HR - 2 Great Dividends To Buy And Hold Forever

2023-08-02 07:35:00 ET

Summary

• Stop frequently trading and get paid frequently instead.
• Some sectors provide excellent income regardless of the market.
• Buy quality income stocks worth holding for decades.

Co-authored by Treading Softly

I'm not one to fall into trends. I usually don't know what is the most popular TikTok video, I'm not into Instagram Reels, and Snapchat was never my thing.

Likewise, when it comes to the market, I'm not into the newest fads. I'm not chasing blindly after AI. Before that, I wasn't trying to buy up virtual real estate in the Metaverse, or trying to chase the next big crypto coin.

I like things to be simple and straightforward. It's one of the reasons I like to use agricultural examples when it comes to the market: You sow a seed, it sprouts into a plant, and you harvest the crop. While there may be many intervening steps in between - the process is simple. It has been used for centuries to grow food that we eat every day.

Likewise, generating the wealth that you can enjoy for decades does not have to be a complicated process. It does not have to take investors a decade to become a professional income investor. The principles and the rules are extremely simple. You can add colorful additions; it's just not what I do. Some investors love to dabble in futures, and some like to trade options, but these are things that are not core to my personal Income Method. The reason is that I like to keep it as straightforward as possible. That way, it can help as many people as needed.

At the end of the day, I'm going to die - not today, but eventually. I want those who have been impacted by my Income Method to be able to continue to use it and follow it without me having to be some guru that they depend upon for every single trade. That's not everybody's style - some people love to be depended upon, but I'm the kind of "teach a man to fish, not just give him a fish" person.

Today, I want to look at two outstanding income generators that belong in your portfolio and should stay there for decades to come.

Let's dive in!

Pick #1: BTO - Yield 8.3%

In March, it was the end of the world. The market was falling, with banks and other financials leading the way down. Silicon Valley Bank (SIVBQ), Signature Bank (SBNY), Credit Suisse (CS), and First Republic were plastered all over the news as failing banks, with dire predictions that things would get worse.

Fast forward four months, and bank failures aren't in the news anymore. As banks start reporting their Q2 earnings, they are off to a very strong start. Wells Fargo (WFC) and JPMorgan (JPM) both raised guidance as Net Investment Income ('NII') is doing very well in a higher interest rate environment. When you are a lender, higher interest rates are a good thing for you in the long run. After all, what do lenders profit from? Collecting interest!

It is a common theme with investing that Wall Street is frequently near-sighted. Panicking over the issues of the moment without regard for whether these issues will be resolved with time. The banking industry is alive and well. Yes, there are issues created by the rapid rate hiking cycle, but the Fed is now slowing down. As interest rates stabilize, absolute higher rates are a positive for banks.

Next week, we will see earnings reported for a lot of regional banks, which is the area that Wall Street has been the most concerned about, and is trading at very low valuations. We can take advantage of this fear and grow our income.

John Hancock Financial Opportunities Fund (BTO) is a Closed-End Fund ('CEF') that invests in banks, both large national banks and regional banks. BTO was hit hard in the March panic, giving up its gains for the year and then some.

While BTO has recovered 30% from May lows, there is plenty of room to go. As Wall Street warms up to the idea that bank failures were isolated to a handful of banks and not a broadly systemic cause as we saw with mortgages in the Great Financial Crisis, we can expect valuations of banks to return to average levels.

Until that happens, we can buy BTO and collect a great yield while we wait

Pick #2: HR - Yield 6.3%

Healthcare Realty Trust Inc. (HR) is a REIT specializing in medical office buildings or MOBs. HR owns a diversified portfolio of 715 medical office properties in 35 states.

Last year, HR shareholders approved the merger with HTA, creating the largest pure-play MOB REIT in the United States. HR's merger with HTA has significantly improved its portfolio scale, diversification, and efficiency. Large mergers always take time to integrate, but HR management has stated that they are on target for 5-7% earnings growth and 4-6% same-property rent growth in 2024 by taking advantage of redevelopment opportunities within the portfolio.

HR has a healthy development/redevelopment pipeline that will contribute to earnings growth. Source

HR's strategy is what they describe as a "cluster" strategy. The goal is to own multiple buildings in close proximity to each other, either "on campus" or adjacent to the property of a major healthcare system like a hospital. For instance, here is an example of a cluster that HR formed in Atlanta.

HR acquired five buildings in two transactions and then acquired development property nearby. They currently are renting 357k square feet and have the ability to develop an additional 184k square feet in an area where HR is already managing property and is very familiar with the supply and demand dynamics. All real estate is local, and there is a lot of value in developing in an area where you are already a successful landlord.

Like most REITs, HR has seen its valuation compress thanks to rising interest rates, despite the fact that HR has no material debt maturities until 2025, giving them plenty of time for rates to change before they are forced to refinance.

Now is a great time to be buying up shares while you can receive a much higher yield than HR has historically had. The market is selling off REITs based on the near-term reality of higher interest rates while ignoring the long-term benefits of rent inflation, growing demand for medical properties, and improved efficiency for HR with its larger scale.

We are happy to get paid while we wait for the market to realize the value it has overlooked.

Conclusion

BTO and HR can provide strong income from the banking sector and the healthcare sector without having to take any additional steps. BTO allows you to leverage strong portfolio managers who own top-quality banks within their portfolio and pay you. HR continues to keep on ticking and providing excellent dividends to its shareholders year after year.

Neither one of these sectors are part of the latest and greatest fads. COVID is long in the rearview window for a while now. Banking was out of favor due to the collapse of multiple banks. It's amazing how times have changed so quickly. The banking is now starting to move back into favor as we start seeing the benefits of higher rates on the bank's bottom lines.

Regardless of the newest trend or craze, some sectors can be relied upon to consistently provide excellent income, year in and year out. These two opportunities allow you to leverage two sectors that can do just that.

When you're retired, you're not going to want to have to fiddle with your portfolio every day, just like you're not going to want to have to fiddle with everything else in your life. You'll want to be able to enjoy each day! Each day is an opportunity to discover something new and find a new way to enjoy it. I want you to have the income to be able to do that. Nothing is more discouraging than being limited by your income and stopping you from being able to do things that you enjoy. That's why I've created the Income Method to provide for the needs of retirees or anyone else. They can leverage the market and earn excellent outstanding income for decades to come.

That's the beauty of my Income Method. That's the beauty of income investing.

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