Summary
- The USA has among the hardest working population globally.
- You work hard through your adult life and deserve a stress-free retirement.
- Two +8% yielding picks to buy the dip and let your passive income rip.
Co-produced with Hidden Opportunities
The U.S. can be considered the most overworked country globally by several metrics. Americans are the world's third hardest-working population in the west (only behind Mexico and Costa Rica), and the tenth-ranked globally. American employees average 41.5 hours per week, with 11.1% of the employees working over 50 hours per week. ( Source )
Why do Americans work so hard?
Rising economic inequality in the U.S. is a logical reason for the culture of overwork. However, feeling financially insecure can affect even those at the top of the income ladder, leading to people working overtime to prove their worth to their employers. Moreover, U.S. laws do little to protect white-collar workers; there is no clear law governing the number of hours worked, and employers can generally demand that employees work as many hours as the employer wants.
To add to the challenges of our hard-working population, the U.S. is the only developed country in the world without national, mandated paid leave or paid parental leave and is one of only two countries with no mandated paid sick leave.
You work very hard to earn a living, but your retirement (or early retirement) should be free of financial stress. At HDO, we strongly advocate making your money work for you. Passive income flows in regular intervals without the need to put in considerable effort to create or sustain it. It is easy to build passive income in a bear market and have it expand your financial independence and pay for your retirement. We have two great passive income producers with up to 9% yields to put your hard-earned money to work. Let's dive in.
Pick #1: AM - Yield 8.4%
Antero Midstream ( AM ) owns and operates pipelines and processing infrastructure that transports and processes liquids-rich natural gas and NGLs to a marketable form. The company also owns and operates the most extensive water-handling infrastructure in Appalachia through an integrated closed-loop system of freshwater pipelines and storage facilities that delivers water directly to pad sites. AM's midstream assets are geared to provide gathering and processing services to Antero Resources ( AR ) under long-term fixed-fee service agreements.
Contrary to popular opinion, midstream infrastructure offers significant value for climate change initiatives. AM's 350+ miles of freshwater pipelines reduce the need for energy-hungry trucks. Similarly, transportation of hydrocarbon commodities would otherwise be through roadways, railways, and seaways, where spills and accidents cause significant environmental damage and pose significant fire hazards.
Investors may quickly look at AM's stock price chart and dismiss the company. Pre-pandemic AM did not present a good investment. The company was Capex-heavy and produced negative Free Cash Flow ('FCF') after dividend payments. Source
AM Investor Presentation - February 2023
But the company has made substantial transformations since COVID-19 and its effects on the hydrocarbon sector. AM is now fiscally responsible and is working towards paying a sustainable dividend while producing FCF after dividends to pay down debt. The company's net cash from operating activities covered FY2022 dividends 1.6x. AM's $0.225/share quarterly dividend calculates to a healthy 8.4% yield.
AM is now well-positioned to internally finance capital investments and returns to shareholders while maintaining flat leverage. The company expects FCF after dividends to be used towards debt reduction and targets leverage below 3.5x by the end of FY 2023. Additionally, management is guiding leverage of 3x or lesser in 2024.
Note: AM is a C-Corp and issues 1099 to investors
Don't you love the term "Free Cash Flow After Dividends"? It demonstrates profitability beyond returns to shareholders, allowing sustainable growth of the business. This is mainly because AM projects a 23% lower Capex in 2023 and a ~7% Adj. EBITDA growth (midpoint) during the year. AM's fee-based business model protects its profitability against volatile commodity prices. We can see this from growing EBITDA over the years. However, the shrinking Capex post-pandemic makes AM a good investment in recent years.
Author's calculations
It is noteworthy that AM is the only member of the S&P 400 that meets all of the below:
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Under 4x leverage ratio
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Forecasted EBITDA growth of 5% or higher in the next two years
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Capex declining by more than 10% in the next two years
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Dividend yield > 6%
Technology is constantly changing, and even the likes of Google ( GOOG ) (GOOGL) and Microsoft ( MSFT ) are threatened by the new kid in town (ChatGPT). Yet, I find comfort in knowing that cloud computing, which can move terabytes of data between continents in a matter of seconds, can't move a single drop of oil by a single mile. Midstream companies enjoy a tremendous competitive advantage - no new kid is on the block, and transporting dirty ol' oil isn't a flashy business.
AM operates vital assets for the nation's hydrocarbon needs. With shrinking Capex guidance, debt reduction, and increased prospects for value to shareholders, we like the guidance from AM and will continue to collect our big dividends.
Pick #2: TDS Preferreds - Yields of ~9%
Telephone and Data Systems ( TDS ) is an 83% owner of US Cellular ( USM ), the 4th largest full-service wireless carrier in the U.S. Notably, USM serves nearly 5 million wireless customers, and TDS provides phone and internet access to almost 1 million Americans predominantly in rural and suburban areas. Source
TDS 10-K
During FY 2022, TDS reported a 9% growth in its operating footprint and deployed 133,000 new marketable fiber addresses. The company grew its residential broadband revenues by 8%, purchased $40 million of common stock during the year, and recently raised the common dividend for the 49th consecutive year . With that streak, TDS is well-positioned to become a Dividend King soon!
Yet it is a challenging time for telecoms. Being the 4th largest telecom company in the U.S. doesn’t exactly scream competitive advantage. With 5G and fiber rollout being generational transformations for the telecom industry, we expect TDS (and US Cellular) to continue to invest heavily in these technology upgrades. Overall profitability will continue to be stressed in this inflationary and rising rate environment. TDS reported a 35% higher YoY Capex in 2022 and a 6% YoY decline in EBITDA.
Despite TDS being a phenomenal dividend steward, we recognize that the business will continue to spend to compete with the Big Three and maintain market share effectively. Hence, we will not invest in TDS common stock but will seek shelter in its tremendously undervalued preferreds.
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Telephone & Data Systems 6.625% Cumulative Preferred ( TDS.PU )
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Telephone & Data Systems 6.00% Cumulative Preferred ( TDS.PV )
We hold TDS-U in our portfolio and find the yield very attractive. However, if investors want to initiate a position or add to their holdings, TDS-V presents an attractive option with a higher (up to 48%) upside to par and a similar current yield. Since prices can shift quickly, the best pick is the one that trades at a higher current yield when you buy. We would prioritize yield over price, as with such low coupons, these preferred could remain uncalled for decades. Both securities pay qualified dividends and are trading at deep discounts.
TDS spent $69 million on preferred dividends in FY 2022 and only $7 million on interest expenses. Both these carried adequate coverage by the company’s Adjusted EBITDA of $290 million during the year. TDS also reported ~$100 million in cash and cash equivalents at the end of the fiscal year ($360 million including US Cellular, but TDS doesn’t have direct access to USM’s cash assets)
The company issued an EBITDA guidance between $260-290 million, which shows a YoY decline due to higher Capex. However, it still adequately covers the interest expenses, the preferred dividends, and $151 million of common dividends (FY 2022 amount).
TDS is a phenomenal dividend steward, with 49 years of consecutive payment increases. Over 49 years, TDS has been through great times and tough times for the telecom industry. This puts us, the preferred shareholders, in a very comfortable position. Common dividend payments can only be made once all preferred dividends are paid in full. TDS is highly incentivized to maintain its streak to achieve the Dividend King status, and we will collect 9% qualified yields and let the markets do their thing.
Conclusion
As a student, you work hard to get good grades. In your adult life, you work hard to earn a living, get promoted, and eventually get rewarded with more work with higher responsibilities.
The reward for good work is more work - Tom Sachs on Twitter
But your retirement doesn't have to be stressful, not for financial reasons. American businesses are managed by some of the brightest, most qualified entrepreneurs globally. Additionally, these companies are operated by among the hardest-working workforces in the world. My capital is placed in a diversified pool of American dividend-producing companies, and I sleep well at night, knowing my money will work hard for me.
Want your money to work hard for you? The income method can make that happen. We discuss two picks with +8% yields to strengthen your passive income and move you toward achieving greater financial security.
For further details see:
2 Fat Dividends To Buy The Dip