TDS - Retirement: The Fight For Your Financial Independence

2023-08-29 07:35:00 ET

Summary

• We have financial obligations at every stage of life.
• My portfolio is my financial battalion, strategically poised to conquer my fiscal battles.
• Two +8% yields to build your dividend army to conquer your retirement goals.

Co-authored with “Hidden Opportunities.”

Franklin D. Roosevelt, the 32nd President of the United States, navigated the nation through some of its most challenging times, including the Great Depression and World War II. Stricken by polio and paralyzed from the waist down, President Roosevelt faced his own physical and emotional challenges while leading the nation.

On a more personal level, our challenges may not be of the same magnitude as those dealt with by President Roosevelt. However, throughout life's journey, financial challenges are unwelcome yet unwavering companions. From the exuberance of youth, where aspirations often outpace resources, to the settling into adulthood, where responsibilities multiply, and commitments deepen, each phase introduces its unique tests. A new graduate has bills to pay and emergencies to save for. Eventually, there are goals like saving for a car or a house.

Parenthood ushers in a new set of considerations, and we strive to balance the present needs of our near and dear ones with the future we envision for ourselves. The challenge subtly transforms as we approach the golden years, emphasizing the preservation of the nest egg built over a lifetime. Then come the medical expenses and other retirement surprises, including the need to support your children. These financial hurdles are ever-present and ever-changing. You don’t have an option but to prepare and face them confidently.

I am training my portfolio to fight these challenges for me by investing in high-quality and deeply discounted dividend payers. Every investment dollar will generate a predictable cash infusion that I can count on no matter how the markets move.

"Money is my military, each dollar a soldier. I never send my money into battle unprepared and undefended. I send it to conquer and take currency prisoner and bring it back to me." – Kevin O'Leary.

Your portfolio can fight to get you a free pizza once in a while and eventually get stronger and more capable of covering your mortgage payments. If you nurture such a portfolio well, it can replace your paycheck and get ready for retirement on your terms. Here are two picks to consider if you want to design your dividend army.

Pick #1: RQI – Yield 8.5%

REITs - real estate investment trusts - are one of the best friends for an income investor. These are “pass-through” entities that collect growing rents from their tenants and hand them over to us as dividends. They are incentivized to do so, as REITs pay no corporate tax as long as they distribute 90% of their earnings to shareholders.

From a historical perspective, REITs are better positioned in this high-interest-rate economy because, on average, they maintain long-term, well-structured balance sheets with low leverage ratios. As such, public equity REITs have limited their exposure to the challenges of the current mortgage market. Source .

Cohen & Steers Quality Income Realty Fund ( RQI ) is a Closed-End Fund ("CEF") with 221 holdings across real estate investments. The fund’s top holdings are some of the biggest and most prominent REITs tied to essential services in the modern economy. Source .

Cohen & Steers are one of the largest, most experienced team of professionals specializing in real estate investing. The firm brings more than 35 years of experience in the U.S. public REIT sector and over 18 years in global real estate.

RQI pays $0.08/share monthly to calculate an impressive 8.5% annualized yield. The CEF is leveraged at ~30% to boost returns to shareholders, and this debt carries 81/19% fixed/floating rates. Most importantly, the weighted average cost of all financing is an impressive 2.6%, making it an absolute steal and impossible for an average investor to come close. RQI trades at a 5.6% discount to NAV, making every $100 you invest to buy $136 worth of assets (calculating the discounted pricing and the 30% leverage).

High-quality REIT operators are well-positioned to navigate this rate cycle through their balance sheet health and mostly fixed-rate debt. At current discounted prices, your investment in RQI works hard to generate reliable monthly income, up to 8.5% yields from the CEF, with investments across landlords of almost everything around us.

Pick #2: TDS Preferred Shares - Yields Up to 11%

Telephone and Data Systems, Inc. ( TDS ) has been a diverse and innovative provider of communication services since 1960. TDS is a Fortune 1000 company that is also an 83% shareholder of United States Cellular Corp. (USM), the fourth-largest wireless service provider in the U.S.

USM operates in 21 states and provides wireless services to 4.7 million customers. The company is pursuing capex-heavy 5G deployment to offer its customers faster and more reliable wireless services.

On the other hand, TDS is a broadband and fiber Internet service provider with 1.2 million customers in 32 states. Source .

TDS and US Cellular have a regional focus. They don’t provide services across the country like AT&T ( T ), Verizon ( VZ ), and T-Mobile ( TMUS ).

GAMCO Asset Management Inc., a 4.5% shareholder in TDS, has recently been pressuring management to reconsider the ownership of USM. On August 4, the Board of Directors of TDS and US Cellular announced the initiation of a process to explore strategic alternatives for US Cellular, the most significant regional cell phone carrier left standing on its own in the U.S.

The strategic review could result in the potential sale of USM to one of the telecom leaders. Regional wireless infrastructure is a valuable asset and can bring attractive valuations and offers for USM.

TDS and USM prices surged following this announcement, along with TDS preferreds. Still, these fixed-income securities present desirable yields and upside to par. Although unlikely, it is also possible that the review doesn't produce any tangible outcome for TDS and USM shareholders. This could create a downside for the common stock as Wall Street is currently optimistic about some M&A activity. We look to get paid irrespective of the outcome and will now discuss how TDS preferred dividends enjoy adequate protection.

• 6.625% Depositary Shares, Series UU Cumulative Redeemable Perpetual Preferred ( TDS.PR.U )

• 6.00% Depositary Shares, Series VV Cumulative Redeemable Perpetual Preferred ( TDS.PR.V ).

During Q2 2023, TDS deployed 41,000 marketable fiber service addresses (66,000 YTD). Considering the capex was front-loaded during the year, management has improved the FY 2023 guidance. TDS now expects Adj. EBITDA to be between $270 million and $300 million (upper limit raised from $290 million), and the company expects almost all of its fiber expansion markets to be initially launched. The resulting broadband penetration improvement is expected to reduce the pressure on TDS’ Adj. EBITDA.

YTD, TDS has spent $35 million on preferred dividends and $4 million in interest expenses. The spending amounts align with our projections and are adequately covered by a $70 million Adj. EBITDA for the period. TDS enhanced projections for FY 2023 further strengthen the coverage for preferred dividends. At the end of Q2, TDS, and US Cellular had over $1.1 billion in combined liquidity, providing adequate flexibility with expansion capex and other expenses, including the remediation and litigation associated with TDS’ limited lead cable sheathing .

At this time, TDS-V presents a better opportunity, offering ~83% upside to par and sporting a very attractive current yield of 11%.

TDS has an impressive track record of 49 consecutive years of dividend increases and is set to become a Dividend King next year. A positive outcome of the USM strategic review and completion of planned capex projects would provide tailwinds for continued dividend increases for the foreseeable future. But as investors in the cumulative preferreds, we see adequate safety for our dividends and will sit back and enjoy the show as dividends keep getting credited into our accounts.

Conclusion

Kevin O’Leary is a famous businessman and television personality known to always talk about cash flows, dividends, and royalties in his deal-making on Shark Tank. Most of the offers he makes place him in a position of collecting his share from day one.

"Over the last 40 years, 71% of the market returns came from dividends, not capital appreciation. So rule one for me is I’ll never own stuff that doesn’t pay a dividend." – Kevin O’Leary, Businessman, investor, and TV personality.

I like my investments to pay me regularly. And when these companies achieve their milestones and strategic goals, I want more significant incentives. Dividends are the best method to dip into successful companies' profits directly. As they continuously and increasingly serve society with their goods and services, I would like to be paid every step of the way. After all, financial responsibilities are continuous; why not the same for the returns from my investments?

Our investing group focuses on diversifying our investments across a set of +45 assets to achieve a +9% overall yield. I am happy to have the Income Method help me conquer life’s financial obligations and enable a rich and independent lifestyle.

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