RNP - Buffett Says Don't Do Stupid Things: Buy These Instead

2023-05-29 07:35:00 ET

Summary

• Warren Buffett sees a lot of people do a lot of stupid things.
• Why is investing in the stock market viewed as gambling?
• We take a look at what he thinks and how you can apply it to your portfolio.

Co-authored with Treading Softly.

Recently, the famous Warren Buffett was asked questions by CNBC about his views on the market and specifically about cryptocurrency. He once again doubled down on his opinion that Bitcoin and other cryptocurrencies were without value or essentially worthless and that he did not believe in supporting and investing in them. He went on to describe them like this:

“I didn’t like chain letters when I was a kid. I thought, why in the world should I send along a chain letter? I’ve seen people do stupid things all my life. And I really, I empathize with that. I mean, people like to play the lottery. … People love the idea that they’re going to make more money tomorrow. It really drives them crazy if their next-door neighbor is making more money not knowing what they’re doing, and they’re just sitting there and their spouse is saying, ‘Why is that guy getting a second car, and why are we missing this whole thing?' The gambling instinct is so strong.” – Source: CNBC .

He also went on to express his support for the traditional or classic means of wealth generation.

For many younger investors, Warren Buffett has always been this exceptionally wealthy individual who cautions against making big trades or gambling for big wins. Yet, for those of us who are old enough to remember him when he was building his empire – he was a very strategic investor who found value in companies that others overlooked. He's also been a very big fan of getting dividends, even if he isn't a big fan of paying them.

Through his skills, Warren Buffett has been able to bail out banks, buy up companies that would be untouchable for others, or make big bets as he did with Occidental Petroleum Corporation ( OXY ), even when others doubted. All the while, he was receiving large dividends from his preferred security positions or other companies he's held.

Warren Buffett is just like you and me. He likes a good payday, and he doesn't like to have to pay it out. He prefers to do buybacks instead and concentrate his ownership while buying out weaker hands at lower prices.

I don't believe in blindly imitating a famous investor. I do believe in applying principles that they have used to create their wealth to be able to create my own. Without a doubt, there's going to be a comment on the article today of someone saying, "Well, Warren Buffett wouldn't buy X, Y, or Z." I agree, he might not have today, but he might have if he was present today doing the same activity he was doing 30 years ago.

Today we will look at two funds that provide exposure to outstanding sectors with tangible assets that provide regular income streams into our portfolio – The kind of dividends that Warren Buffett enjoys and doesn't pay.

Let's dive in!

Pick #1: BGR - Yield 6.7%

BlackRock Energy and Resources Trust ( BGR ) is a Closed-End Fund ("CEF") that invests in "big energy." If you follow the energy space, you probably recognize every holding in its portfolio. Source .

This is because BGR focuses on large-cap companies with $10+ billion market caps. There are a lot of advantages to owning "big energy." The energy sector requires massive amounts of capital, and investments can take years, if not decades, to pay off.

Since 2014, U.S. energy companies have struggled. The spread of shale oil created a bubble, which led to a collapse in energy prices to levels that weren't profitable for many smaller companies. As oil prices fell from $100+ to under $30/barrel, many companies went bankrupt. Even the largest corporations saw significant contractions.

Today, it is a different world. Oil prices were recovering prior to COVID, and since then, they settled into a trading range centered around $70 – prices where big energy companies can operate with significant profits.

At HDO, we are bullish on energy, but when it comes to large energy companies, there is a significant conflict with our investment strategy. Big energy companies typically pay dividend yields in the 3% range. That simply is not enough for us.

This is where BGR comes in. BGR approximately doubles our yield. As a CEF, BGR pays out both the dividends it receives, plus harvests capital gains and passes those along to shareholders as dividends.

BGR hiked its dividend three times last year and once so far this year. We expect that BGR will continue hiking its dividend as NAV remains strong. Even with inflation slowing down, energy prices are likely to remain much higher than they were pre-COVID.

High-interest rates and fiscal tightening around the globe will make it even harder for smaller companies to compete. This creates an advantage for the large, well-capitalized companies that BGR invests in. With BGR, we can gain exposure to the strength of the energy sector and collect our high yield too!

Pick #2: RNP - Yield 9.3%

Cohen & Steers REIT and Preferred and Income Fund ( RNP ) is a CEF that invests in a combination of real estate investment trusts, or REITs, and non-REIT preferred shares. A combination of two things that are currently out of favor in the market, which creates a fantastic buying opportunity.

RNP carries approximately a 50/50 mix. The half invested in REITs is heavily concentrated. Their top 10 holdings account for over 30% of the entire portfolio and over 60% of the REIT portfolio. Source .

It is also a list of REITs that would be considered best in class in their respective sectors. The market's concern about REITs is that they rely on using leverage, and with interest rates going up, that is getting more expensive.

Yet for well-capitalized REITs, there are usually many options available to them. RNP's third largest holding, Welltower Inc. ( WELL ), demonstrated this by issuing over $1 billion in exchangeable notes with a 2.75% coupon.

As fears of a financial crisis subside, these REITs should see improved valuations. If a financial crisis happens, these are all REITs we would be comfortable holding through anything.

The preferred portfolio that RNP holds is primarily banking, insurance, and utility preferred.

Due to recent bank failures, preferred shares throughout the banking sector are trading at discounts. As of March 31st, RNP's largest exposure was to preferreds from large banks such as Wells Fargo ( WFC ), Charles Schwab ( SCHW ), JPMorgan Chase ( JPM ), and Bank of America ( BAC ).

Cohen & Steers REIT & Preferred Income Fund has plenty of upside potential as fear dies down, and the best part is we can collect a healthy yield while we wait!

Conclusion

I think you and I both know someone who does stupid things. They can be incredibly intelligent in one part of their life and incredibly stupid in another. After reading those two sentences, I guarantee you that someone has popped up in your mind.

Warren Buffett says, don't be like that person when it comes to generating wealth.

Ironically, so many of us approach the market to try to score the next Netflix, Facebook, or Amazon, hoping that our other losses will eventually be wiped away in the massive success of finding the "next big thing." It's the reason why the stock market has a reputation for just being gambling. Instead of rolling dice or playing cards, you're hoping to pick the right company out of faith and hope.

Even with that reputation, the stock market is still recognized as the single greatest generator of wealth the world has ever seen, but why is that? It's not because of all those who lost money gambling on the "next big thing," but it's because of those people who are faithfully and consistently invested in strong and stable companies. From those companies, they can receive strong returns. I am not personally invested in every strong company in the market because not all of them meet my personal investment criteria. For me to hold a company or investment, it has to pay me to do so. I will acknowledge that many fantastic investments do not fall into that category. If you hold them, I am so happy for you.

I recognize that my investment goal is to glean a strong, consistent, and reliable income from the market. In that way, I don't have to worry about what the prices are doing tomorrow, in five years, or in ten years because my pocketbook is full of cash those companies have paid me. Cash that I can then take to the grocery store and buy groceries, or go to a restaurant and buy a meal, or go to the movie theater to watch the latest release, or go to the golf course, or to anywhere cash is accepted, which in this country is basically everywhere.

I can't pay someone in shares of Berkshire Hathaway or Amazon. Have you tried? I guarantee you they'll make a weird face at you. But you know what they'll happily accept? Cash.

My retirement will be paid for by the market. I'm not going to gamble or do dumb things – I'm smarter than that, and so are you. I help control my ability to make stupid choices by filtering every investment decision I make through my philosophy, the Income Method. It has helped thousands of investors achieve success in the market.

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

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