BTO - 2 Big Yields +7% To Retire On

2023-05-01 07:35:00 ET

Summary

• “Our favorite holding period is forever” – Warren Buffett.
• Stock prices move in and out of favor from time to time; our focus is on growing our income.
• Critical business sectors define the U.S. economy, and we accumulate them for our long-term objectives.

Co-authored with "Hidden Opportunities"

Long-term investors often aspire to buy and hold forever. However, this rarely happens in practice. We often feel unsettled with volatility, succumb to price movements and media coverage pressures, and desperately try to protect ourselves from the downside during shaky markets.

Certain businesses are so essential to the American economy that the government tends to bend over backwards for them. Two notable examples are banking and hydrocarbon energy.

1. Banking is so critical that even if prominent players do a terrible job complying with regulatory requirements, the government swoops in with billions of dollars to save and rescue the sector. Government agencies closely monitor the banking sector with stress tests to ensure the stability of the lending system and credit availability, and the leading players present a strong investment case amidst widespread uncertainty.

2. Hydrocarbon companies are the lifeblood of the American economy. Despite all the political stances and commitments to defund the sector in favor of renewables, the visibly tremendous dependence has the same political leaders warming up to the industry.

Although you can’t predict the future, you can pick investments based on a company’s financial health, ability to keep competition at bay, and a proven track record of adding value to shareholders. We have two picks for you today that offer these great qualities. Let's dive in!

Pick #1: MMP - Yield 7.5%

Magellan Midstream Partners, L.P. ( MMP ) is a public Master Limited Partnership (‘MLP’) that owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation's refining capacity, and can store more than 100 million barrels of petroleum products such as gasoline, diesel fuel, and crude Oil. Source

Structurally, MMP is a 100% public LP with no general partner or distasteful incentive distribution rights (‘IDR’). Without a general partner, MMP is an independent service provider capable of providing midstream services to any customer. 85% of the company’s revenues are tied to long-term, fee-based contracts shielding its profitability from commodity price volatility. Source

MMP is a terrific dividend steward, boasting 21 years of annual distribution increases since the IPO in 2001. Its quarterly $1.0475/share distribution calculates to a 7.5% annualized yield. Management has guided a healthy 1.38x distribution coverage for the year. MMP also operates with an industry-leading 3.6x leverage ratio, a weighted average interest rate of 4.3% in 2022 (down from 4.4% in 2021), and no debt due until 2025. Notably, 83% of MMP's long-term debt matures after 2030, and the most substantial portion matures after 2042.

Crude Oil and refined products have significant applications in our day-to-day lives. Despite the hype and interest in EVs, demand for crude oil transportation will persist for decades, and we will collect reliable quarterly distributions from this stickiness.

MP is a well-run partnership with shareholder-friendly management. A 7.5% yield from an industry that forms the lifeline of global energy production and consumption.

Note: MMP is a Master Limited Partnership that issues a Schedule K-1 to unit holders. MMP will report Q1 earnings on May 4th before the market opens.

Pick #2: BTO - Yield 9.4%

According to S&P Global Market Intelligence , several Hedge Funds used the banking sector sell-off in March as an early buying opportunity, dismissing speculation that a significant crisis was at play. Notably, bank insiders (including regional banks) and top-level management have been buying their stock at a breakneck pace since the Silicon Valley Bank collapse.

In a recent interview , Professor Aswath Damodharan, a highly regarded expert in corporate finance and valuation, said the following about investor fears in the sector.

"I know it's going to be incredibly scary to go into a sector where everybody is running in the opposite direction, but there could be an opportunity to find regional bank stocks now that are being punished" – Aswath Damodaran, a professor at the Stern School of Business at New York University.

While some significantly discounted bank stocks are out there, we won’t be cherry-picking individual common stocks at this time. We seek to diversify across the sector to collect big quarterly distributions. John Hancock Financial Opportunities Fund ( BTO ) is a Closed-End Fund (‘CEF’) that gives us just what we need.

BTO is actively managed, and the true worth of those words can be seen in the fund’s portfolio composition. BTO had no position in Silvergate Bank, Silicon Valley Bank, and Signature Bank. Despite being heavily invested in the North American banking sector, the CEF only holds positions in 4 of the 15 banks (as of December 2022) that Barron's considers having a “ Risky Speciality .”

BTO is diversified across 173 holdings, with Banking and Capital Markets being the core focus area, representing ~94% of the fund’s assets. Source

BTO operates with a 20% leveraged portfolio. This has affected the price negatively during the fear-stricken sell-off but will aid the rebound when rationality sets in. Don’t be too quick to dismiss the fund at the sound of the word leverage. BTO spent $3.2 million towards interest expenses for a $125 million debt position. That calculates to an average 2.5% interest rate which an average investor can only dream of in the current economy.

The CEF has rewarded shareholders with growing distributions in the past decade, and its current $0.65/share quarterly payment calculates to an attractive 9.4% yield.

Despite the scare in March, the banking sector continues to show strength, with bigger and better-managed names seeing deposit inflows. Despite increased loan loss provisions, setting aside more money for a potential recession or economic slowdown, industry experts insist that industry conditions for banking are far better than during the Great Financial Crisis.

"Even if we go into a recession, consumers would enter it in far better shape than during the great financial crisis" – Jamie Dimon, CEO of JP Morgan

As income investors, sell-offs provide opportunities to buy a bigger yield cheaper. BTO offers a whopping 9% yield through heavy diversification into the highly feared banking sector.

Conclusion

Human beings like to accumulate assets throughout their lifetime. Popular hobby-oriented collectibles include stamps, rare coins, artwork, and baseball cards. The importance of asset collection became so pronounced that Non-Fungible Tokens (‘NFTs’) took off in the previous bull market cycle, promising the potential to preserve the uniqueness of your digital collection.

From an investment standpoint, people buy assets like farmland, real estate property for rental and vacation purposes, and even precious metals like gold. As income seekers, we focus on accumulating assets that pay us real money regularly. In this uncertain economic climate, this asset class is available at handsome discounts, and you should take advantage of the sale. At High Dividend Opportunities, this forms the basis of our investment strategy, and we maintain a comprehensive Model Portfolio of 45+ securities across a wide range of asset classes. Our portfolio carries an average yield of +9% to enable financial independence and fuel a comfortable retirement.

We want to buy and hold our picks for as long as it suits our requirements. BTO and MMP are excellent distribution stewards with a strong record of growing shareholder payments. Both represent industries that form the basis of the American economy and offer up to 9.4% yields so that you can persistently buy more shares to boost your passive income.

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