TPVG - Live Off Dividends With 2 Great Picks

Summary

• Cash assets may provide psychological comfort but are sure to result in defeat vs. long-term inflation.
• Periodic selling of portfolio positions is not a sustainable retirement strategy.
• Invest in productive assets that keep you wealthy through good and bad times.
• Two picks with up to 14% yields to put your money to work.

Co-produced with "Hidden Opportunities"

Personal Finance 101 tells us to establish emergency savings and develop positive spending and saving habits. This helps avoid the situation of living paycheck-to-paycheck. Once that's taken care of, and you have funds tucked away to cover a medical emergency, a job loss, or a vacation, you've reached a state of financial stability. But continuing to accumulate cash is a poor way of managing your finances.

"Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value." - Warren Buffett

Putting your cash in a savings account or a CD will make it grow, but it's unlikely to help you beat inflation. Source

Moreover, remember that interest income is taxable as regular income, making your cash equivalents afford less and less with time. Source

Fearing a recession, you may accumulate a few months of operating expenses, large expenses, some dry powder for opportunistic purchases, and some more for psychological comfort. That's a lot of cash assets that you could put to work instead.

This is why we like to invest in dividend income. This technique meets both your requirements - you have your funds invested in inflation-resistant assets, but your portfolio is producing paychecks that you can use for your household needs. We focus on discounted high yields that can naturally produce inflation-beating returns. This article discusses two picks with up to 14% yields to get your income flowing in sickness and health, so you never need to sell your positions during bear markets.

Pick #1: THQ, Yield 6.9%

Healthcare is considered one of the defensive industries with relative insensitivity to economic conditions because these companies experience inelastic consumer demand. Patients are less price sensitive because insurance companies pay the most significant proportion of healthcare costs.

The COVID-19 pandemic accelerated healthcare transformation to become more accessible, digital, and patient friendly. The industry is well positioned to evolve further, creating meaningful investment opportunities. The healthcare industry in the United States is the largest in the world, accounting for 18.5% of the national GDP in 2021. The number is projected to reach $8.3 trillion by 2040, more than double the amount in 2020.

During the great financial crisis of 2008, healthcare jobs and national expenditures consistently grew despite substantial cuts in other sectors. Employment of registered nurses in the U.S. more than doubled employment projections. We like the recession resistance offered by healthcare and want to invest in it through the income method.

Tekla Healthcare Opportunities Fund ( THQ ) is a closed-end fund ('CEF') offering us this opportunity. THQ's top 10 portfolio companies constitute 50% of the fund and represent some of the biggest healthcare companies in the U.S. (Source: teklacap.com)

A critical difference between THQ and other Tekla CEFs is that THQ is only composed of U.S.-based companies and the fund invests in fixed-income securities such as bonds and preferred stock. This CEF pays $0.1125/share monthly, calculating a 6.9% annualized yield. Here's a breakdown of THQ's distribution sources.

Investors often view Return of Capital ("ROC") negatively. There's a big difference between the good Return of "Capital" and the bad Return of "Principal." If the fund's NAV changes less negatively than the ROC component of the distributions paid out over time, you have a healthy and sustainable investment.

Let's look at how THQ has performed. In the past 36 months, THQ paid total distributions amounting to $4.05. Out of this, $2.83 was ROC. Yet, the CEF's NAV grew 11%, indicating that THQ is a high-quality fund producing a steady flow of tax-advantaged income.

THQ trades at an attractive 11% discount to NAV presenting an excellent opportunity to add to your income portfolio. The aging population in the U.S. and the recession and inflation resistance of the industry make us like the long-term prospects of the healthcare industry. THQ is an excellent passive-income producer, paying monthly distributions with a high degree of long-term sustainability. A 6.9% yield from this deeply-discounted and diversified healthcare CEF for a defensive portfolio.

Pick #2: TPVG, Yield 14%

Everyone is worried about the upcoming recession. Let me tell you something - recessions don't shutter strong businesses, and they don't impede transformational ones from starting up. Many great unicorns like Uber ( UBER ) and Square ( SQ ) began operations in the heart of the Great Financial Crisis downturn and became large-cap corporations.

Venture capital is known to achieve superior returns in a recessionary environment where capital becomes scarce. No one wants to IPO in a deep bear market. VCs work with these rapidly growing companies that stand out and view short-term stress as meaningful opportunities to grow and deliver in-demand products and services. Data tells us that VCs have massively outperformed the broader market repeatedly during past recessions. (Source: jcventurecap.com)

TriplePoint Venture Growth ( TPVG ) is a unique Business Development Company ('BDC') that provides financing primarily to venture capital-backed companies at the venture growth stage. Fewer companies going IPO is good for a firm like TPVG because it increases the demand for high-interest yet much-needed growth capital.

As with other BDCs, TPVG faces strong tailwinds from this rising rate environment. During Q3, the company projected a whopping $0.37 increase in Net Investment Income ('NII') from a 300 bps change in prime rates. This is because 62% of TPVG's assets (loans) carry floating rates, and 77% of its liabilities (borrowings) are fixed rates. ( Source )

The Federal Reserve has raised rates at a record pace of 400 bps in nine months this year, outpacing the projections and positioning TPVG for even higher NII.

TPVG has a solid track record of distributions to shareholders, with $12.95/share of cumulative distributions declared since IPO through Q4 2022 (including $0.45 of net special distributions). This represents 86% of the BDC's IPO price, and the cash cow has a lot more to pay out in the coming years.

TPVG's reported Q3 NII of $0.51 per share, allowing the BDC to announce a 2.7% raise in its quarterly distribution to $0.37/share. The BDC also announced a special distribution of $0.10 for 2022.

Let's talk about Medly Health Inc., the startup pharmacy that recently filed for bankruptcy. At the time of filing, Medly Health reported more than $110 million in secured debt ($81 million to Triple Point Capital's affiliates, including TPVG). $34 million of this secured debt was issued by TPVG. Below is a breakdown of various forms of funding issued by TPVG to Medly Health. (Data Source: TPVG 10-Q )

While Medly is a significant borrower (a top 10 portfolio constituent), TPVG maintains a well-diversified debt portfolio with a weighted average annualized yield on total debt investments of 13.8% in Q3 2022. TPVG is writing off the Medly debt and it calculates to ~$0.96/share in book value, and this is assuming they recover nothing. The BDC’s stock price has fallen by over $1.50 due to the announcement making the selloff a meaningful buying opportunity.

Since TPVG has issued secured debt to Medly, the BDC maintains a claim on the company's assets, estimated to be $100 million at the time of bankruptcy filing. It's yet to be seen how much of the principal TPVG can recoup through Medly's sale of assets, but the BDC has been actively monitoring the situation since Q3.

"We downgraded one portfolio company Medly Health, an online digital pharmacy with a total principal balance of $34.3 million from category two to category three, due to reductions in its operating plan, changes in its senior team and the overall liquidity position. On November 1, we were made aware of recent preliminary negative developments and Medly, which we believe may result in a future downgrade of their outstanding loans here in Q4." - Sajal Srivastava, President, and Chief Investment Officer, Q3 conference call

Medly was downgraded from White to Yellow (at the time of the conference call, before Medly filed for bankruptcy) on TPVG’s credit rating scale. This puts 10% of TPVG’s debt below the white category, ~$2.4/share in book value.

TPVG has utilized this bear market to grow its total investments while maintaining the weighted average credit score of the obligors. The BDC's well-diversified portfolio of high-yield debt can cushion the impact of situations like Medly and continue delivering returns to shareholders.

TPVG trades at an attractive 14% discount to NAV and has a forward yield of 14%.

As we progress through a bear market, investing in companies that can easily pass on high borrowing costs to their obligors is critical. Bear markets are perfect for venture capitalists, and they have been known to outperform public markets during shaky economic conditions when banks significantly tighten their lending standards. TPVG is a unique method of investing in venture debt while collecting handsome distributions. Up to 14% yields are up for grabs from this high-quality BDC with growing distributions.

Conclusion

It's often assumed that being rich and being wealthy are the same. Rich people are wealthy and wealthy people are rich, right?

Wrong. The rich work hard for their money and often worry about losing their jobs. The wealthy employ their money to work hard for them and produce paychecks through passive income.

Dividends are an excellent way of transforming you into a wealthy investor. A diversified portfolio ensures that your next paycheck is right around the corner and you can slowly achieve financial independence.

We have two excellent picks to protect your portfolio income. With up to 14% yields, picks like this ensure that you don't run out of your savings or be forced to liquidate your positions in a bear market. You have a substantial and constant flow of cash into your account.

A happy retirement is dependent on staying healthy and wealthy. We can help you with the latter so you have the means to focus on the former.

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