Adding Stability To Your Portfolio Doesn't Mean Giving Up High Yield

Includes: JCAP, TRTN, WY
by: John Windelborn

Each of these three stocks yields over 6%.

These three stocks offer a good mix of "peak pricing", mixing both cyclical and anti-cyclical business models.

None of these three industries are going to go away anytime soon, leaving you less stressed with your long-term investments.

I consider myself a value investor first and a high-yield or income investor second. These two styles of investing frequently line up and that is where I focus the majority of my time researching and entering/exiting positions. Higher-yielding stocks have the psychological benefit for me in that I don't have to fret over the daily fluctuations in the share price, nor do I have to watch all of my unrealized gains disappear in a downturn like stocks that don't pay a dividend. As long as the investment thesis remains intact and shares aren't overvalued, I can simply hold and collect a steady stream of income with which to reinvest.

Speaking of stock market downturns, this past week has been a rather unpleasant for the broad market, with the S&P 500 (SPY) down 2.4%, and down 5.7% for the month.

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The sell-off in oil (USO) has been nearly a 16% decline in the past 10 days. The flight to safety has brought the Treasury bond yields down and mortgage REITs have taken a beating, with one of my larger positions, the UBS ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN Series B (MRRL) down 4.86% for the week. While periodic market pullbacks are not only expected but also healthy, seeing your computer screen light up bright red for multiple days in a row can be nerve-racking.

Investors such as myself don't want to abandon our risk for the low rates of a bank CD or a bond fund. This is why it is nice to spread out your high-yield plays into different sectors and styles. Many people falsely believe that a high yield alone makes something a poor or risky investment. That is simply not true. The dividend yield of something is a function of the current share price, and has nothing to do with the underlying financial health of the company. Yes, sometimes problems with a company can precede a dividend cut and the accompanying drop in share price and soaring yield can clue you in to those problems. However, there are several stocks out there that have strong balance sheets and are paying out hefty dividends. Even better, these stocks are somewhat defensive in nature and will add stability to a volatile portfolio. I will briefly talk about three of my favorite such investments from my own portfolio (Some readers like when an author has "skin in the game" as it naturally lends a higher degree of conviction).

Best-performing position for the past week: Jernigan Capital (JCAP) +0.05%

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Jernigan Capital is a storage REIT that I have written on recently, and since I recommended it, it has returned a mere 1.5%. However, there is an upcoming dividend, the annual yield is 6.6+%, and it has beaten SPY by 5% in the past month and 9.3% in the past year for total return.

JCAP is a unique player in the self-storage space. Instead of simply owning properties outright and using massive scale and efficiencies to drive profits like the big players, it makes loans to storage owners and developers. These loans are made at an interest rate of 6.9% with a 49.9% future profits interest and right of first refusal. While these loans can typically generate "mid-to-high teens unlevered IRR", the beauty of the investment portfolio is that JCAP will usually acquire the property after stabilization. This shifting of the riskier-style development loan into a regular income-producing tangible asset means that over time JCAP is not only growing revenues but also increasing profit visibility and stability.

Image from April 2019 Investor Presentation

Okay, so why do self-storage properties make good, stable investments? Times of economic disruption and a slowdown in the economy shake up people's lives. Instability helps drive demand for storage space, whether it's downsizing a housing situation, moving for a new job, or just the overall trend of millennials flocking to live in tiny, expensive apartments in the heart of the city. As Hoya Capital Real Estate also points out in his article on the storage REIT industry, "nearly half of renters lease their space for more than two years". Add to this fact that the millennial generation accounts for nearly a third of the residential demand of self-storage, and you have a solid investment thesis. You have an investment that is simple to operate, has clear demand drivers, paying out a 6.6% yield that is easily covered by its rapidly growing earnings. Oh, did I mention JCAP historically trades roughly in line with tangible book value and there is a clear path to book value reaching $26 by 2022? A share price gain of 23% in that time, coupled with a 6.6% dividend, is a very safe and predictable ~13% gain per year.

Second best-performing position for the past week: Triton International (TRTN) -0.92%

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Triton International Ltd. is another stock that I have recently written about. This one is a little odd, because it looks a lot riskier than it actually is. There is a lot of volatility on a daily basis and on a rolling month basis. However, the stock has remained relatively range-bound between $30 and $36 over the past year. This has given swing-traders many opportunities to make a good profit, buying at ~$30 and selling after pops.

For the more patient investor, I believe that this is a classic case of a market being caught up in headlines and ignoring the fundamentals. The media tells us about the latest tariff tweet and suddenly everyone thinks that a global recession is happening and all trade will grind to a halt. Instead of joining the panic, consider the following chart of international shipping:

Source: UN 2018 Review of Maritime Transport

Except for the biggest economic disaster of the modern era, international maritime trade has enjoyed healthy growth rates for practically all of the past 17 years. The 2001 tech bubble and resulting financial issues didn't even cause growth to go negative. The other nice thing to note is that the time immediately after economic turmoil shows a massive rebound in trade growth, far surpassing the prior damage.

Since Triton leases out its fleet of shipping containers, worldwide trade growth is a driving factor for its relevance and its profits. The leases are not short-term contract leases though, they are longer leases, and nearly half of them mature in 2023 or later. This means that earnings are less lumpy and more predictable than you might think.

While debt is high at 7.4B, TTM free cash flow of $409 million is encouraging. That FCF represents $5.35 per share and a current FCF yield of 18.1% based on the closing price today. In addition, TRTN sports a nearly 6.9% yield and the company has room to increase it sometime soon. Management has also bought back $82 million worth of shares in the past quarter (2.9% of the float), and a new $200 million share repurchase program was just authorized.

TRTN is also no stranger to growth, and plowed enough money into capital expenditures to increase its revenue-earning assets, its fleet of shipping containers, by 6.6% YoY. Despite this, occupancy remains high at 97.6%, which is a number that traditional safety REIT landlords would be very happy with. With a leased shipping container industry market share of over 50%, TRTN has demonstrated its ability to outperform its peers.

Worst-performing stability position for the past week: Weyerhaeuser (WY) -2.64%

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This is another pick that looks "wrong" at a glance. Down nearly 39% in the past year, it looks like it would send your net worth ablaze (in the bad way). The investment thesis behind timberland is two-fold: trees/timber/lumber appreciate in value over time as trees get bigger and new trees grow, and inflation helps push prices higher (for once it's nice to be on the same side of that fight). Ideally, if lumber prices decline, you can just harvest fewer trees and wait until prices go up to be more aggressive. You're also holding the land that the trees are on which means that you are essentially also an extremely patient land investor. Weyerhaeuser, just like the other timberland companies, sells acreage when prices are favorable and reinvests into cheaper land.

If JCAP can be considered anti-cyclical, WY is unfortunately more dependent on the economy at large for good lumber prices. Construction is still the main source of demand for lumber, so an economic slowdown is not a great thing for WY. While Weyerhaeuser has been a bad investment after lumber prices came back down from their peak a year ago, at these levels, the stock looks attractive.

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After reading Andrew Hecht's article on WY and doing my own research, I initiated a position in WY on 5/28 at $22.60 and intend to hold until the next run-up in lumber prices. While there is short-term pain in the company with prices so low, WY will make plenty of money when prices inevitably go higher. The company has been around since 1900, and has demonstrated the ability to weather the highs and lows. While you hold shares here at what looks like a bottom, you are being paid a 6% dividend to wait. The world will always need lumber and they're not making more land anytime soon. These facts make this stock easier to hold, knowing that any downswings are just short-term distractions.


High-yield doesn't always mean high-risk. The above three names should have no problem continuing to chug along, and with its 6+% dividends, it doesn't need to accomplish a lot to offer a decent return. Share price declines just mean that your dividend reinvestment gives you more shares. While those invested purely in share price appreciation agonize over their loss of months of progress, you can smile knowing that your portfolio is not just holding up alright, but also growing.

Disclosure: I am/we are long JCAP, TRTN, WY, MRRL, VIIIX. 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.