USA - I'm Buying The Dip On These +9% Yields

2023-07-05 07:35:00 ET

Summary

• Patience is one of the key traits of a successful investor.
• It is easier to be patient when you get paid to wait.
• Two big yields to enhance your passive income.

Co-authored with "Hidden Opportunities."

In 1973, Warren Buffett purchased The Washington Post Company shares for $10.6 million. The very next year, Mr. Buffett saw a 20% drawdown on his investment, and it took three years for the value to recover. But the Oracle of Omaha cares more about business fundamentals than the market price.

Washington Post's stock price continued to improve and increase as the business grew considerably. Eventually, it turned out to be one of Mr. Buffett's most profitable investments.

"A market downturn doesn't bother us. It is an opportunity to increase our ownership of great companies with great management at good prices." – Warren Buffett.

Patience and decision-making based on business fundamentals are crucial to achieving investment success. As the market traverses its uncertain path, we focus on our investment goals – to build passive income from dividends. Let us now discuss two excellent dividend payers.

Pick #1: USA - Yield 9.3%

Liberty All-Star Equity Fund ( USA ) is a highly diversified Closed-End Fund ("CEF") that comprises several highly desired stocks that aren’t necessarily known to be generous with their dividend payments. Source .

USA combines five unique investment strategies with three value-style and two growth-style techniques organically blended to produce income for shareholders. The CEF’s distribution policy is designed to pay out 10% of its NAV (paid quarterly at 2.5% per quarter).

Don’t be too quick to assume USA’s five strategy fund management would be expensive to shareholders. The CEF comes at a modest 0.68% management fee and a total expense ratio of 0.93%. This is on the low side of expense ratios by CEF standards.

USA comprises 147 holdings, with Financials and Information Technology representing 40% of the fund. These beaten-down sectors are rebounding strongly in this newly-born bull market, and USA shareholders are well-positioned to reap the benefits.

USA’s $0.15/share quarterly distribution calculates to a 9.3% yield. During the last bull run, as the economy recovered from the COVID-19 shock, USA handsomely outperformed the S&P 500 index (SP500).

This outperformance is highly repeatable in the next bull run.

While the USA is actively managed, the CEF does not utilize leverage in its investment strategy. Having a variable distribution policy pegged to the NAV, USA’s dividends rise in a bull market and shrink in a bear market. We consider such a self-preserving fund essential in a diversified income portfolio as it has strategic protections to ensure it doesn’t overpay or underpay under any circumstances.

Technology will continue transforming our lives with increasing impact in the future. While these companies don’t directly cater to our investment needs, USA lets us invest in their success while collecting large distributions.

Pick #2: AWP - Yield 12.2%

Rising interest rates at a global level have put pressure on Real Estate across the board. Companies that own and operate income-producing real estate, real estate investment trusts or REITs, have had their valuations beaten down due to the perception of headwinds from higher interest expenses.

Yes, interest rates are the biggest risk for REITs since interest payments constitute a significant expense for these companies. But a lot of REITs were exceptionally well-prepared for the monetary tightening.

"A lot of REITs have really cleared their debt maturity decks, particularly in 2019, 2020, and 2021 in the low yield environment." – Mark Streeter, managing director and team leader in North American credit research at J.P. Morgan.

During those three years, core property REITs (office, industrial, retail, residential, self-storage, health care, triple net) alone issued $115 billion in bonds. Many REITs have addressed not only their 2023 maturities but also their 2024 maturities. As the most common debt structure chosen by REITs is the 5-10 year fixed-rate notes, we expect tailwinds for this sector as central banks around the world pivot this year. Most well-managed REITs have little variable debt or debt maturing this year. It will be in 2026-2031 that most REITs will be looking at a material change in their interest rates, and we expect them to refinance at highly favorable rates.

We look to take advantage of the high yields and deeply discounted prices through a diversified approach. Global REITs have proven to outperform over the long term despite temporary price collapse during market crises, making them solid buys today. Source .

abrdn Global Premier Properties Fund ( AWP ) is a CEF that invests in global REITs and maintains ~40% exposure to non-U.S. REITs. Rising interest rates and the strengthening U.S. Dollar caused AWP to underperform its U.S.-focused peer funds in 2022.

With inflation visibly slowing down globally, we expect Central Banks to reverse their course in phases, resulting in a weaker U.S. Dollar and a better operating environment for REITs. Both will be a significant tailwind for AWP, whose portfolio is built with some of the most prominent global REITs. Source .

The weakening U.S. Dollar is a positive for AWP since 40% of the revenue is from outside the United States.

AWP maintains $68.9 million in portfolio leverage, representing approximately 15.8% of gross assets. This material increase from 11% in January shows that AWP has taken advantage of depressed REIT prices to load up on quality names. Source .

By CEF standards, AWP’s leverage is still relatively low, allowing it to increase leverage in the future (as required) while ensuring that the fund will not be forced to dispose of assets at weak prices to deleverage.

We added AWP to our model portfolio in March 2020, almost at the bottom during the COVID-19 market crash. Since then, we have collected 39 monthly distributions amounting to $1.56/share. During this time, AWP price has been volatile due to various parameters, but the income remained solid through thick and thin. This is the beauty of the income method. In today’s climate, opportunity knocks on the door again, and AWP trades at a ~6% discount to NAV. This presents a compelling opportunity to buy/add to your position. AWP’s $0.04/share monthly distribution calculates to an impressive 12.2% annualized yield.

The hawkish Fed provides a much-desired opportunity to load up on AWP once more to expand our position and thicken our income stream from this well-managed global REIT fund.

Conclusion

The Fed policy has taken center stage in the market news for over a year, and the markets have acted in anticipation, and investors are trading in fear.

In his 80+ year investing career, if Mr. Buffett had moved on from his investments by succumbing to market price swings, he would have suffered losses, lost out on the future growth of the stocks, and we would have never heard his name. The Oracle of Omaha’s successful methods can be attributed to his belief that the stock market is a device for transferring money from the impatient to the patient.

At High Dividend Opportunities, we patiently pursue the income method by adequately diversifying our income sources across 45+ securities, of which USA and AWP are components. Our portfolio carries an overall +9% yield capable of generating lifestyle-supporting income for our financial independence.

I don’t know what tomorrow or next week will bring upon my job, health, or investment values (and I wouldn’t trust anyone who said they did). But I feel comfortable knowing my portfolio can produce for my needs through thick and thin. The income method can offer you a helping hand to achieve the same; two picks with +9% yields to buy the dip and patiently collect dividends.

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