UTG - 2 Magnificent +8% Yields For Your Retirement

2023-07-27 07:35:00 ET

Summary

• "Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money."– Jonathan Clements.
• Do you plan to slowly burn your nest egg for financial warmth in retirement?
• Consider dividends instead to never have to worry about running out of money.
• Two +8% yields to grow income through thick and thin markets.

Co-authored with “Hidden Opportunities.”

The 4% rule is one of the most popular strategies adopted by retirees. This involves saving diligently during your working years to build a nest egg. Then, to maintain one's standard of living in retirement, steady yearly withdrawals amounting to ~4% of your portfolio value are made.

It sounds great, but the drawback of this method is that it assumes a 30-year retirement duration and that you will make the same percentage withdrawal irrespective of market conditions and your financial requirements. For example, investors following the 4% rule likely faced a significant dip in income during the Dot-Com bubble and the Great Financial Crisis. They would also have faced a tough decision of which assets to sell off to meet their standard of living needs.

Everyone’s spending needs fluctuate year to year. There could be furnaces to replace, roofs to repair, trips to take, and children to support potentially. Depending on what life throws at you, the 4% rule can create possibilities of shrinking income and outliving your savings.

"My parents didn't want to move to Florida, but they turned sixty and that's the law." – Jerry Seinfeld.

I want to retire at a location of my preference, maintain my spending power through retirement, and not worry about the market movements next year. Dividend income can do this, and if you are looking to build a solid passive income stream from your portfolio, I have two excellent bargains for you to consider.

Pick #1: UTG – Yield 8.1%

Even though they are as boring as companies get, utilities are one of the most valuable sectors for income investors. These companies provide essential services such as electricity, water, and natural gas, fundamental to our everyday lives and business operations. The demand for these services remains unaffected through economic cycles, and the companies often operate under a regulated framework that provides a level of stability and predictable revenue streams.

While individual utility companies pay dependable dividends and enjoy regulatory protection for their profit margins, they operate more regionally, and their operations are vulnerable to weather patterns, cyber attacks, and natural disasters. We like this industry for its moat, regulatory protections, and inelastic demand. Reaves Utility Income Trust ( UTG ) is a suitable method of drawing benefits from this sector while collecting sizable monthly income.

UTG is a Closed-End Fund ("CEF") diversified across 44 companies, primarily in the U.S. and Canada, and a small yet notable participation from Germany and Italy. 80% of the CEF is built with companies that are the largest and most prominent in their field, with utility and communication services companies, and there is modest exposure to infrastructure REITs like Digital Realty Trust ( DLR ), Equinix ( EQIX ), American Tower ( AMT ). Source .

UTG trades at par with NAV, presenting an excellent opportunity to initiate/add to your income portfolio. The CEF pays $0.19/share, a solid 8.1% yield, with a stellar track record of distribution raises and special payments since its inception in 2004. Built primarily with the recession-resistant utility sector, UTG has kept its distribution even during the darkest days of the Great Financial Crisis or the COVID-19 crash.

UTG is modestly leveraged at 20% of net assets. As of April 30, the portfolio carried $515 million in borrowing from credit agreements at a weighted average interest rate of 4.99%.

There has been some concern about UTG’s distribution sustainability. Let us discuss this briefly. YTD, UTG’s distributions have been 69% capital gains (primarily long-term) and 31% net investment income. In its semi-annual report , UTG reported $146.9 million (almost $1.96/share) in unrealized gains as of April 2023, positioning the fund well for distribution sustainability for the foreseeable future.

Markets rarely go in a straight upward or downward direction. There is a healthy mix of rallies and declines, and UTG has actively managed to change its allocations, take advantage of the movements, and generate cash returns for shareholders. Current price levels provide a sizable 8.1% annualized yield from a robust and resilient sector to brace yourself for the upcoming recession.

Pick #2: SLRC – Yield 11.1%

Examining businesses thriving in unfavorable economic conditions reveals the exceptional resilience of equipment leasing and asset-based financing. This can be attributed to the fact that challenging financial circumstances compel companies to prioritize preserving cash flows, optimizing operations, controlling costs, and upholding competitiveness. As such, flexible financing options facilitate the cost-effective pursuit of equipment upgrades and enhancement of operational efficiency.

SLR Investment Corp. ( SLRC ) is a Business Development Company ("BDC") specializing in a diversified array of commercial finance solutions such as cash flow lending, asset-based lending, equipment finance, and other specialty finance investment strategies. Source: slrinvestmentcorp.com

SLRC maintains a highly diversified portfolio, with investments across ~780 unique borrowers in over 110 industries. The BDC maintains an average exposure of $3.7 million (0.1% per issuer).

As of March 2023, 99.8% of SLRC’s investment portfolio was built with senior secured loans, of which 98.6% is first-line senior secured floating-rate. BDC’s weighted average asset yield stood at 11.9%, and equipment financing and asset-based loans represented ~65% of the total loan portfolio. This increases the reliability of interest payments, as businesses will do their best to keep their business-critical tools and equipment.

At the end of Q1, SLRC had minimal exposure to bad debt. According to the company's internal portfolio risk rating, 98% of the portfolio had a rating of 2 or better, indicating overall strength in the credit scores. 0.3% of the portfolio could be considered bad debt.

SLRC ended the quarter with leverage of 1.12x. Notably, the BDC significantly raised its leverage from COVID-19 lows and took advantage of the booming economy. Its current leverage is within the target level range of 0.9 - 1.25x. The BDC has no debt maturity until the end of 2024 and maintains access to over $800 million in available capital to scale up and cater to an economy where cash flow preservation will be a critical goal for businesses.

As the SUNS merger from 2022 became increasingly accretive, SLRC’s Net Investment Income improved materially during the quarter. Its $0.41/share NII covered the $0.41/share quarterly dividend ($0.13666 paid monthly). SLRC boasts a mouth-watering 11.1% yield.

SLRC trades at a ~19% discount to NAV. This BDC is mainly composed of first-lien senior secured loans and lends against mission-critical assets of small and mid-sized. SLRC is well-positioned to benefit from these high-interest rates and thrive through recessionary pressures.

Conclusion

Past performance is no guarantee of future results. Every financial product is required by regulation to disclose this to potential investors. We all know this, yet the 4% rule makes the very assumption by quantifying your portfolio sustenance on the historical performance of the financial markets.

At High Dividend Opportunities, we work towards building an income stream that doesn’t involve the depletion of our savings, our most valuable asset. Our “Model Portfolio” of +45 carefully-selected securities targets an overall yield of +9%. With a collection of mispriced, misunderstood, and generous dividend-payers, our income easily beats inflationary pressures and is well-positioned to enable lifestyle maintenance through a long retirement. Most importantly, it doesn’t involve distress-selling at times when we should be buyers.

The longest bear market in recent history occurred between 2000 and 2002 and lasted 929 calendar days. That could repeat anytime in the coming decades, along with periods of scorching inflation and painful recessions. It remains uncertain if the 4% withdrawal rule can be emotionally executed during such challenging times. However, if implemented diligently, the income method can generate surplus income to reinvest wisely and enable you to seize lucrative opportunities during times of market fear. I am confidently investing in two picks boasting up to 11% yields, grabbing this golden opportunity to maximize returns before the discounts evaporate.

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