2023-03-28 14:00:00 ET
Summary
- The market is creating panic, or is the panic driving the market?
- I learned a valuable lesson when I was younger that I want to share with you today.
- Income in retirement is the ultimate level of safety.
Co-produced with Treading Softly.
I once met a man who was doing maintenance work at a corporately owned McDonald's ( MCD ). He worked only two days a week for as long as he felt like, and the store manager seemed genuinely pleased with this arrangement. The older gentleman did exceptional work when he was present, and what he fixed rarely needed to be repaired again any time soon.
I approached him while he was working one day and asked him why he worked at all if he worked so rarely and why, of all places, he worked at a McDonald's – not necessarily the most prestigious of jobs.
Why would he even bother to answer me? Well, I had built up a friendship with him because I worked at that McDonald's while in high school and was still employed there when I asked him – we were co-workers.
He told me that he had plenty of money for his retirement, but he enjoyed doing handyman work because it kept his mind sharp by solving problems – so he came in when he felt inclined to be active.
His retirement income was provided by a large number of rental properties he owned from years of owning a construction company; he didn't even cash his paper paychecks most weeks because he didn't need them.
He was retired in splendor and safety.
In today's market, you don't need to be a former business owner or rental property owner to set up your retirement to have the same sense of calm and enjoyment that he had. There are countless oversold and sentiment-driven income opportunities to which you could assemble an outstanding and spectacular income portfolio that will easily pay your way in retirement.
Let's take a closer look at two of them right now.
Pick #1: RQI - Yield 8.7%
Cohen & Steers Quality Income Realty Fund ( RQI ) is a closed-end fund, or CEF, that provides us exposure to high-quality real estate investment trusts, or REITs. Like much of the market, REITs sold off out of fear of the risk of a "credit freeze." A credit freeze is when it becomes extremely difficult to take out a loan, even for companies that have what would, in normal times, be very reasonable credit. Credit freezes happen when banks start becoming concerned about their own liquidity and become unwilling to lend. Lending standards tighten up, and companies start having trouble borrowing.
This can become a major issue for companies that have debt they need to refinance. As maturities approach, they are forced to take extraordinary measures like selling assets into a bad market or issuing equity at poor prices. During the Great Financial Crisis ("GFC"), many REITs ran into trouble with maturing debt when real estate was out of favor. Many REITs were forced to dilute shareholders or sell properties at poor prices because they were unable to refinance debt.
I do not believe that a credit freeze is likely to happen, and the banking difficulties will be confined to banks that REITs generally don't do business with. However, what if one were to happen? REITs are very well positioned today to manage it.
Whenever there is a crisis, those who are impacted most by it learn. REITs were slammed hard by the GFC, and since then, we've seen the "normal" practices of REITs change. Today, it is very common for REITs to seek to fund themselves with unsecured debt – usually with a combination of a "credit facility" consisting of a revolving line of credit and term loans, and then unsecured bonds at a fixed interest rate. It has become common practice for REITs to refinance their bonds six months to a year before they mature and to have availability on their revolving line of credit that is sufficient to repay bonds for another 1-2 years.
With interest rates at historic lows last year, many REITs even paid prepayment penalties in order to refinance early. As a result, most high-quality REITs have little to no debt maturing in 2023 or 2024.
RQI 's holdings represent a Who's Who list of blue chip REITs. Source .
RQI Factsheet Dec 31, 2022
These are REITs with very high-quality balance sheets. They have low levels of secured debt and high levels of liquidity. Most of these REITs went through the GFC and came out the other side the best in their sectors.
We would be willing to invest in any of these REITs individually, except for one small problem – their yields are too low for our goals. If you are constructing a dividend growth-style portfolio and you are happy with lower yields and strong dividend growth, consider anything on this list. While the market is selling off everything, it is a great time to buy high-quality. With RQI, you can gain exposure to these high-quality REITs for a 5% discount.
Pick #2: PFFA - Yield 10.9%
Virtus InfraCap U.S. Preferred Stock ETF ( PFFA ) joins the list of investments that are on sale due to their indirect exposure to the banking world.
PFFA 's direct exposure to banks is modest compared to peer iShares Preferred and Income Securities ETF ( PFF ).
InfraCap
Instead, PFFA holds preferred in utilities, MLPs, REITs, and mortgage REITs. Source .
InfraCap
PFFA's focus on higher yielding preferred meant that most banking preferred, which typically have very low coupons, did not fit their strategy.
However, as we frequently see on Wall Street, when panic happens in a major sector, it usually spreads through everything. PFFA had very large gains so far this year and saw a significant selloff in March.
PFFA is still holding onto a small gain year-to-date, but with the price back down, it is yielding near 10%. In our opinion, preferred shares are oversold across the board. The broad-based selloff overstates the risk.
It is time to buy while others are fearful, and PFFA is an excellent way to gain diversified exposure to preferred equity.
Conclusion
PFFA and RQI are both outstanding funds to own and hold for income generation over the decades. Both provide broad exposure to vital sectors in the portfolio of a professional income investor. You can enjoy income from debt issued by large companies as well as income from real estate – much like a landlord collecting rent from their renters, but without having to deal with the 1 a.m. maintenance needs!
These are only two picks for an income portfolio; we recommend a healthy income portfolio should contain no fewer than 40 individual positions, which is why our Model Portfolio averaging a yield of +9%, contains +45 individual picks allowing investors of any risk tolerance to build a healthy income portfolio.
The lesson I learned from that older gentleman was that I wanted a retirement so secure that I could go to work whenever I felt like it and do what I enjoyed without worrying about how much they were paying me – because I had plenty of income on my own.
Today, I do so through my large and growing income portfolio, which collects countless dividends each year. While the market may be tossing and turning in the midst of a raging storm, I can be sleeping soundly knowing that my retirement is grounded in safety and splendor thanks to the dividends pouring into my account.
Sounds great, right? You can enjoy it too. Get off the deck, where you're being whipped and beaten by the raging storm, and see the calm waters below the surface.
That's what our Income Method can provide. That's the beauty and serenity of income investing.
For further details see:
2 Great Dividends To Retire In Safety And Splendor