HR - Billionaire Mark Cuban Says Dividends Create Value: 2 Great Picks For Your Retirement

2023-10-11 07:35:00 ET

Summary

• Mr. Market offers no certainty, assurances, or guarantees with your investments.
• Billionaire Mark Cuban says stocks are like trading cards, with values set by the next buyer - unless they pay dividends.
• When the going gets tough, dividends brighten the financial path ahead, offering income stability and reliability.
• Two +8% yields from Healthcare Realty and SLRC to retire in style and splendor.

Co-authored with "Hidden Opportunities"

Have you participated in a marathon? They are a 26.2-mile outdoor race that requires a ton of practice, and you're always at risk of your body unexpectedly breaking down, and the weather conditions are not in your control either. You may follow a strict diet and a rigorous training regimen, but the marathon doesn't owe you anything. Similarly, you may be a disciplined investor with strict metrics and other criteria to design your portfolio.

But the market owes you nothing for all that diligence, and billionaire Mark Cuban has argued that Wall Street has become a "platform for hackers" that use high-frequency trading and complex algorithms to make money. His sentiment isn't much unlike that of iconic investor Warren Buffett, who has said that Wall Street has turned the stock market into a casino.

"I rarely think the market is right. I believe non dividend stocks aren't much more than baseball cards. They are worth what you can convince someone to pay for them." - Mark Cuban

This is why I prefer using the stock market as a machine that provides more predictable and stable returns and isn't correlated with the emotions and sentiments of the public or Mr. Market.

"Dividends may not be the only path for an individual investor's success, but if there's a better one, I have yet to find it." - Josh Peters, Author

Investing for cash flow is a more reliable strategy than relying on capital gains as it provides ongoing income through unpredictable market conditions and can lead to true financial freedom. Let us look at two picks that will help you traverse that path.

Pick #1: SLRC - Yield 11%

SLR Investment Corporation (SLRC) is a unique business development company with a highly diversified $3.1 billion portfolio of senior secured loans to ~780 distinct borrowers across more than 115 industries, with an average exposure of just under $4 million.

During Q2 2023, SLRC generated NII (Net Investment Income) of $0.42/share, over-earning its quarterly distribution, indicating operational enhancements following the merger with SUNS. The improved NII resulted from a more extensive asset portfolio and higher interest rates, as the BDC predominantly maintains a floating-rate portfolio.

99.4% of SLRC's portfolio consisted of senior secured loans, with approximately 98% invested in first-lien loans, giving the BDC access to the collateralized asset in the event of defaults. This structure positions the portfolio to withstand inflationary pressures and interest-rate headwinds better than portfolios with lower-tiered loans and equity exposure.

During the second quarter, the BDC did not place any assets on nonaccrual, and the weighted average investment risk rating was under two on its 1-4 risk rating scale (with 1 representing the least amount of risk). As of June 30, 2023, 99.4% of SLRC's portfolio was performing on a fair value basis, while the BDC's weighted average asset level yield was 12.1% (up from 11.9% sequentially). Better portfolio yield with no change in risk levels is the math we like. Source

SLRC's business segments, like sponsor financing and asset-based lending, have historically outperformed during challenging market conditions as companies' access to traditional lending sources becomes constrained. SLRC's funding profile is well-positioned to weather a rising rate environment with its next fixed-rate maturity at the end of 2024. The BDC's senior unsecured fixed-rate notes carry a weighted average annual interest rate of 3.8%.

The BDC's $0.13667/share monthly dividend calculates to a 11% annualized yield. Moving forward, the company plans to make its distributions quarterly rather than monthly, and this change is expected to occur in Q4 2023. SLRC trades at a 14.5% discount to its book value, presenting an attractive opportunity to buy into this defensive BDC.

Pick #2: HR - Yield 8.6%

Healthcare Realty Trust Inc. ( HR ) operates a robust portfolio of 714 real estate properties in 35 states at an 89% occupancy rate as of Q2 2023. The REIT maintains relationships with 56 of the top 100 health systems in the country, indicating a high-quality tenant base. According to Green Street Hospital Rankings, 96% of HR's portfolio was rated B or higher, and 89% had a rating of A or higher, indicating an increased composition of credit-worthy tenants. Source

Ninety-one percent of HR's portfolio comprises MOBs, and the REIT's assets are primarily on-campus, resulting in a higher proportion of specialists vs. primary care.

Primary care represents 35% of the portfolio, while the rest is diversified across specialists. Notably, HR provides leasing and property management services to 93% of its portfolio, positioning the REIT to collect more rents through these value-added services.

HR stock has dropped considerably after the announcement of its Q2 earnings.

HR lowered FFO guidance for FY 2023 by 3% to $1.57 to $1.60/share and indicated that the annual dividend would not be covered by the FAD (Funds Available for Distribution). While this immediately raises concerns about a dividend cut, management mentioned their current dividend as sustainable and expressed that the payout ratio will return below 100% through same-store NOI (Net Operating Income) growth in upcoming quarters.

HR's FY 2024 momentum looks bright due to its leasing momentum. The company reported record leasing volumes that will translate into occupancy in 2024, and most importantly, new leases automatically reflect higher rent rates. In contrast, existing leases only provide partial inflation protection at renewal. Management revealed that these developments could potentially boost HR's same-store NOI growth to the 4% - 6% range, resulting in improved dividend coverage.

HR is actively selling non-core, less strategic assets at a cap rate of around 6.5% when its portfolio implied cap rate is above 7% due to its depressed stock prices. With the proceeds from the sale, the REIT is pursuing developmental projects with 6.5% - 8% yields and redevelopment projects that project 9% - 12% yields. This is an interesting and lucrative strategy to recycle proceeds from non-strategic assets accretively.

Management expects to use the excess proceeds from the disposition toward debt repayment and opportunistic share repurchases. ~14% of HR's total debt carries floating rates (down from ~20% last year). Management expects debt repayments to bring the REIT's leverage ratio between 6-6.5x EBITDA.

HR maintains a relatively comfortable debt schedule with more significant maturities in 2025. Even with the higher for more extended interest rate scenario, we expect a better interest-rate environment when more considerable and significant maturities occur.

HR's $1.24 annualized dividend calculates to an 8.6% yield. The benefits of the HR-HTA merger are yet to translate into portfolio earnings growth, but the signs are strong. As an operator of properties experiencing strong demand, leasing activity, and rent increases, HR is well positioned to improve its dividend coverage soon and continue NOI growth as its development pipeline translates into occupancy.

Conclusion

"Even so, the old farmer said to his son:

A cow for her milk, A hen for her eggs,

And a stock, by heck, for its dividends.

An orchard for fruit, Bees for their honey,

And stocks, besides, for their dividends"

- John Burr Williams (Theory of Investment Value)

Our Investing Group uses the financial markets to produce passive income through dividends. We buy shares of a business to tap into its profitability and collect our share during the ownership. There are hundreds of metrics that can be used to estimate the value of a company, but the majority of them are comparative. As Mr. Cuban says, they don't offer any definite value for the stock, unless they pay dividends. Dividends paid by companies put real cash into the hands of shareholders. This is the core aspect of our approach, and is based on the fact that the actual value of an investment lies not in the whims of Mr. Market but in the tangible benefits it can provide.

"These shares of stock have no intrinsic value (the exception being when dividends are paid). Their only value comes from selling to someone believing that the share will go up in value." - Mark Cuban

We believe in a pragmatic approach to investing, which values financial stability and the ability to enjoy the fruits of our investments, much like an orchard for its fruit or bees for its honey. This is why we maintain a comprehensive portfolio of +45 dividend payers. This article discusses two picks offering +8% yields to make your portfolio support your retirement, ensuring that your financial orchard continues to bear the sweet fruits of financial security and independence.

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