THQ - 2 Great Dividends I Keep Buying More

2023-03-10 07:15:00 ET

Summary

• I find that leveraging the skills of others can provide strong income from specific sectors not prone to paying dividends.
• Knowing your skill set and limits are keys to success that many ignore.
• I use two great funds paying up to 7% to do this.

Co-produced with Treading Softly.

I am an independent person. I take pride in my ability to handle my own issues and solve my own problems. I credit my parents for instilling within me a drive to solve my own problems through investigation, research, trial and error, and effort.

To that end, I also have developed a sense of knowing my personal limits. For example, I might be comfortable doing electrical work in my car, but I know my limits when it comes to rewiring parts of my home. Knowing what you don't know is every bit as important as knowing what you know.

At those moments, I want a professional. Someone who has trained extensively in the field and knows the ins and outs to get the job done safely. I have an electrician that I have developed a relationship with and when I am in need - I call him up and he does excellent work. I can depend on and rely upon his aid and he gets promptly compensated for it.

Regarding the market, my team and I are knowledgeable and skilled in many areas of investing. We have various specialties on our team, and I learned long ago that running High Dividend Opportunities was not going to be a one-man show. My current team has been with me longer than any team I've assembled before.

Yet even with a team like mine, some areas in the market do not provide the regular income and dividends that we require. We need experts who can invest in a sector, actively manage a portfolio, and turn non-income/low-income sectors into investments that are income powerhouses. I like to use Closed-end Funds, or CEFs, to leverage skilled portfolio managers who do the specific granular investing on my behalf and provide income into my account while collecting their due compensation.

Let's look at two outstanding funds that I use for income, and that I keep buying more shares of.

Pick #1: BCX - Yield 6.2%

BlackRock Resources & Commodities Strategy Trust ( BCX ) continues to trade at a substantial discount to NAV. BCX invests in a combination of mining, energy, and agriculture. Source .

These are all sectors where prices went up a lot in the past couple of years, and the companies are thriving on higher commodity prices. While some investors might have a dim view of the sector because commodity prices are lower than their peaks, we need to keep in perspective that prices are still very high relative to pre-COVID. Inflation has happened, and it is very unlikely that we see prices go back down to pre-COVID levels anytime soon. Even if inflation were to reach 0%, these companies would still be making more profits than they were in the years leading up to 2020.

We are seeing an interesting dichotomy, where investors in the individual companies see the high earnings and great outlooks and are buying. While at the same time, having negative sentiment toward the sector because inflation has peaked.

As a result, the prices of BCX's holdings have gone up, and NAV is near 7-year highs. Investors are buying the individual companies. Yet the price of BCX, an investment in the sector, has stayed down. Right now, you can buy BCX for a 13% discount to NAV.

There is no particular reason that a CEF's price has to rise to NAV. It certainly could trade at a discount for years. So why is this important?

First, it provides an opportunity for the fund to buy back shares, which BCX has been doing. BCX has bought back 11.5 million shares for $90 million.

This results in shareholders becoming more concentrated, increasing NAV/share while also increasing cash flow per share.

Second, dividends are funded from NAV. CEFs are required to pay out most of their taxable income, including capital gains, as dividends. There are now fewer shares to share the pie with and NAV continues to climb to multi-year highs.

BCX raised its dividend twice last year, and with NAV still trending upward, it is very likely that we see more dividend raises in the future. Last year, they chose March to raise. We can't guarantee they will follow the same pattern, but when NAV remains high and goes higher - good things are more likely to happen.

Pick #2: THQ - Yield 7.3%

Tekla Healthcare Opportunities Fund ( THQ ) is a CEF that invests in healthcare companies: pharmaceutical companies, providers, medical equipment companies, medical technology, and even real estate. If you see your doctor, THQ has a financial interest in every aspect. Source .

The healthcare sector is a defensive one since the demand for it is inelastic. The fundamentals behind the sector are strong and inevitable. The U.S. consumer is aging, and the demand for medical care is rising. There is a reason that every other commercial on daytime TV is for some drug, some medical insurance, or some medical device.

There is no question that we want healthcare represented in our portfolio as the Baby Boomer generation puts higher demands on the healthcare system. Unfortunately, the dividends that can be found among healthcare companies tend to be much lower than we target.

This is where CEFs can be a powerful tool. The CEF invests in the companies and converts the gains to a dividend that meets our goals. Instead of large unrealized capital gains that can disappear like mist, we get a monthly dividend deposited into our brokerage account - tangible realized gains, every month. THQ provides us with competitive exposure to the healthcare sector, while providing a high yield.

Next time you're at the doctor, take a look around at all the things that are paying your dividends. The medication, equipment, bandages, vials, needles, insurance companies, and more are all generating earnings for the companies that THQ invests in. It might not make going to the doctor "fun," but it sure does make you feel a little better when you know everything around you is fueling your dividends!

Conclusion

Sectors like mining, commodities, and healthcare are sectors we want exposure to. Yet the dividends can be inconsistent or nonexistent depending on the firms you invest in. Holders of Rio Tinto ( RIO ) are seeing a reduced dividend forecast in 2023 due to lower commodity prices and their management holding closer to their 60% payout target. This type of variability is expected in the mining sector. RIO is a great investment, but not necessarily the consistent income investment we look for at HDO.

Fortunately, a CEF can allow me to eat my cake and have it too. I can leverage skilled portfolio managers, using their skills to invest in these sectors and provide me a total return that will primarily be in the form of dividend payments.

I love doing things for myself and enjoy the sense of pride which comes from being able to see the outcome of my efforts. I also know my limits. I do not want to be busy trading in and out of various holdings in the healthcare sector or commodities to generate income for my portfolio. That is not a strategy that fits my goals or my lifestyle. Instead, I outsource that effort and enjoy the income they generate.

That way, my valuable time can be used doing what I enjoy most. I think you can agree that most of us would rather enjoy our hobbies than worry about price movements. That's what income investing via our Income Method allows you to do.

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