Retirement: The Power Of Passive Income

Jul. 30, 2022 11:00 AM ETPDI, RLJ.PA, TPVG151 Comments


  • What kind of money do you demand that your money earn?
  • Everything has a price as well as a value – they're rarely the same.
  • We look at yields up to 12% while we dig deeper.
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Origami dollar seedling being watered with coins

Richard Drury

Co-produced with Treading Softly

What is income worth to you? We all have various desired "returns" from our investments. We aim for an average yield of 8-10% for our Model Portfolio in High Dividend Opportunities. Sometimes we stray lower and often are well above our benchmark target for common equity and funds. We have different targets for preferred securities or bonds.

Some securities trade entirely on the market's value of the income it produces. I think of RLJ Lodging Trust, $1.95 Series A Cumulative Convertible Preferred Shares (RLJ.PA). While tied to a hotel REIT, the underlying business doesn't have much impact on price. RLJ has a very healthy balance sheet, and its ability to pay the preferred dividend, even in the midst of the COVID impact on hotels, isn't a question. RLJ-A trades based on how the market values receiving $1.95 annually. The market currently thinks it should get 7.5% returns to generate $1.95 annually.

This morning, I bought a ring for my wife as a gift. It had a sticker price, and I paid a negotiated price that was slightly lower but perhaps more than the jeweler was willing to sell it for. I guarantee the price I paid was more than the jeweler will pay to get the replacement stock. So what is the ring worth? To me, more than I paid. To someone melting it down to resell the base metals and the stone? Less.

What is an investment worth? It seems like a stupid question because I can pull up my portfolio at any random moment and tell you the price of any given stock, but that isn't really the value of a stock. It is the price that I could buy or sell that stock for at this second. It is the liquidation value.

Everyone buying believes they are paying less than it is "worth", otherwise, they wouldn't be buying. That includes the person who would buy the shares if I sold. In other words, no matter when I sell, someone believes I am selling at a bad price.

We go through life buying things all the time at a higher price than they are worth to others. It's the root of a capitalist economy: things are worth more to one person than to another.

How do I determine the value of my portfolio? Through the dividends I receive. After all, my purpose for buying stocks is to provide a healthy income throughout my retirement.

Let's look at some examples.

Pick #1: PDI - Yield 12.3%

PIMCO Dynamic Income Fund (PDI) is a great example. If you ask the market's opinion, it has lost value over the past year. The price that buyers are willing to pay and the price that sellers are willing to accept has declined.

Yet today, I am collecting a higher dividend than when I purchased PCI. (The predecessor was combined into PDI). Additionally, that dividend has significantly better coverage. As interest rates rose from March through May, PDI's dividend coverage expanded to 180%!



PDI has $0.71 in undistributed taxable income, implying that there are very good odds of a special dividend this year.

Let's review, what happened to PDI since last year:

  • Paying the same monthly dividend (a higher dividend for PCI investors like myself)
  • Has seen its dividend coverage improve substantially.
  • Went from having ($0.08) in UNII causing many to fear a cut, to having $0.71 in UNII suggesting a special dividend is likely this year.
  • Receiving higher yields as old investments mature and are reinvested, supporting higher future earnings.

Put me in a time machine, send me back to last year, so I can tell myself that the dividend will be more secure than I believe it is, that I will get a special dividend next year, that dividend coverage would improve materially, and that the future outlook for earnings would improve. Are those things that would make PDI more valuable to younger me, or less valuable?

Yet as we go into the future, these things have lowered the market's opinion of PDIs value! The reason is that PDI holds loans, and the price of loans has declined causing NAV to decline. Other investors are selling loans of all kinds hand over fist, and they are willing to sell them at bad prices. Too bad for them.

I'm getting over 12% yield on any new capital invested or dividends reinvested. In addition to that, I'm also likely to receive a special dividend in December. As interest rates rise, it will put downward pressure on PDI's NAV, but at the same time, it will increase the number of future dividends that it will pay. Which is more important to me? What my neighbor will pay me for PDI tomorrow, or the dividends I receive?

To me, the answer is obvious. I don't care that the pawn shop will only pay half or maybe less of what I paid for my wife's new ring. If you think I'm going to panic sell it you are out of your mind. The value I get isn't from the liquidation price. Now if someone wants to sell me some jewelry for half price, I'll happily stock up for future gifts.

With your investments, don't worry about the liquidation value of your investments. Worry about whether the income from them is stable, whether it is becoming more stable, and whether it is improving. If it is, then I suggest buying more income while the market throws its fits. In the long run, the market will shoot up. Those who are bailing out and selling into the bear markets end up losing in the long run. If the market wants to sell me PDI at a +12% yield, who am I to pass on a sale like that?

Pick #2: TPVG - Yield 10.3%

TriplePoint Venture Growth (TPVG) is a BDC (business development company) that invests in "venture stage" companies. These are companies that have received several rounds of venture capital funding, have started generating significant revenues, and are preparing for an IPO within a few years. (Source: TPVG Investor Presentation)

TPVG Investor Presentation

TPVG Investor Presentation

While many BDCs might invest in companies that are likely to be privately owned indefinitely, TPVG invests in companies with a clear exit plan. Venture capital partners have already provided equity funding. TPVG provides a debt investment, often receiving warrants or equity kickers that will be valuable when the borrower IPOs.

TPVG has executed this strategy with great success over the years. I'm sure you recognize the names of a lot of the companies that were or still are TPVG customers.

TPVG Investor Presentation

TPVG Investor Presentation

But what about now? If you have glanced at the stock market, you might realize that now isn't a great time to IPO.



The goal of an IPO is to raise capital and sell equity at a high price. The company founders, original investors, and venture capital investors have been sitting on illiquid investments for many years. They had a vision for the company and tied up capital to support it. The IPO is their opportunity to cash out and realize gains.

With many well-established companies down over 20%, it isn't the best environment to try selling something new to the market. Investors who are losing money on their old favorites are not going to be eager to plow money into something new. Firms that don't actually need the capital aren't going to risk an IPO in an unfriendly market.

Year-to-date, IPOs are down 83% by number and down 95% in capital raised.

(Source: renaissancecapital)

Renaissance Capital

Renaissance Capital

IPOs have been extremely rare, and the IPOs that happened did very poorly. IPOs are TPVG's exit plan, so this terrible environment for IPOs is likely one reason why TPVG has a very weak valuation.

TPVG has frequently traded at a premium to NAV, often at a 20%+ premium to NAV. Today, it is trading at a 3% discount to its $13.84/share NAV.

Data by YCharts

Historically, when TPVG started trading at a discount, it has been a great opportunity to buy. Throughout all these gyrations in valuation, TPVG's dividend has remained unchanged, with a few special dividends thrown on top over the years.

2022 is likely to be the slowest year for IPOs since TPVG has been publicly traded. This year, TPVG might not have any exits at all. It would probably be best for TPVG if every single one of its borrowers held off on an IPO because an IPO today is not likely to fetch an attractive price.

What does this mean for TPVG? Well, most of TPVG's profit doesn't come from IPOs. TPVG's recurring profits come from collecting interest on their debt. Most importantly, it is through interest payments that TPVG funds its dividend. The excess earnings from IPOs usually are paid out through the specials, which are fun but are typically smaller than the quarterly recurring dividend.

If borrowers are not going to IPO, what are they going to do? They are going to pay interest longer. Since many of these loans are floating rates, and most of TPVG's leverage is a fixed rate, TPVG collects even more interest when rates rise.

TPVG Investor Presentation

TPVG Investor Presentation

This analysis assumes that credit spreads remain the same, and they aren't. Across all debt classes, credit spreads are rising. So lenders are making even more money on new loans.

TPVG is making more money because of these conditions, its dividend is more secure, yet its share price is down. All I can say is thank you to the market as I buy at double-digit yields.




What is income worth to you? That's something only you can answer for yourself. The market has oversold various excellent income opportunities like TPVG and PDI.

This means you can not only buy them here and get outstanding income now, but as the market exits the bear and returns to the bull, you can enjoy a sizable unrealized gains cushion. I live on dividends and invest for income, but I don't shy away from capital gains either!

Retirement requires money, and most things in life do, don't they? Everything has a price tag attached to it. So when it comes to the market, I am going to buy the best possible sources of income.

I have a set target yield I try to achieve with any investment entering my portfolio. Markets like this make it much easier to achieve that target and allow any dividend reinvestment to compound my income at an even higher and faster rate.

That's the beauty of income investing and dividend investing. Don't miss it! Take advantage of it while the market is offering you amazing opportunities.

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This article was written by

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