2023-03-07 11:00:00 ET
Summary
- This March, we have two excellent buys to add more income to your portfolio.
- These picks are paying excellent high-yield regular dividends and are adding in additional supplemental dividends.
- Earn high yields of 10% and above with these top-notch picks.
Co-produced with Treading Softly
As the calendar changes, the weather is getting warm, and we're spending more time outdoors again. So long as you're not being slammed by another snowstorm, you hopefully can soak up a little more sun and a little more warmth than you had in February.
March also brings with it a vast array of earning reports. Stocks all over the market are releasing their earnings and updating investors on how they closed out the prior year. The market often has more volatility as investors react to the latest information from management teams and finalized numbers from 2022.
We've enjoyed a large array of earnings data from our High Dividend Opportunities Model Portfolio, which targets 9% yields. Today, we want to update everyone on our outlook on two excellent income-paying securities which deserve a spot in your March "must buy" list for income.
Both not only are they paying high yields but are also adding more income through supplemental dividends as well.
Let's dive in!
Pick #1: ECC - Yield 14.8%
When it comes to investing in CLOs (collateralized loan obligations), people often forget a very binary relationship of debt investing. CLOs, in essence, are a pool of senior secured loans which pay interest and principal to the CLO, which in turn pays out its required interest to its debt holders.
Eagle Point Credit Co., Inc. ( ECC ) invests in the lowest level – the equivalent to common equity of a normal fund – getting what's left over after everyone else is paid. For ECC , this has been a profitable place to stand, and historically they've been able to pay large sums of income to their shareholders.
Last time ECC released earnings, they announced a $0.50 special dividend to help cover their spillover – taxable earnings that had not been paid out as required. ECC's management team stated they expected they would have to do additional special dividends to cover their taxable requirements.
This quarter, ECC shared two important updates for shareholders interested in income generation:
Firstly, ECC announced additional supplemental or special dividends – an additional $0.02 per share for the next three months. For the remainder of 2023, the Company expects to also declare a monthly variable supplemental distribution, though the amounts of such distributions may vary.
Secondarily, ECC was forced to pay an estimated $0.04 excise tax. This tax is applied to CEFs or BDCs who pay the regulatory minimum required but not a higher threshold to face no taxes. Management determined that paying some tax – usually in the 8% range – was cheaper than issuing new shares to generate that same capital. Why would a CEF be willing to do this? The simplest answer is that they see the current CLO market as highly attractive and intend to buy more CLO positions with that capital.
To compound this, ECC has been exceptionally active in issuing new shares with their current premium to NAV, generating $71.9 million in cash from issuing 6.7 million additional shares. This isn't uncommon for a fund to do when a large special is announced and new buyers pile in and spike the funds premium to NAV. As a shareholder owning shares before this spike, you saw the NAV per share of your shares appreciate $0.12 from this selling alone.
So where is ECC putting all this cash to work? Buying new CLO positions. Currently, CLOs offers an approximate yield of 27% when buying the equity tranche.
NAV per share moved from $10.23 in September to $9.07 in December and back up to $9.62 in January. This move tracks with the wider CLO market value dropping and accounting for ECCs large special dividend. As CLO values recovered, so did ECC's NAV per share. Since CLO equity is not publicly traded, prices can be extremely volatile. This has been exacerbated by above-average volatility in the debt markets.
Overall ECC's management team continues to prudently deploy new capital and ECC itself has entirely fixed-rate debt, so moving interest rates are not a detriment to their ability to pay out strong dividends as their CLOs continue to provide strong income overall.
Pick #2: ORCC - Yield 10%
When it comes to a nearly perfect environment for a business to thrive, the current rate market for BDCs could not be better. Most BDCs issue floating-rate debt and have fixed-rate costs for themselves. This allows them to book rising interest income and see it flow quickly to their bottom line.
For Owl Rock Capital Corp. ( ORCC ), their management team continues to see great success in executing their plan. ORCC earned $0.49 per share of net investment income, easily covering its normal dividend of $0.33 handily and leading them to issue an additional $0.04 supplemental dividend. Even with paying a $0.37 dividend in Q4, NII covered the dividend by 130%!
The other interesting fact to note in ORCC's quarterly earning report is their plans to buy back shares when trading at a discount to NAV. Currently, NAV per share is $14.99, up from last quarter. ORCC trades hands for ~$13.70, so there is over a $1 discount baked into their share price.
To help this process, ORCC's manager, Blue Owl ( OWL ) offered their employees the ability to buy shares of ORCC, and the BDC itself bought back shares. I'd expect them to continue this process as long as shares trade at a discount. Historically, employees make excellent shareholders as they are disinclined to sell as long as the company employs them. It also creates better alignment between ORCC's managers and ORCC shareholders. OWL employees bought $17 million in shares, and ORCC bought $35 million.
ORCC is sitting on $445 million in cash and $1.4 billion in undrawn availability on their credit facility. We fully expect ORCC to continue to grow its portfolio while profitable choices abound.
When we first bought ORCC, we were highlighting how ORCC had a plan of action to cover their dividend with NII. Today, they have raised their dividend, are paying a supplement, and are covering that much higher dividend by 130%. ORCC is earning a lot today and has plenty of cushion to maintain the dividend even if the environment becomes less favorable, such as a recession starting.
Currently, we find ORCC highly attractive, offering a fully covered 10% yield, and if their outperformance continues, we'd expect additional supplemental dividends to come.
Conclusion
With ECC and ORCC, we can enjoy strong current income with a nice March/April bonus boost from their supplemental dividends. I enjoy getting paid a high income, and I love getting something extra from my holdings that are paying me a high yield.
So far, ORCC and ECC have returned over 30% and over 20% respectively in total returns during High Dividend Opportunities' holding period, and we continue to enjoy income from both positions. These are only two of what should, at minimum, be 42 individual income holdings in one's personal income portfolio.
Holding picks like these allow me to enjoy a busy spring where I'm not worried about every market gyration and Federal Reserve meeting minutes. I can enjoy a hike, a long drive on the weekend, or a warm fireplace crackling while I drink my favorite beverage.
Some holdings are run so well that you can check in every three months to ensure the ship is running smoothly and you go back to enjoying your life. That's the beauty of income investing.
For further details see:
2 Fabulous Dividends For March - Yield +10%