction due to Qualified Business Income.

[PendragonY]

@RoyalAce

Well, no, the dividend is taxed as an ordinary dividend, not technically as interest. NLY is a REIT and that is one of the entities that qualify for the 20% deduction.

[RoyalAce]

@PendragonY You are mistaken. If you are serious about that you should check the investor relations tab of CSWC. Look at the end of year tax data for previous years and PLEASE read the footnotes about taxation. Your broker last year will have declared 92% of distributions as interest derived ordinary income and only 8% as qualified.

NLY IS a reit and qualifies most of the distribution as QBI.

[PendragonY]

@RoyalAce

Again, it's an ORDINARY and not a QUALIFIED dividend. Tax rates are different.

[RoyalAce]

Thanks for introducing me to CSWC. After further investigation I started a tracking position @ 25.90.

As for NLY I've held it as a core position that I've traded around for 20 years but am now at the minimum I've ever held. 9.65% IRR but always a lot of drama in mortgages.

[Rida Morwa]

@RoyalAce you are very welcome, thank you for sharing your thoughts and experiences

[Cuip99]

i bought NLY and now I will take a look at CSWC. I like Rida's advice!

[Rida Morwa]

@Cuip99 I'm glad you are enjoying my articles!

[Michael123a]

@Rida Morwa : Hey Rida: I own CSWC because I like their business strategy, plus that it is an internally managed BDC, and the dynamic of their earning results. Yet, I bought it at $14.00. The present NAV is too much for me to purchase any more, although I would like to. Don't get me wrong, I appreciate the price appreciation of my investment, but the present NAV is around $17.00 and the stock price is about $26.00. Too rich for me. Remember NEWT had a monstrous premium to NAV and we all know where that one went, but NEWT is NOT CSWC by any measure.

[PendragonY]

@Michael123a

CSWC is raising quite a bit of money from its ATM program (it collected almost $28 million last quarter at a big premium to NAV). The yield is good, the dividend is well supported and the NAV is rising. Plenty of reasons to buy CSWC today.

[Rida Morwa]

@Michael123a If you want to buy at a discount and get a good BDC, ORCC and SAR present good options.

[Bemylov]

@PendragonY The same thing was said about NEWT recently. Live by yield, die by yield

[Risk Advisor]

Regarding NLY, the ten year has recently declined from 1.48 on 07-01-21 to 1.19 on 08-04-21. Yet the author states that Treasuries (Ten Year) will eventually increase (and presumably with it MBS yields) allowing NLY to leverage up.

But the Ten Year is not set by the Fed unlike the Fed Funds Rate and the Target Rate. It moves up or down based on market demand. When demand is high, the rate declines, when demand is soft, the US Treasury is forced to offer a higher rate. So why is the author convinced it will eventually move up, particularly when it appears that foreign countries notably some in Europe and Japan are buying the Ten Year ("aggressively) due to the fact that their own equivalent of the Ten Year in their home market is inverted?

Since the Fed does not directly control the Ten Year, it can influence it by the following: Since QE was implemented, the Fed has purchased billions of MBS flooding the market with cash partially resulting in the decline of the Ten Year. If it were to begin tapering, the Fed would slow but not eliminate the purchase of MBS. Presumably this would constitute support for an increase in the Ten Year.

That said, the Fed this week stated that it has no plans at this time to announce tapering. Does the author have any other reason why the Ten Year will eventually increase?

[Rida Morwa]

@Risk Advisor As inflation continues to pressure rate, the 10 year rate will rise as inflation is baked into the equation more so. Investors do not want negative net returns once inflation is accepted as non-transitionary.

[jimi james]

perhaps you might review another BDC , Suro Capital, SSSS, just announced dividends of $2.25 per share with paydate on SEP 30.....get in prior to AUG 16.....now is best....
so far this year
Jun 30 paid $2.50 per share
Sep 30 will pay $2.25 per share
Dec 30 most likely $2.25 per share

not bad for a $14 dollar stock soon to be $16 with an insane yield
young very good management team....buy buy buy ...no hype just facts.

[Rida Morwa]

@jimi james SSSS is an interesting BDC, its big dividends have been half cash, half shares. They are not overwhelmingly reliable for timing or consistency as it depends on the outcome of their VC investing. That being said they have performed really well.

[PendragonY]

@jimi james

Half of that dividend, max, will be in cash. The rest is in shares (up to 100%). And NAV declined (because the investment portfolio didn't pay enough gains to cover the dividends paid out already.

[LovesCoffee]

@PendragonY

Actually, the half cash, half stock depends on your brokerage. I use Fidelity and my $2.50 dividend was almost all cash with only a small percentage in stock.

LC

[JJ Cylk]

I hold both CEQP & NLY at about 1.75% of my portfolio and I own PFFA at 2% of my portfolio, which holds these two in an ETF package. Should I be increasing CEQP or NLY up to the 2% limit or go shopping else where. I am looking to re-invest money from the sale of NEWT the other day.

[Rida Morwa]

@JJ Cylk I would always encourage a full position of CEQP- as it is an excellent income generator. Having a full position of NLY is not a bad idea either.

[dean3084]

Rida, You mentioned you are long AGNC which I'm also. I bought a small position in October 2020 @ 14.10 and more in June @ 17.13. My average is 15.63 as I've been dripping. I'm not dripping on any of my stocks anymore and using cash to pick the best investment. As a retiree my main goal is to preserve my capital at a minimum but enjoy higher dividends. It appears that AGNC is around a 9% discount to book. Do you thing buying more AGNC would be prudent? Yes, I have owned NLY for a long period and very happy with total returns. IMO you are the best and a straight forward author. Thanks Dean3084

[Rida Morwa]

@dean3084 Thank you for your kind comment. I do think AGNC and NLY are excellent choices for income generation, I will caution they are not buy and hold forever type stocks, so you will always want to watch for the Federal Reserve raising rates as a time to look to exit. AGNC is trading at a slight discount to book value making it attractive here.

[dean3084]

@Rida Morwa Your comment on buy and hold stocks especially AGNC has hit home and hard. I have a propensity to hold instead of taking a nice profit. Nothing goes straight up without a dip. You have opened my eyes and my approach from here on will change. Bottom line for me from now on is don't stay married to any security. Buy low and Sell high. Thanks again Dean3084

[Rida Morwa]

@dean3084 You are very welcome. The HDO Model Portfolio is actively managed to ensure it is prepared for any market condition and activity

[Phil in OKC]

CSWC has been a big winner for me since I began buying in in May 2020. The future looks very bright for it and I am letting it run with free rein. Check out that 49% dividend percentage growth rate over the past five years.

[Rida Morwa]

@Phil in OKC Yes its been an impressive run and CSWC is still running!

[PendragonY]

@Phil in OKC

I liked CSWC back in 2018 and planned to buy it (about $17 at that time). I never ended up doing that and I still kick myself. But bought in 2020 and it has done great for me.

[sourdo]

I just started a new small position with NLY a couple of days ago on pps weakness per Scott Kennedy's suggested buy point. Cost is $8.28 share. I will add on the dips.

Good luck to all!

[Rida Morwa]

@sourdo Welcome to being long NLY!