GHI - Earn Lifelong Income With 2 Magnificent Dividends

2023-08-22 07:35:00 ET

Summary

• Buying the best that you can afford is a principle that can prevent you from going into debt.
• Novice investors often make the mistake of chasing what they think is the best without considering their own investment goals.
• Realty Income and Greystone Housing Impact Investors are two investment opportunities that offer consistent and growing income.

Co-authored with Treading Softly

Often one of the biggest mistakes that people make is trying to buy the best of everything. They end up running into debt, leveraging themselves to the max to try and owning the best products and resources. In essence, many people buy things they don't need to keep up with others because what they have is perceived as better. Yet when I first got married, my father-in-law shared a principle that he'd used while running his business for years - it was the principle of buying the best that you could afford. What this meant is that if the best of something was outside of your ability or budget to own, then buying what you could afford was the best, whether it be quality, longevity, or another metric. This way, you still got the best that you could afford, but you weren't going to run yourself into debt doing it.

When it comes to your retirement, you have decades to devote to slowly building up a portfolio that has the best possible holdings to meet your goals. The mistake that so many novice investors make is trying to get the best, failing to recognize that the best for your goal may not be the best for somebody else's. So what frequently happens is a novice investor will read the opinion of 10-20 individuals and analysts who are sharing their thoughts without properly considering their investment goals or perspective. They end up getting pulled in countless directions, chasing what they think is the best without recognizing what may be best for them.

When I was in my 20s, I developed a methodology, a philosophy that guided my investing called the Income Method. It has been an overarching governing philosophy of mine ever since then and has allowed me to create a portfolio that generates massive amounts of income for me month after month. So, when I'm investigating new positions or looking at opportunities, I'm looking through the lens of a professional income investor who's here to get paid for my ownership and to use those dividends to either grow my portfolio or to spend on my day-to-day life.

Today, I want to look at two outstanding opportunities for investments that you could buy now and hold for a lifetime of income.

Let's dive in!

Pick #1: Realty Income - Yield 5.4%

Realty Income Corporation ( O ) has been a very reliable REIT for decades. The Monthly Dividend Company has a stellar track record of 637 consecutive monthly dividends and 103 consecutive quarterly dividend raises. Source

O is the definition of consistency, thanks to long-term leases with a highly diversified portfolio of tenants. Source

O uses "triple-net" leases, which put the responsibility of property-level expenses on the tenants. With an average lease term of over ten years, O's revenue and expenses are consistent and predictable.

Given that, it isn't surprising that O's Q2 earnings were unsurprising. O is doing what it does, producing cash flow and paying a dividend that is rising steadily.

With a strong balance sheet and large scale, O has been taking advantage of a soft real estate market with an aggressive acquisition pace. O has acquired $4.8 billion in real estate so far this year and raised guidance to $7 billion for the year.

If O reaches guidance, and we have little reason to doubt that they will, O will have purchased more than $22 billion in real estate over the past three years - that's more real estate than O purchased from 2010 through 2020.

That's $22 billion worth of real estate that will provide consistent and growing rent payments, which in turn will provide shareholders like us with a consistently growing dividend.

O is a REIT that investors can buy and hold "forever," confident that their income will keep growing every quarter and taking advantage of low prices when the market sells it off. Recently, O has been trading at low prices because interest rates are rising. The market acts as if O didn't thrive from 1994-2006 when interest rates were this high. Here is how O performed from 1994-2006 when the 10-year Treasury Rate was above 4% like it is today:

Excuse me if I don't panic at the prospect that the 10-year is over 4%. I'll just buy a few shares of O at these low valuations and hold them for the next few decades.

Pick#2: GHI - Yield 9.4%

Greystone Housing Impact Investors, LP ( GHI ) is a partnership that invests in multi-family residential properties. As a partnership, GHI issues a K-1 at tax time. This structure benefits investors because a large portion of GHI's portfolio is invested in "mortgage revenue bonds" and "government issuer loans" - MRBs and GILs. These unique investments are originated by government housing agencies and are tax exempt. As a result, a portion of the distribution that investors receive every year is tax exempt.

GHI reported much stronger earnings in the first half of 2023 than we expected. GHI reported Cash Available for Distribution ('CAD') of $0.62 for Q2 and $1.43 for the first half. With an annual distribution of $1.47, GHI has nearly covered its annual distribution in the first half alone. Historically, GHI has paid out close to 100% of CAD, and when CAD has been higher than the distribution, GHI has paid out a supplemental or special distribution.

Over the past year, GHI's MRB businesses has faced the same challenge as other lenders - rapidly rising interest rates. Rising rates have a benefit in that being able to lend at higher rates increases interest income. However, GHI also uses leverage, and rising rates increase GHI's cost to borrow. This can create a mismatch between what GHI receives and what they have to pay.

Over the past year, GHI has seen its average yield increase from 5% to 6.6%. This improvement was offset by an increase in interest expense from 3.1% to 4.9%. Source

At $7.8 million net interest spread, GHI saw a healthy increase over 2022 and is slightly up from the $7.4 million in Q1. This works out to be about $0.346/share, slightly less than the current dividend, but a big improvement over last year when rates were moving quickly. As rates stabilize, we can expect spread income to continue to improve. If rates come down, GHI will be in the beneficial position of being able to choose to refinance its debt at lower rates and realize larger spreads.

GHI's other core strategy is its "Vantage" joint ventures where GHI provides capital and a partner develops a new apartment complex. After construction, the property is leased up and stabilized and then sold to investors. Three of these properties were sold this year, generating capital gains. These gains are lumpy and are the reason why GHI outearned its dividend dramatically in 2022 and is on pace to outearn its dividend this year.

This strategy has been so successful that GHI has created two new JVs. The first "Freestone" JV properties are already under construction, and GHI has a total of nine properties in its pipeline.

This development strategy has been a big win for GHI over the past few years and has generated several special and supplemental distributions. There's a good chance that we will see a special distribution later this year since CAD is on pace to exceed the distribution. However, we need to be aware that these gains are dependent upon property sales, and the timing of those sales cannot be guaranteed. With three JVs executing this strategy instead of just one, property sales should become more common, but we can expect significant lumpiness from quarter to quarter. Additionally, a macro-event could cause the real estate markets to freeze up and pause the realization of gains from this strategy.

That's what happened during COVID. The Joint Venture opted to hold properties rather than attempt to sell them in 2020 when the market was poor. That strategy forced a distribution cut, but in hindsight, was the smart move that led to large extra distributions in 2021 and 2022.

GHI is seeing an improvement in its core MRB business and is expanding its development strategy. We believe both will lead to more distributions for investors in the future!

Conclusion

When I think of something that's of quality or the best, I think of something that I can buy and hold for decades without having to worry about it and simply enjoy the income as it rains in. I like to picture these types of investments as a home with a cozy fireplace in the wintertime. The storm can be raging outside, and I can be sitting on my couch with a hot cup of tea, listening to the crackle of the fire.

GHI and O fit this bill. These are two companies that you can own shares of and reap income for decades to come without having to babysit their every move because of their expert management teams.

This way, in my retirement, I can truly sit by my fireplace and listen to a crackle while drinking a hot cup of tea, or I can be sitting along the side of my pool, having a glass of iced tea and enjoying a dip in it whenever I get too hot. The key to achieving both of these is to be able to have a portfolio that you do not need to babysit. If you have children and they are grown and gone, the last thing you want is to have another child in your portfolio that you need to take care of every day. Instead, let your portfolio be an adult that takes care of you by paying you strong dividends.

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

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