2023-03-30 14:00:00 ET
Summary
- Warren Buffett advises investors to be long-term business buyers, not short-term stock pickers.
- We are growing our income through the fear and uncertainty.
- Two picks with up to 8% yields to champion this bear market.
Co-produced with “Hidden Opportunities.”
Is the news forcing you to liquidate your portfolio to preserve your capital? If you are upset with your portfolio performance and are cursing the likes of Jerome Powell, Vladimir Putin, Joe Biden, the Chinese Government, and the mayor of your city for your misfortunes, then maybe you are approaching the markets incorrectly.
We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned. I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future. - Warren Buffett, Berkshire Hathaway shareholder letter, 2022 .
We are investors with a long-term focus, but at the same time, our objective is to collect “waiting fees.” As such, we are using the American Tailwind to propel our passive income. Capital gains may prove pleasant for the future, but dividend-paying stocks provide income security for the present. If reinvested appropriately, your portfolio eventually becomes an ATM you can tap into for your needs.
We will now discuss two picks with up to 8% yields that form the backbone of the American Tailwind.
Pick #1: UTF - Yield 8.2%
Tight monetary policy is defined as a phenomenon where the Federal Reserve seeks to reduce the demand for money and limit the pace of economic expansion. While we see visible changes in business and consumer spending, a critical sector employing millions of Americans is set to see hundreds of billions of dollars in inflows over the next decade.
The $1.2 trillion Infrastructure Investment And Jobs Act has spun up 20,000 projects since signed into law in 2021.
But these have barely scratched the surface of funds released to date. Spending is ramping up, and here are a few notable initiatives that have been announced recently:
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$2.5 billion in competitive grants for state and local governments to build 500,000 electric vehicle ("EV") chargers by 2030.
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$185 million in grant awards for 45 projects across the country to reconnect communities by retrofitting, or mitigating transportation barriers such as highways and railroad tracks, capping interstates with parks, etc., and creating new crossings through public transportation, bridges, tunnels, and trails.
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$1 billion to 99 airports in 47 states and two territories towards improvement and expansion of terminals, bagging systems, etc., to enable handling of higher passenger volumes and provide improved travel experience.
Several more projects will be funded in the coming months (years), resulting in more job creation in these sectors, and we can expect some of the country's leading utility and infrastructure companies to be significant beneficiaries. We bring you a Closed-End Fund (''CEF'') from Cohen & Steers, the Cohen & Steers Infrastructure Fund ( UTF ), uniquely positioned to benefit from these inflows while making significant and sustainable distributions to shareholders.
UTF 's sector diversification is deeply into stable and recession-resistant industries, with electric and gas utility, midstream, towers, toll roads, airports, and associated corporate bonds representing ~85% of the fund. These experience inelastic demand due to the essential nature of their services and the lack of alternatives or regulated nature of the services. Source .
UTF's top portfolio constituents are some of North America's most significant utility, energy, and railroad companies. Source .
UTF is a monthly pay CEF with almost two decades of steady distributions to shareholders. Its $0.155/share monthly distribution calculates to a healthy 8% yield! Today, UTF trades almost at par with NAV, making it a bargain to lock in high yields. Infrastructure will receive hundreds of billions of dollars in the next decade, and UTF's portfolio companies will be happy recipients of government funding. With UTF in your portfolio, you will happily collect its sustainable distributions.
Pick #2: EPD - Yield 7.7%
Enterprise Products Partners L.P. ( EPD ) is a leading North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals. The partnership operates >50,000 miles of pipeline, 18 fractionation facilities, 20 deepwater docks, and a liquid storage capacity of >260 MMBbls.
Note: EPD is a Master Limited Partnership (''MLP'') that issues a Schedule K-1 for tax purposes.
As the company's name suggests, EPD's primary business is the transportation, storage, and processing of raw feedstock used to manufacture products widely used globally. ~71% of EPD’s 2022 Gross Operating Margin is from midstream services around petrochemicals and Natural Gas Liquids ("NGL"). Source .
EPD makes money delivering and processing raw materials essential for everyday goods. 96% of all manufactured goods contain petrochemical feedstock. These include Natural Gas, Ethane, Propane, Butanes, Pentanes, and higher carbon compounds.
Let us look at ethane – the domestic demand has soared over the past ten years and is projected to continue as the population grows. The outlook is similar for other feedstock and extends to the overall demand and consumption growth at a global level. Source .
Worried about energy price volatility due to bank failures and recession fears? EPD is immune to volatile commodity prices, as demonstrated by improving performance metrics in the past five years:
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Improving Adjusted EBITDA
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Declining leverage ratio
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Declining organic growth Capex.
EPD is almost a Dividend Aristocrat, with 24 years of annual distribution increases, and is set to become the bluest of blue chips in this fiscal year. Its current $0.49/share quarterly distribution calculates to a 7.7% annualized yield. Source .
EPD ended 2022 with a BBB+ Credit Rating and 2.9x leverage ratio, the lowest in the midstream sector. 97.9% of the company's debt is fixed rate with a 4.6% weighted average cost of debt. For 2023, the company projects its leverage to be within 2.75 to 3.25x, consistent with other blue-chip Dividend Aristocrats.
For FY 2022, the partnership maintained an impressive 1.9x distribution coverage (its highest ever) and has $1.2 billion available in its buyback program ($250 million spent in 2022). At present, EPD can self-fund its expansion projects without taking on more debt.
With lingering geopolitical tensions, recession fears, and China's economic recovery, energy commodity prices are expected to be volatile in 2023. However, EPD is the income method of investing in this sector through its largely fee-based contracts.
"One thing we believe is there will be continued volatility in 2023, but our experience is that volatility leads to opportunities." - Jim Teague, Co-CEO.
EPD treats its shareholders very well. And why won't they? The management team is a considerable shareholder base, with 32% ownership. Management eats its own cooking, and you can sit back and collect 7.7% yields knowing your investment is in good hands.
Conclusion
At High Dividend Opportunities, we are buyers in bull markets, bear markets, and uncertain markets. We don't attempt to time the market bottom but stay invested through the chaos. Our goal is to own more of the U.S. economy, regardless of the current mood that the market is in.
We collect our "waiting fees," and prudently reinvest to grow our income stream even more. We are buyers of securities issued and managed by quality businesses where returns to shareholders are management's top priority.
…Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers. - Warren Buffett, Berkshire Hathaway shareholder letter, 2022 .
UTF and EPD are excellent income investments in this market fear. They are part of the 'High Dividend Opportunities' model portfolio, which currently carries an overall yield of +9% and consists of +45 stocks and securities.
Infrastructure and energy are necessities for humankind, and the industries providing these experience inelastic demand through economic cycles. With up to 8% yields, UTF and EPD present time-tested investments with shareholder-friendly operating principles to enable a prosperous retirement.
For further details see:
Buffett Says Bet On America; 2 Fat Dividends For A Rich Retirement