Having A Late-Life Drug (Deductible) Crisis? Do This!

Summary

• If I had to choose, I'd choose a drug-deductible crisis over a drug crisis.
• Growing old is tough enough without having to constantly deal with governmental and health insurance onslaughts.
• We'll discuss a late-life crisis and how we kept ahead of it, buying shares in high yield REITs, Government Properties Income Trust and Chatham Lodging.

Recently, I wrote a piece titled, "Did Your Medicare Premium Just Double? Here's How I'm Dealing With It." Over 50,000 readers read that article and left over 700 comments. For background on what I'm about to discuss, I recommend reading it and adding your own 2 cents in the comment section.

Life Crisis

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We're all familiar with the concept of a mid-life crisis.

mid·life cri·sis

noun

noun: mid-life crisis

1. an emotional crisis of identity and self-confidence that can occur in early middle age.

It is often manifested by middle-aged males, who, in a desperate attempt to regain, retain or recapture their youth and vitality, go out and buy themselves a fancy toy. The most common is a shiny new sports car. We're all familiar with this stereotype.

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When we get into late-life, other crises befall us. Here's another that I just faced.

From $0 To $500 Drug Deductible

My wife and I both have Medicare Advantage Care plans. As a condition of having part D drug coverage, we must pay, in addition to our regular monthly premiums, $46 per month to the Medicare Advantage Care plan, plus $32 per month which is deducted from our Social Security benefit. This is just for drug coverage. So, in total, we are spending $78 per month, each, or $156 per month for both of us to have drug coverage.

This does not pay for our drugs in total. We still have to pay various amounts, from $12 to $46 for drug prescriptions, based on what tier the drug falls into in the plan's drug formulary.

Moment Of Truth

Recently, upon placing an order for a prescription, we were told we'd have to pay the full cost of a drug prescription, some $100. "Why?" I asked. I was informed that my health plan, beginning January 1, had instituted a $250 per person drug deductible. This means that each of us has to pay the full cost of our drugs for the first $250 each year, before the plan would pay any part of the costs for drugs, above the $250 threshold, based on the tier if falls into.

I consulted the latest "Evidence of Coverage" manual, and lo and behold, our health insurance company had pulled a fast one on us. We were now responsible for that first $250 of drugs, which represents a total of $500 for the two of us, each year.

So, on top of the $156 per month we pay ($1872 per year) in drug coverage premiums, we now have to pay the first $500 of drug costs before our plan pays a penny towards our drug costs! Since our combined drug costs rarely exceed $500 per year, it's as if we now have a catastrophic drug plan that doesn't cover the usual costs of our drugs and will only pay off for us if we develop a very serious health problem. Our drug costs now total a minimum of $2372 annually if we spend $500 on drugs this year.

I Didn't Take This News Sitting On My Hands

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Those of you who follow me and know me, know by now that I'm a proactive investor. In the face of real-world events that impact my financial security, I take action to remedy the situation as best as I can.

Over the last couple of days, here's what I did.

In my personal portfolio, I bought:

1000 Government Properties Income Trust (GOV) Dividend $1.72 Income $1720

1000 Chatham Lodging Trust (CLDT) Dividend $1.32 Income $1320

Total new income $3040

Both stocks had been on my watch list for sometime. Subscribers were apprised of this and alerted with my target entry prices. Buyers of GOV at our entry price received a high yield of 11.67%. Buyers of CLDT at our entry price received an accidentally high yield of 7.06%.

What's Up With These High Yields?

Thanks to the ten-year treasury spiking to 2.91% on 2/27 and 2.96% the week before, REIT investors are starting to stampede towards the exit. They're falling over themselves, trying to dispose of their shares as fast as they can. This panic is putting extra downward pressure, out of proportion to the threat. This panic is also driving shares on my watch list into my hands at the target entry prices that I determined would give me the yield and income that I want. I don't let the market decide what I pay for a stock. I set the agenda and achieve the goal.

The Fed's Take

Jerome Powell, the new Fed chairman, testified to Congress on Monday, 2/26/18. He assured Congress that his intention was to continue the slow and measured pace of interest rate hikes pursued by his two predecessors, Janet Yellen and Ben Bernanke. Though he stated the economy continues to strengthen and unemployment continues in a steady downtrend, he saw no reason to divert from the slow and steady course. He also stated that based on current economic conditions, three rate hikes as expected by the markets is a correct assumption. Though he acknowledged the recent stock market correction, he stated that he was not concerned from an economic standpoint and the course he's set for interest rate hikes would not be deterred.

It is important to recognize that the Fed is clearly telegraphing a message to us. Along with quarterly reports showing profits rising 11% on average from last year's comparable quarter, the message is that raising rates is consistent with a strengthening economy to keep it from over-heating and to keep inflation in check. The Fed is getting ahead of the curve to smooth out the final stages of this long economic recovery. When rates are rising in a strong economy, it is a good sign that companies, including the REITs, are doing well, and that continued profitability is expected. In other words, slow and steady rate increases should not only be expected, but they are appropriate in today's economic environment.

My Take

Ben Bernanke proved his word could be trusted when he embarked on a slow and steady approach to increases in the Fed Funds rate. Ms. Yellen stated her intention to follow the same course when she assumed the mantle of Fed chair. Mr. Powell is following suit, and trying to give assurance to the markets. It is clear the Fed has decided the economy is growing strongly enough to withstand the impact of slowly, moderately rising interest rates. Taking these stewards of the central bank at their word has proved profitable for those of us interested in growing our income.

Every time the market is spooked by a rate hike, the dip created by investor panic in interest-sensitive stocks proves that taking a dip into the pool is well-worth taking. The accidentally high yields thus created by compressed stock prices has proved a boon to income creation and growth.

Historically, there have been many periods when interest rates rose slowly and REITs performed well. As long as the Fed abstains from any sudden, large rate shock, REIT stock prices normally recover from these panics. That's when investors say, "I should have bought those REITs when they were so cheap and the yields were so high."

Sale Prices

Government Properties had fallen from a 52-week high of $22.99 when we bought additional shares on sale, 36% off.

Chatham Lodging Trust had fallen from a 52-week high of $23.91 when we bought additional shares on sale, 22% off.

Both companies had recently reported AFFO off slightly from last year's comparable metric. Even so, the payout ratio came to around 71% using current dividend rate and current AFFO (adjusted funds from operations).

Both companies reported AFFO that comfortably covered their dividend payments. Forward guidance on AFFO was good as well. Knowing that dividend coverage is solid, we entered our target entry limit prices and they were executed.

As indicated above, FFO of $1.61 easily covers the $1.32 dividend and still leaves room for dividend growth.

Problem Statement

Our health insurance company, as stated earlier, introduced a combined $500 drug deductible, bringing our total out of pocket cost for drug coverage to $2372.00 annually.

Problem Solved

In order to neutralize the negative impact these drug costs would have on our financial situation, we took proactive steps to cover those costs. The purchase of GOV and CLDT increased our annual portfolio personal dividend income by $3040.00.

$3040 new income minus $2372 drug costs = $668.00 surplus

These two equities are also owned in the Fill-The-Gap Portfolio, which derives its annual income from these portfolio constituents:

Constructed beginning on 12/24/14, this portfolio now consists of 21 companies, including AT&T Inc. (T)., Altria Group, Inc. (MO), Consolidated Edison Inc. (ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (MAIN), Ares Capital (ARCC), British American Tobacco (BTI), Vector Group Ltd. (VGR), EPR Properties (EPR), Realty Income Corporation (O), Sun Communities Inc. (SUI), Omega Healthcare Investors (OHI), W.P. Carey, Inc. (WPC), Government Properties Income Trust, The GEO Group (GEO), The RMR Group (RMR), Southern Company (SO), Chatham Lodging Trust, and Iron Mountain Inc. (IRM) and Kimco Realty Corp. (KIM).

FTG Portfolio Update

After reporting disappointing earnings for the most recent quarter and slashing its dividend by 35%, DineEquity changed its name to Dine Brands Global (DIN), and in premarket trading its shares were down more than 12%. Then a funny thing happened on the way to the market opening.

Investors had a change of heart and interpreted slight improvement in Applebee's earnings as a sea-change event. Prices reversed at the opening and climbed for several days thereafter. A meteoric rise from $50 to over $76 in just a few days was enough to convince us to let go of our 100 share position in the FTG Portfolio. Often, a rapid rise in so short a time frame is reversed as short-term investors get antsy to take profits off the table. I believe a short squeeze also contributed to this rise and thought it wise to take our profits as well. No need to be greedy, we sold our shares for $75.87.

Having bought these 100 shares on May 25, 2017, for $47.87, we booked $2800 in profit, or 58.5% in nine months' time. We also earned $291 in dividend payments along the way. We'll add these $7587 in sales proceeds to our current $50,000 in dry powder and wait for the next good opportunity to come along to reinvest for more income.

Conclusion

Don't you wish the federal government operated this way, covering its costs and winding up with a surplus?

I think we'll treat ourselves to a nice dinner on the town tonight, using a few bucks of that surplus.

Your Engagement Is Appreciated

As always, I look forward to your comments, discussion, and questions. Do you invest proactively? What strategies have you employed to deal with income/spending gaps? Please let me know in the comment section how you approach these situations in your own portfolio and how you arrive at your decisions.

Author's note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.

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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Analyst’s Disclosure: I am/we are long ALL FILL-THE-GAP PORTFOLIO STOCKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.