2023-09-14 07:35:00 ET
Summary
- $1,000,000 used to be the financial goal for retirement.
- For many, $1,000,000 only equates to $40,000 in annual retirement income.
- Income investing allows you to earn $40,000 a year with a much lower account balance.
Co-authored by Treading Softly
When I was a young child, I thought that having $10 meant that you were the richest person in the world. Then I had $10, and it wasn't as much as I thought.
When I was in elementary school, I thought that you were pretty set when you had $1000. With that much, you could buy basically anything I could imagine wanting at that point in time with plenty to spare.
For many adults, the concept of having $1,000,000 seems impossible. Many people will live their lives from bookend to bookend, never possessing in hand $1,000,000. They may have earned and spent $1,000,000 in their lifetime, but if you're earning $50,000 a year, you're only going to generate before taxes $2 million in your lifetime, assuming 40 years of earnings. Most of that money is going to be eaten away by your expenses and needing a place to rest your head at night. It's understandable why for so many, $1,000,000 seems like an intangible goal. But at the same time, $1 million just isn't what it used to be.
To make things worse, we often straightjacket ourselves when we reach retirement. We enter a mindset where we dismantle anything we've built over the decades to buy a loaf of bread. Many follow the 4% withdrawal rule meaning if you were lucky enough to save $1 million, you're only getting to use $40,000 annually. Sure, when added to social security and possibly other revenue sources, $40,000/year is nice, but it isn't what most of us imagine when we think of being a "millionaire".
We combat this mindset by presenting income investing as a real-world practical alternative. Today, we're going to look at two opportunities to get +7% returns annually via dividends paid monthly. No dismantling is required to live at a level higher than your millionaire peers! Provide yourself with a similar income, using half the capital.
Let's dive in!
Pick #1: RNP - Yield 8.9%
The Dow Jones Equity All REIT Index closed 1H 2023 at a market-cap-weighted 8.1% discount to NAV (Net Asset Value) due to elevated interest rates weighing down the sector. Such valuations naturally give rise to hungry M&A activity, and we have already seen several announcements revolving around our portfolio holdings. Global Net Lease ( GNL ) has acquired The Necessity Retail REIT ( RTL ) for $4 billion, and KSL Capital Partners recently announced the intent to acquire Hersha Hospitality Trust ( HT ). Source
SPGlobal
REITs continue to trade at a significant discount to NAV, making it an opportunity to increase our allocation into this dividend-friendly sector. Preferred securities are another asset class that remains depressed at this time.
Cohen & Steers REIT & Preferred Income Fund ( RNP ) is a high-quality CEF (Closed-End Fund) that provides diversified exposure to these highly oversold (and income-friendly) asset classes. RNP maintains a 51% exposure to REIT common stock and 49% exposure to non-REIT preferreds & fixed income securities.
Within its REIT holdings, RNP maintains a 50% allocation to industrial, infrastructure, healthcare, and data center REITs, which report high occupancy rates and typically carry long-term lease agreements with high-quality tenants. Source
RNP Fact Sheet
Eighty-five percent of RNP's fixed-income portion comprises Banking, Insurance, and Utility preferreds, which are safer income sources from deeply discounted industries. During FY 2022, RNP's distributions are 56% from long-term gains and 44% from NII (Net Investment Income). This makes it a highly sustainable form of income generation while preserving the fund's value. Its current $0.136/share monthly dividend calculates to a healthy 8.9% yield.
RNP operates with 32% leverage, with a modest weighted average interest rate of 2.6%. Eighty-one percent of RNP's debt is fixed for an average term of 3.07 years, giving the fund adequate time to ride out the current interest cycle and refinance at more attractive rates. As a result of its low leverage costs, RNP will be better protected from the adverse effects of leverage in recessionary conditions.
RNP Fact Sheet
At a modest 5% discount to NAV, RNP is a bargain for your income portfolio. You can collect generous monthly payments from two undervalued yet dividend-focused sectors and wait for their respective value to unleash.
Pick #2: EPR - Yield 7.6%
EPR Properties ( EPR ) is a REIT that was initially founded as an owner of movie theaters back in 1998. Over the next 20 years, it experimented with owning a variety of properties. The backbone was always movie theaters, while among the other property types, some were more successful than others. In 2019, EPR found its identity, the theme that tied together its most successful property investments: experiential real estate. Simply put, places where people travel to experience things.
It was extremely fortunate and extremely unfortunate timing. EPR sold off a lot of properties in 2019 that didn't fit its targets, mostly from its education portfolio. As a result, it ended 2019 with over $500 million in cash on hand and nothing drawn on its revolving line of credit. A balance sheet positioning that was extremely comforting in March 2020.
On the other hand, 2020 was a terrible time to own real estate that was based on the idea of people being around other people. EPR's earnings were already going to be down because they sold a chunk of assets and were sitting on cash. The stress that COVID put on their tenants added to it and has resulted in a slow recovery as tenants like Regal struggled with the debt they took on during the COVID era.
The great news is that the long-term outlook for experiential real estate remains strong. People love to go out and do things. The experience during COVID was not typical of an economic slowdown. Typically, people cut their entertainment spending a lot less.
With COVID restrictions behind us, people are returning to their habits. "Barbenheimer" stunned many, showing that people are still willing to flock to theaters. Year-to-date, the box office is still below 2019 levels but is trending in a positive direction. Source
It is important to note that the number of movies being released continues to be below pre-COVID averages, as a number of movies were disrupted during production.
In EPR's portfolio, theaters have rent coverage of 1.3x, which is lower than the 1.7x EBITDARM coverage in 2019. EPR's other tenants have fared much better on their recovery, with rent coverage rising to 2.7x.
EPR is working to reduce its exposure to theaters, which is a process that will likely take years. So it is encouraging that the sector is on the path to stability. The Regal bankruptcy showed that EPR can work out deals that protect its cash flow and asset value in bankruptcy court. Note that at 83% of 2019's box office revenue, EPR's new contract with Regal would be expected to match pre-bankruptcy rent. Year-to-date, the 2023 box office is at 85% of 2019.
EPR has been cautious, maintaining capital and keeping its dividend payout ratio low due to the uncertainty of the Regal bankruptcy. As a result, it has very strong debt ratios and a very low AFFO payout ratio.
EPR Q2 2023 Presentation
With the Regal bankruptcy behind them, we can expect two things from EPR. They will ramp up investing activity, buying more non-movie theater properties, and a dividend raise will likely be announced in the next six months. Historically, EPR has announced dividend raises in January.
EPR has been slow to recover from COVID, with so many of its properties being hit hardest by the pandemic. Yet the trends are favorable, and the risk is diminishing as consumers go back to their social ways. Investors in EPR can enjoy a generous yield today, with a clear pathway to dividend growth.
Conclusion
With RNP and EPR, we can collect excellent monthly income from companies that are operating all across the United States. I absolutely love receiving monthly dividends because those are the easiest to match to my monthly expenses.
For many novice income investors, the easiest thing to do when they start receiving regular income from their portfolio is to directly match it to various bills they need to pay. At first, you may only have enough to cover your cable bill, and then your phone bill, and then your mortgage, and then multiple bills at the same time. It makes it an easy goal post as you build up your portfolio's income generation to match it towards the various things in your life that it could entirely cover. Before you know it, your entire portfolio's income will cover and exceed your entire monthly spending. When you've reached that level, you've started to achieve true Financial security and independence. No longer are you dependent on the pension plan from your company or on the government's good graces to pay Social Security as promised. You are able to rely on the companies that you have invested in and your own portfolio.
When it comes to retirement, I don't want you to be dependent on somebody else for your welfare. You've spent decades as an adult building your lifestyle, saving your money, and living your life on your own terms. The last thing I want for you is to suddenly be forced to live on somebody else's terms because you're not able to afford your life. That sounds to me like an absolutely terrible outcome. Instead, I want you to have an abundance of income that vastly overwhelms your expenses, allowing you to enjoy life to its fullest, whatever that means for you. It's entirely possible with income investing.
That's the beauty of my Income Method. That's the beauty of income investing.
For further details see:
2 Monthly Dividends To Live Like A Millionaire