- You are your best asset.
- This doesn't mean you should let your money sit idle. Make it work!
- Two excellent picks to make your money earn more money.
- Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »
Co-produced with Treading Softly
There was a time in history when people didn't live to hoard cash. It may surprise you to consider how radically different life would be if everything wasn't valued based on a fiat currency. You see the US currency, the Dollar, has no value unless you have trust in the U.S. Government.
Most people have some level of trust. They must do because they keep using their currency.
It was not that long ago that humanity was more focused on just surviving rather than hoarding currency. Tangible assets were valued based on their ability to produce more assets.
- A farm was valuable for its ability to repeatedly produce crops and livestock.
- A windmill was valuable for its ability to grind grains into flour.
- A person was valuable for their ability to craft goods from raw materials.
This viewpoint of hoarding currency has crept into all aspects of our lives. We hoard cash in bank accounts, earning next to no interest for our efforts while banks make a killing with it. We hide money under our mattresses in distrust of big banks. We've grown accustomed to our money doing nothing except existing.
We buy stocks that don't pay dividends hoping they'll accrue value on their own. The company has no need to show appreciation for your partial ownership and often has different values than your own. You're taken for granted.
I reject this idea. I want what I worked hard for to work harder for me.
I learned a long time ago that nothing earns money quite like money does.
These two upcoming picks earn a combined average yield of 7.75%. Using the Rule of 72, we can readily see how quickly our income stream can grow. This means $100,000 invested in them will generate $7,750 annually. Your income will also double every 9.3 years! This means it would only take 41 years for this $100,000 to generate $2.1 million in dividends alone. Reinvest it, leave it, and while you're working away, your money is doing its part. This will work even faster if you are still routinely adding more capital to this portfolio.
After 41 years, your portfolio value would be $2.2 million and generate over $170,000 annually in dividends.
That is a prime example of your money earning you money! Time is the ultimate friend of income investors.
Pick #1: ECC, Yield 9%
Eagle Point Credit Company (ECC) is a CLO equity Closed-End Fund that has recently raised its dividend by 25%. A leveraged loan is extended to the borrower who already has considerable debt or poor credit ratings. These leveraged loans are senior and secured loans. This means they take the first recovery in the event of default and are secured by the company's entire asset base. This helps reduce the risk of the loans and makes them have a higher degree of returns. Collateralized Loan Obligation ('CLO') is a portfolio of leveraged loans securitized and managed as a single security. CLOs are structured as floating-rate instruments, and this makes them an effective hedge against inflation.
CLOs are fundamentally different, better structured financial instruments with a history of strong credit performance than their infamous cousin, Collateralized Debt Obligations, CDO, of The Big Short fame. Funds carrying CLOs sold off due to projections of CLO defaults hitting a record-high 15%. That never happened, not even close.
According to the April LC report, 50% of CLOs had zero defaulted assets, and another 38% had less than 1% defaulted assets. The lagging 12-month default rate is under 3% and continues to improve. During the peak of the pandemic last year, over-collateralization triggers were in effect, resulting in funds being directed to the higher tranche loans. This is a normal process to ensure the CLO does not collapse and is a key safeguard that makes CLOs outperform CDOs or MBS in times of economic sensitivity.
With the economy recovering, payments are now being made to the lower tranches. These payments are actually larger than before due to the reduction of debt tranche balances after prepayments of those debt tranches, making the NAV of ECC grow like a weed.
Note: Do not be frightened by higher than usual expense ratios for these CEFs. CLOs are extremely lucrative instruments that are inaccessible for individual investors. The research and maintenance of a portfolio of CLOs is intense and comes at a price.
We're incredibly bullish on the CLO-focused leveraged loans sector for value, high-yield, and inflation hedge. We expect that as ECC's NAV continues to grow strongly and the U.S. economy strengthens further, another dividend increase may be in the cards. CLOs are in essence a leveraged bet on the U.S. economy. In downturns, volatility is increased, in upturns, their value creation is unmatched. One thing I have learned is not to bet against the U.S. economy, especially when the Federal Reserve is taking a hands-off approach and letting the economy kick into overdrive.
Pick #2: DFP, Yield 6.5%
For conservative investors and retirees who do not like price volatility associated with common stocks or CEFs like ECC, preferred stocks are a great solution. Flaherty & Crumrine Dynamic Preferred and Income Fund (DFP) is a preferred stock CEF that is managed by Flaherty & Crumrine, one of the best managers in the field. The managers target the highest quality preferreds, and they actively manage this fund to maximize the returns to shareholders. They have a strong track record of outperformance and have done well in most interest rate cycles, whether it is in rising or declining interest rates.
DFP is a fund that invests in the highest quality preferred shares. DFP must have 80% of its assets in either investment-grade preferred stocks, or if the securities are not investment grade, the issuing company must have investment-grade debt. This means that DFP owns a lot of preferreds in conservative investments like banks, insurance companies, etc.
We also like another preferred stock ETF: Virtus InfraCap U.S. Preferred Stock ETF (PFFA) with a yield of 7.6%.
DFP is a great companion investment to PFFA, which invests primarily in opportunities that are trading "under par value." The two together provide a lot of diversification.
The recent pullback in market price was not reflected in DFP's NAV. NAV continued to grow, and as a result, DFP is trading at a 7.2% premium. This is close to the lowest premium available all year, providing a great opportunity to add more shares.
Today is an excellent time to realize that money shouldn't be left idle. You worked hard to earn it throughout your working years. Now is the best time for it to work hard for you.
As you work toward retirement, or for some of you, enjoy retirement, do not let your hard-earned dollars sit idly by. Make them work for you. They earn money better than anything else can.
Retirement is a time to enjoy new opportunities and lower stress. Income investing provides the financial underpinning which makes the rest of retirement planning easier. You can focus on the fun stuff and not have to worry about the dollars and cents. That's income investing. That's financial freedom. That's what I want for each and every one of you reading this today.
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This article was written by
Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ECC, DFP, OXLC, PFFA either through stock ownership, options, or other derivatives. 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.
Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities. Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.