2 Great Dividends To Reach $2 Million In Retirement

Summary

• 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 »

Goodboy Picture Company/iStock via Getty Images

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.

Source: Dreamstime

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.

Source: TCW

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.

Data by YCharts

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.

Source: Getty

Conclusion

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.

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.

Comments

[waldipup]

"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."

I get that prepayments on higher tiers of a loan reduce lower tier (ECC) risk ,
But how do they increase NAV?

[PendragonY]

@waldipup

The total amount of the loans that make up the CLO is not changed by paying off some of the higher tranches. The equity tranche gets the amount leftover which is increased by reducing the amount owed to the upper tranches.

[waldipup]

@PendragonY

Oh , the higher tranches are debt tranches , not equity one's .

ECC gets the leftovers as equity.

Hope there's generally enough left over to make that work , I guess they know what they're doing though since they're still standing .

[PendragonY]

@waldipup

The difference between the "debt" and the "equity" tranches have more to do with how they are paid. It all really just debt. And it works for all as long as defaults don't exceed the levels assumed when the CLO was assembled (and so far default rates are well below that). Every tranche benefits when a higher tranche gets a pre-payment of principal. The equity tranche also gets a boost in cash flow (as the other tranches are more bondlike and have fixed payments whereas the equity tranche gets ALL of the cash leftover).

[john boy]

I have a core of mortgage and real estate reits, i have ecc in my accounts . a little scared after the 03 20 plunge, are you worried about the 10 yr bond now at 1.20% and do you trust the ratings companys to rate these traunches correctly thanks

[PendragonY]

@john boy

I trust ECC to manage its holdings well. They have a pretty good track record doing that.

[waldipup]

@john boy

" and do you trust...."

I don't trust no one because

Nobodie Nose Nutin'

But I also want more than the .4% available on cash so I invest in stuff like this when it seems to make sense , but not a fortune in any one entity .

ECC , par example' - So far I've only bought their bonds , chicken that I am!

[PendragonY]

@waldipup

The bonds are a pretty solid investment and quite attractive if you like bonds.

[MegaDivGuy]

DFP reduced their distribution as of May, from $0.165 to $0.1617, or about a 2% drop. Meanwhile, the price is rising, from about $29.20 to $29.97. Perhaps time to look for a pullback.

[Rida Morwa]

@MegaDivGuy DFP will see changes in its dividend as the available yields from preferreds rise and fall. Right now they're about as low as you can get.

[PendragonY]

@MegaDivGuy

Well, that is still above what it paid in 2019 and what it paid at the start of 2020.

[Willie2]

Thanks for the suggestions. However, for retirees, like myself, I propose none of us have 41 years to test these theories.

[SleepyInSeattle]

@Willie2 The theory is flawed, mathematically speaking, as both principal and dividend fluctuate. The rule of 72 applies to a fixed amount in interest received after an initial fixed investment. It requires a fixed rate of return, and while investors can use the average stock market return or other benchmarks, past performance doesn't guarantee future results.

[Rida Morwa]

@Willie2 Regardless of testing them, the immediate boost in income is something you can try out right away.

[waldipup]

@Willie2

"I propose none of us have 41 years to test these theories."

Waddayuh mean Willie?

Da Pahteez Jus' Stahtin'!

[Michael-Ho]

Did you be holding onto this investments when the price plunged 75% last year? If you held on, you lost money. If you sold and did not get in at the bottom, you would have lost a huge amount of capital or missed the gains. .

[PendragonY]

@Michael-Ho

I held ECC last year (and bought more too). I didn't lose money and have collected plenty of juicy distributions as well.

[Michael-Ho]

@Michael-Ho
Did you hold on to these…..

Gotta love these iPhones…

[PendragonY]

@Michael-Ho

Like I said. I held ECC last year (and started buying in back in 2019). I even bought more. DFP is a recent purchase, I held a similar fund back in 2020 (and sold it to move into DFP).

[birder 4000]

Although I like reading these suggestions, I am too conservative an investor to follow the advice. As for NEWT, after reading their financials and studying their web site, I sold mine last year.

[Henry_22]

@birder 4000 Smart move. Neither one of those stocks he recommends will be around in 41 years for you to reach your goal.

[Rida Morwa]

@birder 4000 I respect your difference of opinion, if preferred securities are took risky for you, bonds and Treasury notes are the next less risky choice.

[peter9810]

@Henry_22 WPG ? Perfect example. Recommendations should be quality, not quantity, as observed here. 2-3 daily ?

[Philip K Blakeney]

Very tough break on NEWT TODAY... BOUGHT $2500 between 24.2 and 25.1. Had sold prematurely? for 30, 32.5, and 35. Buy and hold FAILS. Buy and trim saves cash for these buyback opportunities.

Viacp, 100 par, firesaled today at 67.75. Glop/a, b, c firesaled 5 days ago, went down $2, bought back what I sold and will sell again tmrw after they, OMG, rerallied in 2 days.

Buy the dips!!!!!!!!!!!!!
Arr
Newt
Alin/a, b, e
Usac
Am
TNP/F
Viacp

With my 25% CASH

[Rida Morwa]

@Philip K Blakeney Buying dips of good companies is a excellent way to see your income grow

[Faninvestor9]

I'm more interested in how to get the $2mil honestly. Any tips?

[ButscherDoug]

@Faninvestor9 What do you mean by honestly? Compounding is not honest?

[Henry_22]

@ButscherDoug He means compounding with stocks that will be around in 41 years, not these two dogs.

[SleepyInSeattle]

@Henry_22 I couldn't agree more.

[Woke like Jesus aka Guy who thinks]

Not NEWT:( that hurt today.

[Rida Morwa]

@A guy who actually thinks Newt has 2 large dividends left to pay this year totaling nearly $2 a share. At these prices you have 10% yield left just this year. Although switching to a bank NEWT can not be trusted as a high income security after 2021

[Just Scott]

“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.”
Could you elaborate on this.?

[SleepyInSeattle]

@Just Scott you are assuming the stocks' price will not go down and this is the wrong assumption - look at the charts!

[Just Scott]

@SleepyInSeattle
I am not assuming anything. That was copied directly from the article.

[Rida Morwa]

@Just Scott I'm using straight income generated compounded at the same yield for the entire period.

[WiTuLo]

Is NEWT still a buy?

[Rida Morwa]

@steve20 We released guidance to our HDO members: seekingalpha.com/...

[WiTuLo]

@Rida Morwa Is that a yes?

[Phil in OKC]

@steve20 That is an invitation to sign up for a free 2-week trial session and you can read everything that has been written or posted on the NEWT debacle.

[warrenwise03]

Say it with my folks...invest in VTSAX (or similar), not in ECC

[Seneca75]

Surprised you don't think it's important to point out the management fees of some of these picks. For example, $PFFA has total annual fund operating expenses of 1.47%. Quite high. And if you compound that 1.47% over 41 years?? An insane amount of money paid to hold this investment.

[Rida Morwa]

@Seneca75 the fund pays the fees internally so you don't actually pay anything yourself

[Seneca75]

@Rida Morwa of course, but that expense ratio compounded over decades is massive.For example, if I invest $10,000, make 7% avg annual return, and pay 1.47% per year in expenses, in 30 years my $10K is worth $50,266. And the cost of those fees is $25,856. Expense ratios matter.

[Rida Morwa]

@Seneca75 Again the fees are internally paid, so you lose nothing. Do you worry about the price of debt from any stock on the market or the CEOs pay over the span you hold it? I don't count the CEOs paycheck as losses on my investment.

[lioneyes]

what would you recommend for 3 million? ;)

[Rida Morwa]

@lioneyes You'll have to wait and see!

[Philip K Blakeney]

@lioneyes 75% preferred, buy the dips, and 25% common. For safety, that translates into 60, 20, and 20% CASH to buy those dips. Keep the dividends and reinvest yourself. Most brokerages do a LOUSY job reinvesting. If you want something done right...

[jcjk]

Surprised you didn't even mention OXLC which pays 2% more. I see you own both.

[PendragonY]

@jcjk

We like OXLC as well, but right now we like ECC better as it has started increasing the distribution again why OXLC is keeping the extra cash to grow book value.

[jcjk]

@PendragonY Yes ECC increased div but it is still under OXLC's percentage wise by 2%

[Rida Morwa]

@jcjk I like both very much and we have recent coverage of OXLC as well.

[bengraved]

Rida, a bank that you possibly might want to check out. NWBI, yielding over six percent. Raised the dividend this year, last earnings report, beat estimates on revenue and profit. NWBI got a downgrade, which resulted in a dip that could make NWBI a good buy.

[Rida Morwa]

@bengraved Thank you for the suggestion.

[extramoney]

@bengraved
I just doubled down on NWBI this morning aftet it went ex. dividend.

[lateralgs]

Curious, how does any lender manage to lend senior secured loans with first recovery rights covered by the borrower’s complete asset base to a company that is already loaded with debt? Most companies’ prior debt structure would include loan covenants restricting a borrower from assigning “first lien” rights to additional newly acquired debt. I assume the new lender would basically refi the borrower’s entire debt portfolio.

[Rida Morwa]

@lateralgs Many loans are unsecured or only secured by a sub company for example. As such the parent company, with its control of those subcompanies can have debt at its level that is superior.

[lateralgs]

@Rida Morwa

Thanks. I hadn’t thought of it from the perspective of parent and subsidiaries.

[Will104]

@lateralgs

Negative pledge protection in the current market is weak to virtually non-existent

[drjoanv]

Where would YOU call "the bottom"?

[Rida Morwa]

@drjoanv seekingalpha.com/... We just released guidance to HDO members.

[drjoanv]

RIDA....What are your suggestions re: NEWT????

Exactly WHO is "smart money"!!!!

[Rida Morwa]

@drjoanv Smart Money is the term for hedge funds and institutions vs Retail investors.

[gnewmie23]

NEWT today..... wowzer! :(

[Rida Morwa]

@gnewmie23 Retail investors and smart money are reacting to the plans to convert to a bank from a BDC. Retail didn't like it, but it seems smart money is buying the dip.

[gnewmie23]

@Rida Morwa I'm watching it closely today; considering buying the dip. Will definitely not be selling into this dip. Will hold nd possibly buy additional shares once I do some additional due diligence on the news. thanks Rida.

[abacromby]

@gnewmie23
Me too. I notice no words on this recommended stock.
23k vanished.