My Oh My, 2 Big Dividends To Buy

Nov. 11, 2021 9:10 AM ETBCX, CVX, GLCNF, GLNCY, PFFA, RLJ.PA, VALE105 Comments

Summary

  • Commodity prices are rising, driving up the cost of living.
  • Higher expenses need higher income to offset it.
  • Here are two ways to grow your income and benefit from rising commodity prices.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »

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Co-Produced With Treading Softly

Have you ever heard the song "My Oh My" by Slade? They were a very popular British Rock band in the 1970s. One of the verses goes like this:

So let's all pull together, my oh my Yeah, let's all pull together, my oh my We can ride the stormy weather If we all get out and try So let's all pull together, my oh my Yeah, let's all pull together, my oh my"

Like the '70s, many retirees today are worried about the inflation storm. When you are no longer working, you cannot rely on getting a raise to make up for inflationary pressures. Instead, you have to manage your assets to ensure that your investments are producing enough cash flow for you to maintain your chosen lifestyle.

Fortunately, you're not alone. Seeking Alpha has provided us with a fantastic platform for sharing, debating, and discussing investment ideas. I'm thrilled to be a part of it, and I have learned as much as I have taught. When we all pull together, we can do so much more than we can alone, my oh my!

Today, I'm excited to talk about two excellent income choices within our current market environment. Commodity prices are rising sharply - the building blocks of our society are getting costlier. Meanwhile, Central Banks all around the world have little appetite to combat rising levels of inflation. More than ever before retirees need high levels of current income. Dollars today are more valuable than tomorrow's dollars. Investments that depend on you locking up money today for a "big payoff" tomorrow are paying you back in less valuable dollars.

Wise investors know that when commodity prices are rising and income is needed, you can often achieve higher levels of income using funds because their cost of leverage is lower than the average investor.

Let's look at our two excellent funds that will hopefully make you exclaim "My oh my!" as high levels of income pour into your account.

Pick #1: BCX - Yield 5%

BlackRock Resources&Commodities Strategy Trust (BCX) is a closed-end fund that's a "one-stop-shop" for inflation hedges. BCX invests in energy, mining, and agriculture - three sectors that outperform during inflationary times.

BCX Fund Sector Breakdown

- Source: BlackRock

BCX takes a relatively low-risk approach to these sectors by investing primarily in large caps. More than 80% of the companies it invests in have market capitalizations in excess of $10 billion. BCX then improves income by writing call-options on 30%-40% of its holdings. In BCX's holdings, you will find companies like oil major Chevron (CVX) and large miners like Vale S.A. (VALE) and Glencore plc (OTCPK:GLNCY).

BCX came into the year very strong as the market worried about inflation. That cooled over the summer in the face of the Delta Variant. Recently, we've seen a break to the upside for BCX's net asset value. NAV climbed materially in October as inflation is coming back into focus and the world deals with the risk of energy shortages and continuing shortages of numerous raw materials.

BCX NAV and Price

Note that NAV climbed, but the BCX's price trailed. BCX is now trading at a 6% discount to NAV. This is the best time to buy a CEF, when NAV is making a strong move up, but the price has not caught up.

We have been warning on the dangers of inflation and how the Federal Reserve is unlikely to do anything about it. A position in BCX is one of the best ways to hedge yourself against this risk as the next commodity supercycle is in its early days.

Take advantage of this near-term dip and add some BCX to your portfolio before the discount fades away.

Pick #2: PFFA - Yield 7.6%

When it comes to preferred shares, this is an environment where it's very important to be selective. As "fixed-income" investments, preferred shares are seeing pricing pressures similar to bonds. Many preferreds are trading above par and are trading at a very low "yield to call". Preferred shares can do an excellent job reducing volatility and providing an above-average dividend yield, but we must be selective - choosing opportunities that are trading at a high yield and have reasonable yield-to-calls.

This is where Virtus InfraCap U.S. Preferred Stock ETF (PFFA) comes in. We have said before, if HDO created a preferred ETF, it would look a lot like PFFA.

Most ETFs are passive, and simply mirror a particular index, buying or selling stocks based on a predetermined formula. This allows the ETF manager to put in very little effort for their fee. There's no person making the decision to buy or sell a certain stock. This can create risks that obviously poor investments might be bought, while very good investments are passed on because there is no human making the decision. In the preferred sector, this is extremely dangerous.

PFFA is different. PFFA is actively managed. The manager is doing the math to make sure a purchase makes sense, makes sure the purchase is achieving targeted dividend goals, and that the yield to call is not low.

This has led PFFA to have large positions in stocks like South Jersey Industries, Inc. 8.75% Equity Units Due 04/01/2024 (SJIV), yielding 8.5%. SJI is the largest natural gas utility in New Jersey. SJI has raised its common dividend every year since 1999. With energy demand rebounding, SJI is well positioned to see growth, making SJIV even more secure. In addition to a generous dividend, the price has upside since it's convertible into common shares.

PFFA's second-largest position is RLJ Lodging Trust series A Preferred (RLJ.PA), a preferred share that is a busted convertible and cannot be called. Since it cannot be called, PFFA can collect its 6.8% yield indefinitely. Some SA authors have been declaring that a dividend cut from PFFA is inevitable. While they might be right for passive ETFs like PFF, for PFFA they are missing the power of active management which has identified quality picks that provide a high yield and have reduced (or even no) call risk.

PFFA is able to boost its dividend even further by using leverage. Since it's buying preferreds at good prices, the 20%-30% leverage that PFFA uses helps boost the yield, and with its active management, PFFA can deleverage to control downside risk during a crash.

PFFA is likely going to be raising its dividend within the next year. Which makes it stand out that much more against peer ETFs that will see reducing dividends. This is why PFFA is our preferred ETF of choice at HDO!

- Source: Getty

Conclusion

An excellent inflation hedge by investing in a fund focused on commodities and an outstanding preferred ETF yielding over 7%! My oh my! These are generous dividend-paying funds that retirees and income investors will benefit from!

I've been writing and investing for a long time. I have seen popular phrases come and go. I've seen styles change. The "cool" lingo of my youth is no longer popular. Yet through all phases of my life, I've never seen people uninterested in earning more income and earning more money than they have been previously. We all need income to pay our bills. We all need to protect our finances and families from losses and financial ruin.

These funds provide not only protection from inflation but also provide strong reliable and stable income to enjoy through the decades of your retirement.

It's getting dark and cold earlier lately. A perfect night for a fire to enjoy the crisp air. I hope you take some time to be thankful for the blessings in your life and take time to use these funds or ones just like them to enrich your income streams.

If you want full access to our Model Portfolio and our current Top Picks, feel free to join us for a 2-week free trial at High Dividend Opportunities.

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This article was written by

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Disclosure: I/we have a beneficial long position in the shares of PFFA, BCX 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.

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