2023-10-25 07:35:00 ET
Summary
- For many retirees, the preservation of capital is a key focus point.
- Ironically, many retirees also foolishly chase after the latest fads in investing.
- We look at ways to generate income from lower-risk investments that far exceeds what the market typically provides.
Co-authored with Treading Softly.
I've never been much of a gambler. Some members of our team enjoy a good game of poker or other forms of gambling from time to time. Personally, I've never been one to imbibe in such activities. Part of the reason is that I don't like losing money. I only like winning.
When it comes to gambling, there's a common saying that you should never bet on a "sure thing." Technically, a sure thing is something that has almost 100% chance of success. Too often, people believe that they're facing a sure thing and put too much money into it, and end up losing more than they can afford to lose.
All too often, investors fall into the same mindset of believing that whatever pick or investment they're looking at is going to be a sure thing – putting more money into it than they should. One way to combat this is to have strong portfolio management rules, rules that help govern how you invest, where you invest, and how much you invest to ensure that you don't let your emotions get ahead of you. Many investors claim to be low-risk investors with capital preservation as their top goal. Yet many of those same investors also are willing to pile into what they believe is a sure bet. Lately, it seems that AI investing is all the craze. Before that, it was, trying to find the next Amazon ( AMZN ) or Netflix ( NFLX ).
As a professional income investor, I enjoy investing in the market for income. There's nothing more sure than cash in your hand. My investments pay me cash into my hand month after month. That's money that no one can ever take away from me. Today, I want to look at two lower-risk investments that will provide you with excellent income month after month. These are the types of investments that you can buy, leave in your account, and not have to babysit because you know that they will continue to pay you the income that you so desperately need.
Let's dive in!
Pick #1: Realty Income – Yield 6.2%
Interest rates are rising, and the market is selling real estate investment trusts, or REITs, like they are going out of style. Okay, so maybe they aren't so stylish anymore. I've been accused of being out of style before; I can handle it.
Yet the funny thing about fashion is that what fell out of style will return to style again. Stocks aren't so different – the out-of-favor sectors will rise again in the future.
It's funny; if you talk to many investors, they will tell you that real estate "can't survive" high-interest rates. There are a lot of benefits that low-interest rates provide for REITs. After all, real estate lends itself to using a lot of leverage. The leverage REITs typically use today is much lower than what was common a few decades ago but is still high relative to many other businesses. Nonetheless, Realty Income Corporation ( O ) survived and thrived through the 70s and 80s when interest rates were much higher than they are today.
When O started trading publicly, the 10-year Treasury (US10Y) was 7%. The business model worked, and it worked well. Yet, in the late 90's, the Internet was the newest craze. Like many good dividend-paying stocks, O lagged while anything with a "dot com" in its name got a crazy valuation. Dividends were for "old" guys. Everyone "knew" that the best way to become a billionaire was to buy dot-com lottery tickets. Buying boring dividend stocks like O was so uncool.
It was also very smart.
O was particularly strong during the Dot-Com bust, as investors ran away from Growth stocks and started favoring stocks that produced a solid income.
Fast forward to today, and O is a Dividend Aristocrat, having paid 639 consecutive monthly dividends and 104 consecutive quarterly dividend raises. Yet its share price has declined to $50, a price comparable to where it traded during the COVID panic.
It might not be stylish today, but I'm adding more O to my holdings. When income comes back into style, and investors are looking to pay a premium, I will already own O, a powerful dividend-growing machine!
Realty Income reports earnings on November 6th.
Pick #2: PFFA – Yield 10.9%
Preferred shares are considered equity, but they are also "fixed-income" in that they provide predetermined payments. As a result, interest rates have a significant impact on the price of preferred shares, like they do for bonds.
Thanks to the Fed, we are seeing an extended buying opportunity in the fixed-income markets. Interest rates are high, but they aren't going to be high forever. I strongly believe we will look back at the days when so many opportunities were trading at 8%+ yields, and wish we had bought more. Unless of course, you are following the Income Method, then you already are buying more and will be enjoying the dividends for years to come!
Virtus InfraCap U.S. Preferred Stock ETF ( PFFA ) is a great option for investors looking to increase their exposure to preferred equity. PFFA is a unique exchange-traded fund, or ETF, in that it has adopted many of the practices that are more common in CEFs (Closed-End Funds). Most ETFs choose an index and simply follow it according to a predetermined formula. Nobody makes the picks, nobody determines the allocations, and the ETF just buys or sells at any price for no reason other than the index is buying or selling it.
For years, CEFs have set themselves apart with active management. Since the fund is "closed," the manager has to work with the assets they have and try to maximize the return. To aid in this effort, many CEFs will use leverage to amplify returns.
PFFA is an ETF. This means that the assets under management are not fixed. PFFA creates and retires shares as investors buy or sell. This keeps the share price trading close to NAV. Yet it manages its portfolio more like a CEF, utilizing both active management and leverage. Every decision to buy or sell shares is made by the manager and grounded in their outlook for the market.
This has led to some dramatic outperformance relative to peers like iShares Preferred and Income Securities ETF ( PFF ), a more traditional ETF that follows the index blindly and does not use leverage.
On the positive side, investors in PFF can rejoice that the expense ratio is only 0.46%, a bargain compared to PFFA's 1.8% expense ratio. (Note that total return and the dividend are after all expenses). Some folks like to get up in arms over how much money the manager is making; I'm much more concerned about how much money I am making.
PFFA's success is thanks to buying undervalued investments. For example, Crestwood Equity Partners Preferred Units ( CEQPPR ) have been a top two position of PFFA, and thanks to the pending acquisition of CEQP from Energy Transfer ( ET ), the price has climbed significantly. CEQP preferred has been one of our favorite investments as well. In fact, if you look at the top 10 holdings, you will see several investments that I have written about frequently. Source .
I've said it before, if we were to have a preferred ETF, it would look a lot like PFFA. This makes PFFA a natural fit for those looking to double down on preferred shares and benefit when interest rates reverse.
Conclusion
With O and PFFA, we are able to get reliable monthly income from two lower-risk investments. One holds a vast empire of real estate that is tied to very straightforward triple net leases, allowing them to enjoy strong cash flow as well as low-interest debt, as most of their debt was generated well before this recent spike in interest rates. The other allows us to benefit from heavily discounted preferred security pricing, enabling that fund to generate vast amounts of income, which it pays its holders. Together, they have yields up to 10%, allowing your low-risk portfolio to earn outstanding income well beyond what the market typically provides.
When it comes to retirement, you should never put all your money into what you think is a sure bet. You should have various high-quality holdings. You do not want to bet the farm on a single investment. This is why I encourage all investors to hold at least 42 unique investments. I treat any fund as a single investment because it is overseen by a single portfolio manager, the same way I treat any BDC as a single investment, even though it may contain hundreds of loans. This way, you're able to help insulate your portfolio from your own poor decision-making while your portfolio can help insulate you for your expenses by providing you with outstanding income.
So many Americans struggle to find financial security and financial independence because they rely on simply what the government provides them through Social Security as a main means of living. If you're reading Seeking Alpha, you're probably more advanced than most of those retirees and investors, and that's great. I would encourage you to strongly consider these two low-risk holdings as being positions that are worthwhile in your portfolio to provide you valuable income. The income that you so desperately need can be found in the market.
That's the beauty of my Income Method. That's the beauty of income investing.
For further details see:
Lower-Risk High Income, Up To 10% Yields