GLNCY - 2 Recession-Resilient Income Picks: 'Must Own' In Your Retirement Portfolio

2024-01-07 11:30:00 ET

Summary

• Retirement requires a steady stream of income, no matter what storms are coming.
• Commodities are being left behind, a poor choice by many.
• Reframe your understanding and lock up outstanding income.

Co-authored by Treading Softly.

Many different aspects of our economy are impacted by different forces. For example, the price of a dozen eggs is more impacted by the laying rate of chickens found in the country than it is by prevailing interest rates. Furthermore, the price of gasoline is more affected by inflation than it is by interest rates. While it may impact your buying choices, especially if you're using some sort of revolving debt, like a credit card, or need a loan to buy something like land or a car, interest rates can pressure the economy, but do not determine the value of everything within that economy.

Commodities are overwhelmingly driven by demand within the economy for them, as well as by inflationary impacts. Because most commodities have fixed availability, the devaluation of the dollar over time can cause those commodities to rise in value. Recently, we have seen massive levels of inflation since the COVID-19 pandemic due to the injection of additional cash into the economy. Because of this, commodity values have remained elevated compared to historical norms, and these are going to be the new norms going forward.

For this reason, when it comes to the market, owning various investments that are exposed to the dynamic of commodities, as well as understanding that many of these companies are being rewarded by shareholders for being more conservative rather than overly aggressive, allows you to be able to generate large levels of income from even just a small amount of exposure, something that is also highly recession-resistant.

Today, I have two funds that can help you glean great levels of income from commodities themselves.

Let's dive in!

Pick #1: BCX – Yield 6.9%

BlackRock Resources & Commodities Strategy Trust ( BCX ) is a CEF (Closed-End Fund) that invests in commodity sectors. BCX breaks down its exposure into three primary categories: Energy, mining, and agriculture. Currently, it is underweight agriculture. Source .

These sectors were all very popular in the early days of the inflation spike. Investors bought because inflation is generally beneficial for commodity companies. They were right. Higher commodity prices are great for producers. However, now that inflation is declining, we see investors fleeing the sector.

They forget one huge thing: inflation is not a measure of absolute prices. Inflation is a measure of the rate of change in prices. Yes, inflation is down, particularly among commodities, where many of them are at lower prices than they were during the 2021/2022 inflation spike. However, in the big picture, commodity prices are still high.

Consider this slide from Glencore plc ( GLNCY ), one of BCX's largest positions in the mining sector. This is the average commodity prices As of Q3-2023: Source .

Now let's compare that to the same slide from Q3 2019: Source .

Prices are down from last year, but overall are up from pre-COVID levels. Here they are side by side for easier comparison:

Virtually every commodity that Glencore produces is up from 2019. Only Cobalt is down in price. The average price increase is around 40%. Yes, commodity prices are "down" from their peak, but they have settled at much higher prices than they were pre-COVID.

The spike was nice, but as an investment, an extended period of elevated prices is better than a spike that lasts for a few quarters. Higher prices for an extended period provide miners the capital they need to expand, improve their balance sheets, and position themselves for long-term success.

The period from 2010 through 2019 was terrible for mining companies. Commodity prices were low, and making profits was difficult. As we look forward, we see a very different environment this decade. Prices are stabilizing at higher levels than we saw pre-COVID, and while they might be down from their peaks, they are still high. It is high enough to make commodity companies an attractive investment again.

BCX is one vehicle we can use to invest in commodity sectors while getting a stable dividend. BCX is currently trading at a ~15% discount to NAV, which is at the low end of its long-term range.

Pick #2: BGR – Yield 6.2%

BlackRock Energy and Resources Trust ( BGR ) is a CEF that focuses on energy. We previously discussed BCX, which also has exposure to mining and agriculture. BGR is a "pure play" on the energy sector, focusing its exposure on large integrated energy companies. The companies that we would typically refer to as "big oil," even though they diversify into many products other than oil. Source .

While solar and wind have been the fastest-growing energy sources, they remain a fraction of overall energy use. EIA projections show that even with assumed fast growth of non-fossil fuel sources, fossil fuels will still provide the majority of energy for the world in 2050. Source .

In the early 2010s, we saw the "shale boom." Taking advantage of the combination of high oil prices and more efficient collection techniques, companies raced to produce more oil in the U.S. This resulted in the U.S. reversing its perpetual decline in oil production since the 1970s.

The crash in oil prices from 2014 to 2016 wreaked havoc on many oil companies, especially the small ones. Bankruptcies were filed, and many went out of business. Yet, for U.S. production, it was a blip that has since disappeared.

Today, we see oil companies expanding in a much more careful and methodical way. They are approaching the market with stronger balance sheets and ensuring that growth is profitable. As oil prices have risen, oil companies have been hesitant to substantially increase cap-ex.

As a result, we are likely entering a period where oil prices are likely to remain high relative to pre-COVID for an extended period of time. Producers are incentivized to maintain a conservative approach, prioritizing a strong balance sheet and returning capital to shareholders over reckless expansion.

BGR is currently trading at an 12% discount to NAV, providing us an opportunity to gain exposure to large energy producers without paying full price.

Conclusion

With BGR and BCX, We can enjoy commodity exposure while also buying these funds at a steep discount. For many, the COVID play on commodities and the inflationary play on commodities has faded out of the rearview mirror, and they've now sold off the funds at ever-widening discounts over the last three years.

Yet all the while, over the same exact three years, these funds' dividends have only climbed to new heights.

There must be a distinct disconnect between the understanding of the active trader and how commodities truly function. You see both of these funds are now earning and rewarding their shareholders even more, all while the price to NAV discount has climbed. You can now buy these funds cheaper than you could in the last three years, all while still earning an even higher dividend than you did back then.

When it comes to retirement, it benefits you to have exposure to a vast array of different types of investments and economic plays. For our Model Portfolio, we aim to be as interest rate agnostic as possible, meaning if rates climb or fall, they should have a mostly neutral impact on our overall portfolio. When inflation came onto the scene, we held various investments that would strongly benefit from inflation while having some other ones that would be weaker when inflation was hitting hard. The goal here is that no matter what may come from the storms in the market or the storms in life, it would not rock our boat so heavily as to capsize it. Likewise, when it comes to your retirement, the last thing you want to do is to have to constantly be vigilant, looking for the next storm that could potentially destroy your retirement.

Instead, you want to be able to enjoy the retirement that you've worked so many decades to be able to have. The way you can do this is by using our Income Method to leverage your capital into a portfolio that allows you to have that enjoyment and reduce stress as you know that it will not be destroyed by random market events.

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

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