BGR - Retirement Income At Big Discounts

Summary

• My retirement income is paid for by the market, and I keep buying more income at a discount to NAV.
• You can leverage the skills of experts to glean income for less work.
• We look at two funds with yields up to 11%.

Co-produced with Treading Softly.

I've heard the classic saying all my life - if you're good at something, never do it for free.

I learned the hard way when I was a brand new homeowner that I would encounter problems that were beyond my skill set.

In my first home, we had a pipe crack. It was old and by my water heater, so I tried to use a fix from Home Depot to seal the crack temporarily. I may be skilled at many things. I can replace the engine in a car. I can rewire a car. I can research investments. I can raise chickens and profit from their eggs. However, when it comes to plumbing, I have not developed that particular set of skills.

Needless to say, my cracked pipe continued to spray water into my laundry room. I had to swallow my pride in front of my wife, who still thought I was capable of doing anything I put my mind to - did I mention we hadn't been married for very long yet? - and call a plumber.

It took him less than two minutes to remove the damaged pipe and replace it. The cost of the repair was minimal, and I had created more expenses by trying to do it myself.

In life, it pays to know your limits. It always pays to know when to pay a skilled professional and stay out of the way.

When it comes to the market, you can tap into experts who manage and operate funds that invest in various sectors. You buy shares of their funds, and you receive distributions from them. They get paid for managing the fund - why should they do it for free if you're leveraging their skills?

I often get asked - "If I can recreate it myself, why would I buy the fund?" Often it can be cheaper to buy a fund trading at a discount to NAV than buying all the individual companies yourself, plus you benefit from the knowledge and skill of the manager for when to change positions, and a final added benefit is that they often get cheaper leverage costs than you'd pay personally.

So I am happy to leverage the skills of others while buying their funds at a discount to NAV, as I've learned the benefits of doing so and I am not prideful enough to assume I can do it all alone.

Let's look at two sources of discounted income I am buying today.

Pick #1: BGR - Yield 5.5%

BlackRock Energy and Resources Trust ( BGR ) is a closed-end fund ("CEF") that invests in "big energy." 97% of BGR's portfolio has a market cap in excess of $10 billion. So, it shouldn't be a surprise that you probably recognize every holding in its portfolio. Source .

Why would anyone buy a CEF that has a portfolio you could fairly easily replicate?

1. It provides instant diversification.
2. You can buy at a discount to NAV.
3. You receive a higher yield.

BGR's NAV has recovered and is now higher than pre-COVID levels. Even though BGR hiked its dividend three times in 2022, for a 56% year-over-year increase, BGR's share price continues to trade at a significant discount to NAV.

In short, buying BGR is 12% cheaper than buying a portfolio of these stocks yourself.

We also expect that BGR will continue hiking its dividend as NAV keeps going up. Remember, CEFs are required to pay out substantially all of their taxable income, and that includes capital gains. So, when you see NAV continuing to climb, that is a great indication that dividends will be hiked.

While inflation is slowing down, energy prices are likely to remain much higher than they were pre-COVID. For much of the past decade, the shale boom in the U.S. created a race to the bottom and very low commodity prices. The carnage left behind as many smaller companies in the energy sector went bankrupt has led to a much more disciplined expansion.

High-interest rates and fiscal tightening around the globe will make it even harder for smaller companies to compete. For large, well-capitalized companies, this environment is ideal. They aren't forced to race to the bottom to compete for market share and they benefit from high commodity prices. These are the companies that BGR invests in.

Pick #2: AWP - Yield 11.2%

Aberdeen Global Premier Properties Fund ( AWP ) is a CEF that specializes in real estate investment trusts ("REITs"). What sets AWP apart from other REIT CEFs in our portfolio is that AWP has material exposure to non-U.S. REITs. Approximately 60%-65% of its portfolio is in U.S. REITs.

AWP's U.S. exposure is heavily represented in its top 10 holdings. Source .

These are very similar holdings to what we see in peers like the Cohen & Steers funds. What differentiates AWP is the rest of its portfolio which is made up of small positions around the world.

Note that AWP was sitting on a 7% cash position at the end of October. By November 30th, that was down to 1.2% according to the Portfolio Disclosure report. So those funds have been substantially deployed.

Non-U.S. REITs have faced many challenges, including a strong U.S. dollar and economic weakness, particularly in Europe. It is very likely that the UK is currently in recession. Certainly, the price of REITs is pricing in a recession. Here are the largest UK and Japan holdings in AWP's portfolio, and the top 3 U.S. REITs compared to April 1st, 2020 - the heart of the COVID pandemic panic:

The U.S. REITs are still above COVID levels, while the non-US REITs are very close or even below prices experienced in the early days of COVID.

When is the best time to buy? In the heart of a recession, when panic is all around. 2022 hasn't been a picnic for U.S. REITs, but non-U.S. REITs have sold off even more substantially.

AWP is currently using $45.5 million in leverage, which is approximately 11% of gross assets.

This is well below the amount that CEFs are allowed to use, providing the option for AWP to leverage up in the future, while also ensuring that AWP will not be "forced" to sell assets to deleverage. AWP has the luxury of buying and holding, waiting for the recovery.

In 2022, countries around the globe have hiked interest rates aggressively. Rising rates are generally a headwind to REITs, both from the practical sense of increasing the costs of leverage and also from a valuation standpoint as REIT yields need to climb to be competitive with government bonds.

As recessions set in and inflation slows around the world, we can expect central banks around the world to pivot, this will likely be a tailwind for REITs in late 2023 and into 2024.

AWP is a great way to invest in global REITs to benefit from their recovery.

Conclusion

With AWP and BRG, I can leverage the skills of expert portfolio managers and enjoy outsized income while doing so. Additionally, these funds allow me to buy a portfolio of holdings at a discount vs. doing it by myself, plus I get great income to boot!

When it comes to retirement, I often hear that many decide to outsource the "mundane" things of life to others. They pay for their lawn to be kept, oil to be changed, and taxes to be done. Why? They'd rather leverage the skills of others and free up that time for themselves.

When your portfolio is paying for your retirement, it can enable you to have the funds to do just that. Less time and energy are spent on the necessities of life, and more time is spent on the desires of life. This way, your golden years are not whittled away doing what you "must," but are spent doing what you want to do.

That's the beauty of a retirement covered in an abundance of dividend income. That's possible through our Income Method.

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