Bubble Fears? Income Solutions With +13% Yields

Markets don’t usually break when everything looks cheap — they break when everything feels expensive. That’s where we are today. Large-cap and growth stocks sit at valuations far above their historical averages, while small-caps, despite trading closer to long-term norms, are hardly immune if fear takes over. When investors start asking whether AI is the next dot-com moment, that alone tells you confidence is brittle. High valuations don’t break because technology isn’t real; they break because price gets ahead of profit.

That’s the kind of environment where income investors shouldn’t chase fireworks, but lean into caution. Agency Mortgage-Backed Securities (agency MBS) provide something the high-growth world can’t: principal protection backed by the U.S. government, reliable cash flow, and attractive yields. These bonds are supported by millions of Americans paying their mortgages, and their credit is guaranteed by federal housing agencies. The result is steady, recession-resistant income. When markets bleed and risk premiums spike, agency MBS don’t just survive — they’re often in higher demand.

In a market that’s priced for perfection and bracing for volatility, mortgage REITs focused on a leveraged portfolio of agency MBS give investors a way to collect their income and defend their portfolios. While they don’t have the prettiest price charts, they are worth their weight in gold when there is a flight to safety. Let’s dive into our top picks.

Pick #1: NLY - Yield 13.5%

Annaly Capital (NLY) is a mortgage REIT that focuses on agency MBS (Mortgage-backed securities).  While NLY does have various business segments, including CRTs (Credit Risk Transfer), non-agency MBS, and MSRs (Mortgage Servicing Rights), their agency MBS portfolio holds over $71.7 billion in assets.

We saw NLY’s EAD (Earnings Available for Distribution) bottom out at $0.66/share for a quarter, and last quarter they were up to $0.72/share. We expect that NLY's EAD will continue to drift upward as the Fed continues to cut.

It's been a rough few years for NLY as a combination of declining book value from rising long-term rates met an inverted yield-curve where the cost of borrowing determined by short-term rates exceeded the yield of long-term assets like MBS. Both pressures are easing up, and it is becoming increasingly likely that the bottom hit in October 2023 was the bottom for this cycle, both in terms of NLY's share price and its earnings.

Pick #2: DX – Yield 15.3%

Dynex Capital, Inc. (DX) is another mortgage REIT that focuses on opportunities in agency MBS. DX's primary strategy is to buy agency MBS, and leverage it using repurchase agreements, aka "repos".

With the Fed back to cutting, DX’ leverage cost will decline. At the same time, DX has been buying higher-coupon MBS, taking advantage of higher mortgage rates:

Mortgage rates will inevitably come down if the Fed keeps cutting, but not all borrowers will rush out and pursue refinancing. This can create conditions where agency mREITs see a big increase in book value, and their cash flow will continue to rise. With Q3 earnings around the corner, we expect that DX's net interest income will continue to grow. Q4 will be even better thanks to the Fed resuming its cutting cycle.

Conclusion

At High Dividend Opportunities, we don’t speculate on the next winner — we build income across every dependable sector. From REITs to energy infrastructure, agency MBS to BDCs, we diversify across proven cash-flow engines designed to pay us now, not someday. That’s how we plan retirement on our terms: with consistent, defensive income that funds our lifestyle regardless of market cycles. We don’t chase bubbles;  we harvest yield and enable our members to live off passive income from their portfolio. This is the power of income investing.

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