SAR - 2 Big Yields To Buy And Hold Forever

Summary

• Mr. Market may be manic-depressive, but he rewards discipline.
• The market may seem like a roller coaster, but persistence will compound your returns like a snowball rolling downhill.
• Two solid dividend stewards, Saratoga and Diageo, to buy and hold forever.

Co-produced with "Hidden Opportunities"

Strong emotions often shake investors, even those who claim to have a long-term mindset. These emotions can quickly cause us to misunderstand facts and make the wrong moves at the wrong time - repeatedly. Source

Investing is best approached with a long-term mindset. However, finding a stock that you can hold indefinitely takes work. We are talking about a very long time, and a lot can go wrong year-over-year, let alone over decades.

Life is like a snowball. The important thing is finding wet snow and a really long hill. - Warren Buffett

But it is essential to study and not panic over short-term headwinds while maintaining caution for poor management or structural issues in the business. We look for simple but dominant business models that have robust, lasting power. Most importantly, we seek those with a proven track record of shareholder value creation.

Today we'll discuss two picks that are well-positioned across interest rate cycles, inflationary pressures, and economic postures for you to buy and hold forever.

Pick #1: SAR - Yield 10%

Saratoga Investment Corp. ( SAR ) is a lesser-known BDC (Business Development Company) that has a very impressive (and unique) track record of annual dividend growth* since its inception.

SAR maintains a highly diversified investment portfolio (across 39 industries) where no single industry makes up more than 10% of the portfolio's fair value. The most significant constituents are highly defensive industries, representing ~30% of the investment.

• Healthcare and education software: Regardless of the fluctuating economic shifts, learning, upskilling, and investing in the future will continue to grow, as will the need for education. Similarly, the medical community in the U.S. continues to seek digital advancements to support a growing (and aging) population while experiencing severe staffing shortages .

• HVAC Services and Sales: A vital sector that actually provides cost savings to several critical businesses. Refrigeration is a necessity, and energy efficiency saves money. Moreover, sectors with stable demand, like healthcare and consumer goods, depend on refrigeration to improve their supply chain and optimize costs.

• IT Services: The pandemic demonstrated that technology provides powerful means to optimize costs and increase operating efficiency. If history is any guide, we can see that businesses that adopted technology survived paradigm shifts, while those who didn't were eliminated and forgotten (Walmart vs. Sears is a great example).

Like every BDC we currently hold in our portfolio, SAR is well-positioned to profit from a rising rate environment. 98% of the BDC's portfolio assets carry floating rates, while 96% of its borrowings are at fixed rates. With a debt maturity schedule ranging from 2 to 10 years out, SAR enjoys a solid credit structure at a fixed cost and is well-positioned for a hawkish Fed. SAR maintains an investment-grade ('BBB+') balance sheet and has recently received an essential third SBIC license. This increases the BDC's access to government leverage at lower rates than traditional lending sources.

At the end of FY-Q3, 82% of SAR's portfolio was composed of first-lien debt issued to support companies in resilient industries. Moreover, the BDC maintains strict credit quality through periodic reviews and reported that 96% of its portfolio is at their highest credit rating (up from 95% in November 2021). Source

Among BDCs, SAR has uniquely boasted annual dividend increases since its inception in 2015. (*) Notably, the company had to suspend its dividend during the uncertain and hysteria-filled beginning of 2020. Since then, management has worked hard to win back the trust of its shareholders. The BDC was quick to restore a payment, and readers should be pleased to note that the current quarterly dividend exceeds pre-pandemic levels. In November 2022, SAR raised its quarterly dividend by ~26% to $0.68/share, which annualizes to a 10.1% yield.

SAR trades at a 1.7% discount to NAV, presenting an attractive opportunity to load up on this BDC with a spectacular long-term track record of growing NAV (290% increase since Saratoga took over management).

In SAR, we see a rare BDC where investment dollars are well-positioned to provide growing annual returns. Management's investment selectivity, careful credit quality evaluation, and prudent allocation to resilient sectors imply that SAR has your money working harder than you.

Pick #2: DEO - Yield 2.1%

Diageo PLC (DEO) is a premium spirits maker and sells some of the most recognizable alcoholic brands in more than 180 countries. Beverage alcohol is a recession-resistant industry as this is a product people will keep consuming regardless of the economy. Notably, this study by Toptal shows that this industry demonstrated high growth during the Great Financial Crisis of 2008-09.

DEO 's brand portfolio is built with some of the most popular names in every liquor category. Source

The company actually prides itself on saying , "A bottle of Gordon's is sold every 6 seconds." The product category's defensiveness and brand popularity provide strong pricing power and keep the money rolling in, a proportion of which is routinely paid out to shareholders.

During 1H 2023, the maker of Smirnoff vodka reported an operating profit of GBP 3.2 billion, a 15.2% increase YoY owing to solid sales volumes due to higher prices. Notably, DEO's super-premium-plus brands (its most expensive category) contributed 57% of net sales and drove 65% of organic net sales growth.

DEO shares have been under downward pressure due to the 3% YoY sales growth in 1H 2023. But it is noteworthy that DEO enjoys very high-profit margins (41%) in the U.S. and Canadian markets. Additionally, the company expects growth in the region to be in the mid-single digits in 2H 2023 (Crown Royal was in a Super Bowl ad for the first time this year). We are particularly excited about DEO's growing exposure in emerging markets like India, where social drinking is increasingly becoming acceptable , and demand is soaring due to the exploding urban middle-class adult population. ( Data Source )

DEO is a Dividend Aristocrat with 25+ years of annual dividend raises. For 1H 2023, the spirits maker kept up with its track record and raised its interim dividend by 5%. The company has also provided FY2023 guidance of 1.8-2.2x EPS coverage for its dividend. DEO's balance sheet carries an A-/A3 credit rating by S&P and Moody's and the company reported a leverage ratio of 2.5x at the end of December 2022 (at the lower end of its target range). The TTM dividend payment calculates to a 2.1% annualized yield.

Note:

1. DEO is a U.K. corporation and issues dividends in GBP. U.S. investors will receive a dividend payment that is subject to variations based on USD-GBP rates. Four shares of Diageo PLC (LON:DGE) =1 U.S. ADR (NYSE: DEO )

2. DEO pays dividends twice a year - an interim dividend in April and a final dividend in October. The approximate split between the two payments is 40/60.

3. We cannot predict the 2H 2023 dividend. Hence the yield calculation made in this article is based on the sum of 2H 2022 and 1H 2023 dividend payments.

DEO is an excellent dividend-growth candidate, a leader in this high-demand industry, and maintains substantial exposure to high-growth markets. Events and celebrations happen throughout the year - whether friends and family visit, when you go out to dinner, at office parties, or when the streets are decorated with Christmas lights, American flags, or Halloween pumpkins. In any of the above events, there is a very high probability someone around you may be holding a glass of DEO's finest. And you can smile knowing you will receive your (growing) cut when you get the next dividend payment. Cheers!

Conclusion

DIY investors have always sought out those stocks that can be put on autopilot and left to grow unattended. After all, that is the true definition of passive investing, right?

Warren Buffett has advocated for the buy-and-hold strategy and has snowballed his portfolio into a behemoth with nothing but patience and persistence.

Our favorite holding period is forever. - Warren Buffett

There have been bearish news headlines every few years (or months), but despite Mr. Market being emotional, he has rewarded discipline over the longer term. Source

We are identifying the potential cornerstones for our diversified long-term income portfolio and seek businesses that can continue executing "forever" despite external pressures. We have two picks you can buy and kick back while they continue creating returns for the future.

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