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In his 2016 letter to Berkshire Hathaway shareholders, legendary investor Warren Buffett wrote: “Every decade or so, dark clouds will fill the economic sky and there will be a brief rain of gold.” When such rains occur, we absolutely must rush outside with washtubs, not teaspoons.” According to Buffett’s sage advice, now could be the perfect time to invest in high-yield assets while interest rates remain high.
A popular high-yield stock that has caught the attention of income-hungry investors is AGNC Investment Corp (NASDAQ:AGNC). With a stunning dividend yield of 15.38%, it’s easy to see why. However, a closer look at AGNC’s performance reveals some notable risks.
The Risks of Chasing Yield: AGNC’s Shaky Track Record
While AGNC’s sky-high dividend yield is certainly tempting, the company’s recent performance paints a less rosy picture:
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AGNC shares have fallen 4.3% since the beginning of the year
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Over the past year, the stock has fallen 5.18%.
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5-year performance is dismal -48.55%
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AGNC’s dividend rate has been unchanged since the beginning of 2020
More on Buffett: Warren Buffett once said, “If you don’t find a way to make money while you sleep, you’ll work until you die.” These high-yield real estate bonds, with yields of 7.5% to 9%, make generating passive income easier than ever .
AGNC invests primarily in agency mortgage backed securities (MBS) backed by government-sponsored companies such as Fannie Mae and Freddie Mac. Although these securities are considered virtually risk-free due to their government backing, financing them through short-term leverage has become increasingly difficult in the current interest rate environment.
As interest rates have risen, AGNC’s debt service costs have skyrocketed while interest income has stalled. The company has relied heavily on derivatives such as interest rate swaps and short selling of U.S. Treasury bonds to hedge against higher interest rates and support profits. However, as these protections expire, AGNC’s ability to maintain its high dividend and shareholder value comes into question.
A more stable alternative: Cityfunds Yield Fund
For investors looking for high returns from real estate assets without excessive risks, the Cityfunds Yield fund offers a compelling alternative. While AGNC invests primarily in residential mortgages, Cityfunds focuses on home investments – a key difference.
This is what sets the Cityfunds Yield fund apart:
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The goal is a stable effective annual interest rate of 8% with quarterly distributions
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Supported by a diversified pool of secured real estate loans
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Invests in home equity secured notes and short-term mortgage notes
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Offers a manager guaranteed base return of 7%
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Fund with a five-year maturity and redemption after a 12-month lock-in period
By investing in a mix of home equity bonds and short-term mortgages, Cityfunds aims to generate stable interest income that can be distributed to investors on a quarterly basis. The fund’s goal of increasing the loan-to-value ratio of its home investments to 65% to 80% provides additional security.
Unlike AGNC, whose book value per share has fallen from nearly $18 to under $9 in just over four years, Cityfunds’ focus on home equity and conservative LTV ratios helps protect investor capital. And with a guaranteed base return of 7%, investors can count on a reliable source of income even in difficult market conditions.
See how much you can earn with the Cityfunds Yield fund >>
The conclusion
While AGNC’s dividend yield of over 15% may seem like a golden opportunity at first glance, smart investors know that not all that glitters is gold. The company’s inconsistent performance, over-reliance on complex hedging strategies and exposure to a shrinking agency MBS market should give potential buyers pause.
For those heeding Buffett’s call to “stick the bucket” and earn high returns as the economic storm rages, the Cityfunds Yield fund offers a more stable, risk-adjusted way to invest in real estate-backed cash flows. With quarterly distributions, a guaranteed base return and a conservative approach to home investing, Cityfunds caters to income investors.
Are you ready to learn more? Click here to explore the Cityfunds Yield fund and start applying Buffett’s timeless wisdom to your portfolio.
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This article by Warren Buffett: “When It Rains Gold, Get Out the Bucket” and Make It Rain This High-Yield Investment originally appeared on Benzinga.com
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