BIZD - Swim In Cash With 2 Great Dividends

2023-04-24 07:35:00 ET

Summary

• The market is an unforgiving friend but an excellent employee.
• Even though inflation is cooling, prices are still higher than historical norms – this also applies to commodities.
• I want you to have a retirement that is paid for by the market through dividends.
• You can accomplish this by seizing great opportunities as they arise.

Co-authored with Treading Softly

There's a famous saying, "make hay while the sun shines." The idea presented here is that when conditions are ripe, we should do everything we can to be as productive as possible.

In this current market environment, we are seeing that commodity prices are below their 2022 highs but are still significantly higher than they were prior to the pandemic in 2020. Furthermore, inflation is cooling, and interest rates are continuing to be hiked by the Federal Reserve. It is important to remember that inflation is a change in price or level, not an absolute value on its own. This means that even though inflation is cooling, the prices that were seen previously are no longer the prices that are currently presented in the market. As inflation cools, those prices remain stubbornly high compared to what we may have been used to in the past.

Eventually, the Federal Reserve will be forced to lower interest rates as they adjust to the new economic factors that are coming into their view. Remember, all economic indicators are backward-pointing, meaning that they're using historical data to try and predict the future, all while not taking into account what is occurring in the present.

As income investors and retirees, we should be taking into account how we can make the most money from the market in its current condition while also being sure that our portfolios are agnostic to changing situations. We want to be able to have great income regardless of what happens in the market around us.

Today, I'd like to take a look at two fantastic investment opportunities that allow us to see large sums of income pouring into our account from the market, all while remaining safe from various negative economic situations that may occur on the horizon. Half the battle as an investor is knowing what is to come; the other half is knowing what to do today. So, I want to look at two opportunities that give us the ability to make hay while the sun shines while also being able to enjoy the higher level of commodity rates and interest rates that are going to be prevalent versus what we experienced.

Let's dive in!

Pick #1: BIZD - Yield 11.6%

It is a very interesting environment for Business Development Companies ('BDC'). BDCs typically follow a business model of borrowing at flat rates and lending at floating rates. Therefore, rising interest rates directly benefit their bottom lines. This is why we have seen a lot of dividend raises, supplements, and special dividends from our BDC investments.

As Q1 earnings approach, BDCs are a favorite to see more dividend increases. Interest rates are rising at a slower pace than late last year, but the 3-month LIBOR is still up nearly 50 bps year to date. Plus, Q4 earnings only partially reflected the 100+ bps increase during Q4.

One BDC we hold, Capital Southwest ( CSWC ), has announced preliminary numbers projecting Net Investment Income ('NII') of $0.64-$0.65, approximately a 3-5% increase from last quarter and easily covering its dividend. This is despite operating at a very conservative leverage ratio of 0.86x-0.90x.

These are the types of earnings we expect from BDCs across the board. The tailwinds for the sector are so strong that even the weakest BDCs should see tailwinds in their earnings. However, despite these strong tailwinds, the prices for BDCs are low. CSWC is trading at a price roughly comparable to where it was in 2019 when its earnings were 30% lower, and its dividend was much lower as well!

We are seeing this throughout the BDC sector. Income is up, and dividends are rising, but prices are down. The market is fearful, while we can expect that most, if not all, BDCs will report higher NII, will have reasonably stable NAVs, and many will hike their dividends or announce supplemental dividends.

One way to invest when an entire sector has strong tailwinds but is trading at a depressed price is with an Exchange Traded Fund ('ETF'). VanEck BDC Income ETF ( BIZD ) tracks the MVIS®US Business Development Companies Index, which is a market-cap-weighted index. As a result, BIZD holds 25 publicly traded BDCs but is weighted towards the largest ones.

BIZD is a great way to quickly diversify your exposure towards BDCs or to "double down" on the sector as a supplement to individual BDCs you might already hold. The dividend is variable and reflects the dividends paid to BIZD by its holdings.

When discussing BIZD, we are frequently asked about the expense ratio. It is reported as being over 10%, which some people worry about. However, this results from an SEC rule that interprets BDCs as funds, requiring BIZD to include the expenses paid by the 25 BDCs in its portfolio. The expense ratio includes salaries, commissions, interest payments, the coffee in the break room, etc., of every BDC held in its portfolio. Van Eck breaks down how much of the expense ratio is money actually being spent by BIZD and how much is indirect expenses that are actually being paid by the BDCs it owns. Source

If BDCs were classified as banks instead of "funds," then BIZD's expense ratio would be 0.41%. But because BDCs are considered funds by this rule, BIZD has to report expenses that it is not involved in paying.

The BDC sector is positioned to have a fantastic quarter, and BIZD is a convenient way to increase your exposure to this sector before earnings.

Pick #2: BCX - Yield 6.4%

BlackRock Resources & Commodities Strategy Trust ( BCX ) continues to trade at a substantial discount to NAV.

BCX invests in a combination of mining, energy, and agriculture. Currently, mining is its largest position. Source

BCX's focus is on mega-cap companies, with over 92% of its portfolio having market capitalizations above $10 billion. Investors who follow these sectors will easily recognize the names of most of their holdings.

BCX has a mix of U.S. and international companies. The U.S. makes up approximately 2/3rds of its portfolio, while Canada and European countries make up about 1/3rd.

Inflation among commodities has slowed, and prices on most commodities are below the 2022 peak prices. However, we need to remember that inflation measures the rate of increase, not absolute prices. The rate of price increases is slowing down, but prices are still much higher today than they were before COVID. As a result, earnings for these companies will be much higher than they were in the 2010s when commodity prices were generally low.

These companies will continue to have strong earnings, and we'll continue to see higher-than-average dividends from them. BCX allows us to gain exposure to this sector at a discount.

Meanwhile, BlackRock has been very active at buying back shares in its CEFs that are trading below NAV. In Q1, it bought over 900k shares for over $9 million at an average discount of 12%. Source

This results in shareholders becoming more concentrated, increasing NAV/share and cash flow per share, and increasing the potential for future dividend raises.

With high commodity prices, commodity companies will likely surprise the market with higher-than-expected earnings and great outlooks for 2023. We aren't fans of the inconsistent and variable nature of dividends among these companies, but owning BCX provides us with a monthly dividend.

Conclusion

With BIZD and BCX, we can enjoy exposure to a wide array of companies that are benefiting from the current economic market. Higher interest rates, which the Federal Reserve is using to try and squash inflation, are causing many BDCs to pay out higher dividends or special dividends due to the requirements to pay out 90% of their taxable income to their shareholders. This is why we like BIZD, which has a +11% yield.

Meanwhile, large oil and gas producing companies or mining companies with exposure to commodity prices are enjoying record profits due to the fact that commodity prices are higher than they have been previously. As they continue to boost dividends or repurchase their shares, we can enjoy exposure through BCX, which, as a closed-end fund, will enjoy a higher NAV and, therefore, more income to your coffers due to the actions of these commodity-exposed companies. BCX is a great asset to own, with a yield of 6.4%

When it comes to retirement, I want you to have the best possible experience. What this means, in my opinion, is having an income-producing portfolio that produces cash flow well beyond your expenses and allows you to enjoy a retirement filled with relaxation and luxury. Dividend investing allows you to have a defensive position in which you receive cash that the market cannot take away from you - locking in returns quarter after quarter and month after month. This is something that separates an investor from a trader, who is dependent on the market moving upwards to lock in gains.

That's the genius of our Income Method, and that is the beauty of income investing.

The choice is up to you; what kind of retirement do you want to have?

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