WPC - Swim In Cash With 2 Great Dividends

2023-08-11 07:35:00 ET

Summary

• Despite a rollercoaster market, dividend investors are still going to come out richer in 2023.
• It is priceless to know that your next cash infusion is right around the corner.
• Two excellent dividend stewards offering up to 7% yield for an enjoyable retirement.

Co-authored with “Hidden Opportunities.”

Despite the Federal Reserve and economic metrics dominating the news, 2023 will quietly be another record year for dividends. This method of returning value to shareholders has stood the test of time and has traversed interest rate cycles, recessions, and commodity super cycles while producing market-beating returns. Source .

The financial markets are a vast ocean where the turbulent tides of risk and opportunity converge. It isn’t easy even for the most experienced swimmers to navigate these waters. Part of the same ocean is the serene beach with calm waters. We choose this path of proven profitability, free cash flows, and management's willingness to share these with investors.

Dividends are a slow and steady method of traversing the markets. While Wall Street often ignores this under-appreciated market segment, we adopt the income method to strengthen our financial well-being and support our retirement lifestyle. So tighten your swim trunks, grab your goggles, and join us as we dive into the world of dividends.

Pick #1: WPC – Yield 6.4%

W. P. Carey Inc. ( WPC ) is one of the largest diversified net-lease real estate investment trusts, or REITs, specializing in acquiring single-tenant properties in North America and Europe through innovative leaseback transactions. As of June 30, 2023, WPC ’s net lease portfolio comprised 1,475 properties, with 180 million square feet leased to 398 tenants with a weighted-average lease term of 11.2 years and an occupancy rate of 99%.

WPC reported its Q2 results on July 28, and during the quarter, the company completed investments totaling $761 million, with the $468 million sale-leaseback transaction with Toronto-based Apotex being the most significant transaction. This brings the company’s total investments during 1H 2023 to almost $1 billion (including sale-leaseback transactions and capital investments), into mission-critical industrial warehouse properties and essential retail, at a healthy weighted-average cap rate of 7.3%. Most importantly, these investments have a weighted-average lease term of 22 years. Source .

During Q2, WPC generated Adjusted Funds From Operations ("AFFO") of $1.36/share (up 3.8% sequentially) due to accretive investments and contractual rent increases. WPC’s Q2 dividend reflects a modest raise , maintaining its track record of 25 years of continuous dividend increases and membership in the exclusive Dividend Aristocrat club. For FY 2023, WPC provided a narrowed AFFO per share guidance of $5.32 and $5.38, indicating 125% coverage for its annual dividend, which calculates to 6.4% at current prices.

Despite a 6% YoY increase in interest expense, WPC achieved a YoY 15% increase in AFFO during the quarter. This is because WPC is fundamentally built to be a cash flow machine capable of raising rents to tenants to cover its expenses. 99% of the net-lease REIT’s Annualized Base Rent ("ABR") carries contractual rent increases with 54% linked to the Consumer Price Index ("CPI").

WPC maintains an investment-grade balance sheet with recent upgrades to Baa1 from Moody’s and BBB+ from S&P. Its portfolio debt carries a weighted-average interest rate of 3.3% and an average debt term of 3.9 years. U-Haul is currently WPC’s largest tenant, contributing 2.6% of the ABR. The storage rental company is exercising the repurchase option on the properties, and WPC expects $465 million in payments for the same around Q1 2024. In addition, WPC is strong from a liquidity position with $1.3 billion available on its revolver. Collectively, the REIT is well-positioned to meet its upcoming debt maturities.

Companies need cost-effective ways to raise capital for their operations and growth in this rising rate environment. In such an economy, sale-leasebacks are highly beneficial, and WPC is well-positioned to seize the opportunity and grow its asset-rich portfolio. While the market continues to dismiss WPC’s recession resistance and the growth prospects of this cash machine amidst economic uncertainties, we sit back and collect our growing dividends.

Pick #2: THQ – Yield 7%

America’s aging population places higher demands on the healthcare system, and some of the largest healthcare companies in the world are well-positioned to be significant beneficiaries and make excellent investments. Depending on the drugs and treatments, some firms may experience stronger tailwinds than others, and this is where active management of a portfolio of healthcare stocks comes in handy.

Tekla Healthcare Opportunities Fund ( THQ ) is a Closed-End Fund ("CEF") with 129 companies in its portfolio, with some of the largest global healthcare companies being its top 10 holdings. Source .

THQ invests across the capital stack, with a modest allocation to healthcare fixed-income securities such as preferred stock and bonds. The fund exclusively invests in U.S.-based companies and employs ~20% leverage to boost returns from invested assets.

THQ’s YTD distributions have been 58% Return of Capital ("ROC"), 41% Capital Gains, and 1% Net Investment Income. This makes sense, as healthcare companies are typically low-yielding, and THQ actively manages the portfolio to realize gains for shareholders.

During 1H 2023, THQ’s Net Realized and Unrealized Gains added up to $62 million, while the distributions cost the fund $27.9 million for the same period. THQ has adequate capital gains to support distribution payments for an entire year and to grow NAV. We want to remind readers again that ROC is a tax concept , not an economic one, and materially differs from Return of Principal.

Since its inception, THQ has maintained or grown its NAV while maintaining a steady monthly distribution.

The CEF currently trades at a 10% discount to NAV, among the lowest levels since its inception (excluding the sharp market sell-off during the COVID-19 pandemic).

Global investment company Abrdn Inc. is expanding into the healthcare and life sciences space by purchasing Tekla Capital Management. The integration of Tekla into a widely known platform like that of Abrdn is a net positive for THQ shareholders, and there are several benefits, such as improved global reach, research, and operational synergies. THQ shareholders can expect improved valuation for the CEF due to this transaction.

G7 nations have gone through a long spell of declining birth rates, while their improving healthcare systems have led to longer life expectancies. This trend has resulted in a growing proportion of elderly individuals within their populations, making healthcare a vital requirement in these high GDP nations and health spending poised to remain strong for the foreseeable future. We like the fundamentals of this recession-resistant industry, and THQ presents a discounted opportunity to collect sizable monthly income.

Conclusion

The markets are always going to be obsessed with frenzied speculative trades. If it was GameStop ( GME ) yesterday, it is Tupperware ( TUP ) today, and there will be something else tomorrow. Instead, our investing group chooses to invest in building resilient income streams from companies committed to their shareholders. Imagine a calm, sunny beach where the gentle waves rhythmically splash on the sands. This is much like dividends that flow steadily into our pockets like clockwork.

Quality companies are growing their payouts to shareholders, and we are swimming in dividends in this volatile market. Despite price swings, our diversified “model portfolio” of +45 dividend payers ensures that our next paycheck is right around the corner. Dividends stand as a beacon of stability in rocky markets and remind investors that there are sustainable, prudent ways to grow wealth. This is the beauty of the income method, a proven pathway for a prosperous retirement.

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