2023-04-20 07:35:00 ET
Summary
- Does your retirement planning rely heavily on Social Security benefits?
- Social Security is projected to struggle from 2033; what are your plans?
- Dividends can help liberate your retirement planning from political promises.
- Two picks with up to ~10% yields to help you retire on your terms.
Co-authored with "Hidden Opportunities."
Q1 2023 ended with a scare for retirees. According to new forecasts issued by trustees, the Social Security program is expected to run short of cash to pay promised benefits in about ten years, and a key trust fund for Medicare will run out of funds by 2031. Source .
CRFB.org
The average Social Security retirement benefit in January 2023 was about $1,825, or $21,903 annually (the average disabled worker and aged widow received slightly less.) Social Security provides the majority of income to most older adults. For about half of this group, it provides at least 50% of their income, and for about 1 in 4 older adults, it constitutes at least 90% of their income, according to multiple surveys and the Census Bureau study.
Aside from concerns about benefit cuts, retirees must consider the following:
- Inadequate Cost Of Living Adjustments ("COLA") - Social Security benefits have lost almost 30% of their buying power since the year 2000, according to a report by the Seniors Citizens League. Despite nominally keeping up with the average 2.2% inflation, the program has fallen short of keeping up with the soaring costs of critical expenses like healthcare.
- Insufficient replacement of former income - Retirees typically expect 70-80% of their former income to maintain their living standards in retirement. For an average earner, SS will barely meet 40% of their earnings, and the income replacement is even lower for higher earners.
In short, you need a more reliable source of income that takes care of most of your retirement needs. Have you considered dividends? At "High Dividend Opportunities," we are buyers of quality dividends with a 'model portfolio' of +45 solid "super high yielders." With an average +9% overall yield, we aim to secure our retirement and aren't counting on legislative changes or proposals and promises from politicians for our needs. We build our own social security for our retirement. You should do so too!
Here are two picks with up to ~10% yield to produce a recurrent income during your retirement that works for you.
Pick #1: RNP - Yield 8.5%
REITs (real estate investment trusts) and fixed income are both beaten-up asset classes in current market conditions.
The REIT industry's operating performances remain robust despite rising rates because real estate prices and rents benefit in an inflationary environment, and preferred securities provide much-needed stability to a retirement portfolio.
REITs across the board and preferreds issued by banking and insurance companies are notably on sale and present compelling long-term buy-and-hold-for-income opportunities. This is why we like Cohen & Steers REIT and Preferred Income Fund ( RNP ) particularly attractive, since it brings these two dividend-friendly asset classes together to serve our hunger for income.
RNP 's primary investment objective is high current income through investment in real estate and diversified preferred securities. Banking and insurance preferreds constitute 73% of the fund's preferred portfolio. Thanks to the SVB Financial Group (SIVBQ) crisis, the regional bank selloff, and the U.S. banking sector jitters, the preferreds in this industry are trading at deep discounts and sport high yields at current prices. Source .
RNP Factsheet
RNP's top 10 holdings are some of North America's most prominent and high-quality REITs. Notably, 48% and 52% of RNP comprise REITs and preferreds, respectively.
RNP Factsheet
RNP is diversified across 302 holdings, protecting our income from individual companies. RNP employs a 32% leverage with adequate caution. Investors must note that 81% of its borrowings carry fixed interest rates with a 5.2% total current rate of credit.
Cohen & Steers is one of the best-rated asset managers in the REIT sector, with an impressive track record of active management. In the past 15 years, RNP has handsomely outperformed the Vanguard Real Estate ETF ( VNQ ) and the iShares Preferred and Income Securities ETF ( PFF ).
RNP provides substantial flexibility to income investors with $0.136/share in monthly distributions and currently carries an 8.5% distribution rate. This CEF currently trades at a ~2% discount to NAV.
Pick #2: ORCC - Yield 10.5%
BDCs (business development companies) were designed by the U.S. government to help the economy recover from recessions. Naturally, when leading banks get conservative with their lending, businesses are starved of capital needed for sustenance and growth. In response to recent scenes, leading U.S. banking institutions are tightening lending standards, making BDCs significantly more critical for middle-market companies.
Owl Rock Capital Corporation ( ORCC ) is the second-largest public BDC in the U.S. by market cap. It focuses on lending to upper middle-market companies, with most of its portfolio in sponsor-backed companies. We have mentioned in several instances that BDCs borrow at fixed interest rates and lend at floating rates. Rising rates provide a massive tailwind to this sector, as evidenced by growing Net Investment Income ("NII") and increasing dividends in recent quarters.
And these are not risky loans, as one may imagine. 71% of ORCC 's assets are first-lien loans, and ~86% of its asset base is senior secured investments. These fall at the highest levels of a company's capital stack and are paid first if the borrower runs into financial trouble. Source .
February 2023 Investor Presentation
Loan-to-Value ("LTV") is a commonly used term in the mortgage industry, but it helps gauge the asset quality of BDCs. At the end of Q4 2022, ORCC reported an average LTV ratio of 45%, demonstrating comfortable equity cushions to support its investments. This value is below the BDC's target 50% level.
ORCC maintains a very high-quality loan portfolio with a highly selective investment process. Out of 7,800 assessed opportunities, the BDC only closed on 5% last year.
ORCC's portfolio companies maintain a 2.3x average interest coverage, with 90% of its investments performing at or above expectations. Only 3 out of 400 portfolio companies were in non-accrual stages as of Q4 2022.
February 2023 Investor Presentation
ORCC has a healthy balance sheet with adequate liquidity and maintains four investment-grade ratings. The BDC has 47% fixed rate debt at a 4.7% average cost and a ~5.5-year average maturity duration. 98% of its portfolio loans (assets) carry floating rates, giving the BDC massive tailwinds in this hawkish rate cycle.
ORCC was born in 2019 and has maintained a steady quarterly dividend streak since then, with special dividends whenever NII has a comfortable lead over the distribution. Data Source: ORCC Earnings Reports .
Author's Calculation
Through the near-zero rate environment and the uncertainties and hardships associated with COVID-19, ORCC maintained its NII and quarterly dividends. As a result of increasing NII due to this rate cycle, we saw a regular dividend increase in Q4 and a special dividend.
For Q1 2023, the BDC declared a regular $0.33 dividend and a supplemental dividend of $0.04. Annualizing the Q1 total dividend and assuming only regular dividends are paid for the remaining quarters, we calculate a 10.5% yield at current prices.
With ORCC, you have a management team closely aligned with shareholders. As of February 2023, the company purchased $35 million of stock, and $17 million was purchased by Blue Owl, ORCC's sponsor. ORCC also has a $150 million share repurchase plan active from Q3 2022.
With ORCC, you have the characteristics of an outperforming blue-chip BDC with a solid 10.5% yield. ORCC trades at a whopping 14% discount to NAV and presents an excellent opportunity to capture big dividends from this vital industry in current economic conditions.
Conclusion
It has been almost 88 years since President Franklin D. Roosevelt signed the Social Security Act on August 14, 1935. Social Security remains one of the nation's most successful, effective, and popular programs. Due to this popularity and the political ramifications of touching it, it is a hot potato with known structural issues that no one wants to talk about.
Projections clearly show that benefits stand to be significantly reduced over the next decade unless effective legislation is passed. These adjustments (if any) would likely come at the expense of higher taxes for the uber-rich or another increase to the full retirement age.
Are you retiring in 5, 10, 15 …. years? We don't know if SS, as it stands today, will provide sufficient income to support your retirement. Nor do we know if the payments will effectively maintain your quality of living. If your retirement planning highly depends on SS benefits, I urge you to consider a self-sufficient option seriously. At HDO, we have already taken action with a model portfolio of +45 dividend stocks to rely on during retirement. Your retirement should be in your hands! Two quality picks with up to ~10% yields is a good start to retire in the comfort of dividends.
For further details see:
Social Security In Crisis; This Is How To Build Your Own