USA - 2 Big Fat Dividends To Buy The Dip

2023-03-09 11:00:00 ET

Summary

• These two income picks are generating high yields due to recently falling prices.
• We see massive upside potential and great income to boot.
• Your retirement should be spent enjoying your hobbies, and being paid while doing it.

Co-produced with Treading Softly.

In life, we often hear or say axioms. These are oft-repeated statements that are believed to be self-evident as fact.

One well-known axiom is "people never change," as so many have lost faith in the ability of humans to truly change their behavior. While axioms are believed to be self-evident, it's not always the case when moved from theory to reality.

When it comes to investing, the age-old axiom of "buy low, sell high" is often repeated, but too often it is not followed. Investors frequently do the opposite.

The individual investor usually fails to match the performance of the overall market due to their choices.

Emotional and reactionary decision-making can erode a retiree's portfolio rapidly. Often poor decisions are made as sacrifices on the altar of "preserving capital."

This is why I embrace fully my unique methodology of investing we call our Income Method. It is a foundational philosophy steeped in the foundation of immediate income investing, fundamental analysis, and contrarian investing. When others are selling, we are buying.

Today, we have two dipping investments investors shouldn't be selling but buying.

Let's dive in.

Pick #1: USA - Yield 9.8%

Liberty All-Star Equity Fund ( USA ) is a closed-end fund ("CEF") that is very diversified and provides us exposure to many stocks that don't fit with the Income Method strategy.

Its investments are diversified among five portfolio managers, two with a Growth strategy and three that follow Value strategies. Source .

Broadly speaking, we can expect USA's NAV to correlate strongly with the S&P 500. According to portfolio visualizer , the correlation from 1994 to today between USA's net asset value and the S&P 500 is 0.97. Our portfolio overall has a weak correlation with the market, so it is good to have a drummer that is marching to a different beat than many of our holdings.

USA is conservative, using no leverage, and utilizes a variable distribution policy. Each quarter, USA pays out 2.5% of its NAV. When NAV is high, the dividend is higher. When NAV is low, the dividend is lower. This policy means that the dividend is self-correcting. USA is never overpaying or underpaying the dividend.

USA has been trading above NAV a lot in recent months. Currently, it is trading very close to NAV and providing us an opportunity to buy.

Predicting the future is much more difficult than many believe. Will the market go up or down for the rest of 2023? Nobody knows for sure. What we can have a lot of confidence in, is that in time the market will recover. The U.S. economy is one of the greatest generators of wealth in history, and the stock market is one of the easiest ways for investors to tap into that power. USA provides broad exposure to U.S. stocks, and converts it into a generous yield that makes it an appropriate investment for income investors. When you can buy it at a discount to NAV, take advantage of the opportunity. As you can see, much of the time it has been trading at a premium!

Pick #2: EPR - Yield 8.1%

EPR Properties ( EPR ) is in the business of owning "experiential properties." It owns properties where people go to do things in person. It is hard to imagine a worse business when a global pandemic has governments ordering people to shelter in place for a few weeks, which turned into the better part of a year. Essentially all of EPR's properties were ordered closed by the government, and their tenants saw revenues decline to essentially zero.

EPR went into preservation mode. Suspending the dividend, maintaining their cash on hand, and conservatively managing their balance sheet. EPR made it through COVID without having to take on any additional debt and actually reduced its equity outstanding with some share buybacks in April 2020.

Last year, EPR made great strides towards recovery with FFOAA (FFO "as adjusted") and AFFO up over 50%. EPR's AFFO of $4.89 compares to their pre-COVID 2020 guidance of $5.30. So they haven't fully recovered yet but have gotten much closer. Source .

While EPR managed to get through the pandemic without borrowing, the same cannot be said of some of its tenants. In particular, movie theater companies were forced to borrow a lot of money to stay solvent. Cineworld ( CNNWQ , CNWGQ ), the parent company of Regal Cinemas, a major tenant of EPR, filed for bankruptcy due to its high debt load. There is certainly no shortage of rumors that AMC Entertainment Holdings, Inc. ( AMC ) might follow suit.

EPR's theater portfolio continues to have much lower rent coverage than EPR's other properties and lower than coverages in 2019.

However, bankruptcy is not the end of the world for landlords. EPR management stated in the earnings call that they have collected 100% of rent, including deferred rent from COVID-era deferrals, from Regal from October 2022 through February. If a tenant wants to use a property, they are required to pay rent, even if they are in bankruptcy court.

Regal does have the option to reject leases and did file paperwork to reject three of EPR's leases. However, they later rescinded that rejection. At this time, EPR is in negotiations with Regal, and it is unknown what the impact might be. As a result, management is not providing 2023 guidance until after Cineworld's bankruptcy is complete.

Since a theater is tied to real estate, the leases on the real estate are actually an item of value to the company and to any potential buyers of the company. What is a movie theater company worth without any movie screens?

It is quite possible that Regal chooses to close some of the theaters that EPR owns. However, EPR owns theaters that are well above average in terms of traffic and revenues. As evidenced by not having a single theater closed yet, while many other landlords have seen several Regal theaters close.

The main problem with Cineworld is the debt it had to take on during COVID, and the lenders are not interested in shutting everything down. They want to get their money back. They will be interested in maintaining theaters that are profitable.

EPR will work through this issue in a way that maximizes the return for EPR. In the meantime, EPR has $1.1 billion in liquidity which they will use to continue investing in non-theater properties and improve their diversity.

The current dividend is $0.275/month and we expect that to be maintained until EPR has some clarity on the exact impact of the Cineworld bankruptcy. When that situation is resolved, there is a good chance we will see a dividend raise.

Conclusion

EPR and USA are both dipping investments that produce big income as well as big opinions.

As it stands, we see both are excellent income opportunities in which we are paid handsomely to wait for it all to play out. We expect both EPR and USA to climb strongly in share price as their management teams continue to execute as needed and the market recovers post-recession.

For an income investor, buying the dip is easy. We get regular cash infusions into our account - providing the cash needed to purchase - plus those same dividends provide a strong psychological benefit as we are rewarded for our patience.

I know how I'll spend my time as I wait out the market battle. I will be enjoying my hobbies. It's prime time to plant a garden, do some landscaping, or take a horse out for a spin. Perhaps you would rather tee off on the golf course, or go spelunking at a national park. No matter how you spend your time or what hobbies you enjoy. Dividends can pay your way, and there are no better dividends to collect than high yields which are covered.

That's the beauty of income investing. That's the benefit of our Income Method.

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