USA - 2 Yields Up To 18% For June

2023-05-31 07:35:00 ET

Summary

• Welcome to the 6th month of the year.
• Often investors begin by reviewing their year-to-date performance and determining how they want to fine-tune the rest of the year.
• Income investing provides you with more time to enjoy your hobbies and less time focused on your portfolio.

Co-authored with Treading Softly

June is a unique month when it comes to the calendar.

The end of June marks the beginning of summer – it also marks the midpoint of the year! Many of us will take stock of how our portfolio has performed year to date for the first six months of the year and decide whether we need to make any fine-tuning as we aim for the end of the year. It also means that we have an idea of what six months of our income from our portfolio has been so far and if we're closing in on meeting our goals or whether we're exceeding them.

Each month, I like to take a moment and scour through my portfolio and the market for good ideas and pick two big ones that I really want to focus on throughout the rest of the month – so long as they maintain attractive values.

Today, I am going to cover two outstanding picks for June that can really help springboard you into even higher levels of income for the remaining six months of the year.

Let's dive in!

Pick #1: OXLC - Yield 18%

Oxford Lane Capital ( OXLC ) is a Closed-End Fund ('CEF') that invests in the "equity" tranche of collateralized loan obligations or CLOs. CLOs are actively managed portfolios of senior secured loans to publicly rated companies. These loans are typically taken out by companies rated B/B+ by rating agencies, including many publicly traded companies.

OXLC became the latest HDO holding to hike its dividend. This is a move that many might find shocking because OXLC's share price is down, and NAV has been down over the past year. Before the dividend hike, OXLC was already paying out a nose-bleed yield of over 17%! Can a stock have a 17%+ yield and dividend growth? OXLC just proved it can.

This is why we don't get overly wrapped up and hyperventilate over asset prices. Asset prices do not pay dividends. Dividends are paid by cash flow.

Imagine you owned a business that produced $50,000/year in profit. I come up to you and offer to buy your business for $500,000. You turn me down because you would rather collect $50,000/year indefinitely than $500,000 today. The next month, banks fail, Powell says some words, politicians threaten to default on Capitol Hill, and the general "end of the world" is on its way. So I come back and offer you $300,000 for the business. Does your business make less money because I offered you less? Of course not.

This is essentially what happens in the stock market on a daily basis. It's a grander scale because you only own a small piece of a company, and there are thousands of buyers (and sellers) instead of just one of each. Yet, ultimately, the only thing the price of any asset tells you is what other people are willing to pay for it right now.

As income investors, we don't seek to profit from selling our company to others. Our top priority is to profit from the income produced by our assets. What does share price tell us about the income an asset produces? Very little.

This is why we have focused on the cash flow that OXLC produces. The most recent report has a headline that isn't the greatest – core Net Investment Income (‘NII’) declined to $0.22 for the quarter, short of the $0.225 distribution that OXLC paid. Source

We can see that Core NII is never really stable, but the decline over the last quarter was significant. Here is how management explained the decline on the earnings call :

"Joe Kupka

Sure. There were really two major components. One was that the one-month, three-month basis had its widest point in October when the liabilities for January were being set. So remember, the quarter we’re looking at are mainly composed of the January payments. So that was really the payments that took the blunt of this one-month, three-month basis. Since then, it’s definitely tightened, and we expect to see that continue to normalize going forward, again, just based on the publicly available forward curves. And specifically within Oxford Lane’s portfolio, we had an unusually large number of first-time payers, which make the inaugural distribution, which is an outsized payment the previous quarter. So when you’re looking for that quarter-over-quarter core comparison, that explains that delta, you can say."

CLOs borrow and lend at floating rates, but the borrowers often can use either a 3-month or 1-month floating rate, while the CLO borrows at a 3-month floating rate. Typically, the difference is minimal, but thanks to the uncertainty surrounding the Fed, the spread between 3-month and 1-month LIBOR was over 0.6% by the end of October, which impacted the January equity payment. By January, that spread reduced to 0.38%, and today it is down to 0.23%.

Management answered a question about the impact of this spread on cash flow last quarter , and while they didn't provide a number, it was described as "pretty meaningful". It is also very temporary. In the meantime, OXLC continues to take advantage of investment opportunities and continues to reinvest aggressively as it receives repayments.

OXLC raised its dividend because its portfolio is generating more cash flow. The blowout in 3-month to 1-month spreads was extreme and brief. So while many of the potential buyers in the market are cautious and the price is low, we are happy to grow our income by adding more OXLC!

Pick #2: USA - Yield 10%

Liberty All-Star Equity Fund ( USA ) is a CEF that invests in diverse stocks. USA splits its capital among five different managers. Three of them utilize a "value" style approach to the market, and two utilize a "growth" style. The result is a fund that is diversified among stocks and strategies. Source

USA is a CEF for investors looking for broad exposure to the market, and the fund will generally follow the market indexes. With a "value" emphasis, USA will tend to correlate more strongly with the S&P 500 than with the Nasdaq.

One thing that separates USA from the many S&P 500 index funds is that USA pays out a distribution of 2.5% of NAV each quarter. As a result, when NAV rises, USA will pay out a higher dividend. When NAV goes down, the dividend will decline, preventing USA from overpaying. Investors can be assured that USA won't overpay and cannibalize its portfolio while also knowing that when the market recovers, the dividend will be raised.

Over the past 3 years, USA has spent most of its time trading at a premium to NAV. Currently, it is trading at a slight discount to NAV. Now is a great time to add to this holding and collect your income while you wait for the next bull market.

Conclusion

With OLXC and USA, we have the ability to earn large sums of income in very niche areas of the market.

OXLC invests in CLOs and enjoys a large amount of income from a vast array of different debtors, running companies that you depend on every day.

USA gives us a wider market exposure to value and growth picks. By paying a set amount of its NAV every quarter, we can enjoy a dividend that grows as the market climbs or diminishes as the market falls – but we know that it will never cause the fund to completely deteriorate away.

Both of these funds provide great opportunities for large sums of income that you can just set and forget. No need to fiddle with the portfolio or adjust holdings for yourself. They are run by expert portfolio managers doing that for you. Nothing makes money quite like money does, and these portfolio managers are using money to generate large sums of money for their shareholders.

One of those shareholders could be you. Instead of having to fiddle with your portfolio, you could enjoy time working on your car, hitting up the golf course, or taking your loved one out to lunch. Enjoy the moments with family or enjoy your hobbies and make quality time happen by having a large quantity of time available to spend.

My grandfather used to say that you can't force quality time to happen. You can provide a quantity of time and in that time there will be quality time that happens, and you'll remember for years to come. He believed in investing time in others, knowing that eventually there would be quality time that comes out with the right people. So I want you to have a retirement with an unlimited quantity of time that you can enjoy with others, and not have to worry about the market.

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

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