Get Rich, Get Lost with 2 Big Growing Dividends
Co-produced with Treading Softly
What would you do with an endless amount of money? Would you solve the problems of poverty in the world? Would you buy the fanciest cars and houses and live like a real-world Tony Stark?
A popular mantra for dividend income investors is:
Get rich, then get lost
It basically means using the market to generate high levels of income, then go and live the life you want to live. For some, it will be moving to the mountains or the woods, off the grid, lost in the hubbub of professional life.
Have you ever taken a vacation in a cabin in the mountains? You can experience true silence, no cars, no people – except those you bring with you.
There are places in Tennessee where you can sit and see for miles and miles, hearing only the crackle of the fire you made and the millions of stars above at night.
For many, the possibility of living in such a place is a pipe dream, something they dream of while stuck in their cubic office or bedroom at home. Yet the market offers an avenue to make that dream a reality or your version of it. The prudent, diligent and persistent investor can create a portfolio with truly exceptional income-generating potential.
Today I want to take a moment to suggest two stocks that belong in this type of portfolio to help you roll your income.
Pick #1: OXLC – Yield 12.9%
Be greedy when others are afraid. This is good advice, at least when there is no real danger. At High Dividend Opportunities, our goal is to sift through the high yielding picks and separate those that are high yielding because they are very high risk and those that are high yielding because the market is too fearful.
Oxford Lane Capital (OXLC) is an example of an opportunity that the market is too scared of. OXLC invests in “equities CLOs” (collateralised loan obligations).
What is a CLO? It is a set of leveraged loans called “bank loans”. The manager manages a portfolio of loans and sells rights to the cash flows from the loans.
It starts with the manager accumulating a portfolio of loans. These aren’t business loans your friend’s nephew is starting in his mother’s basement. These are loans to reputable companies that are often publicly listed and still have a public credit rating. These are generally B/B+ rated companies. These loans are “senior secured” loans that sit at the top of the equity stack. They have priority over equity, debentures, and even 2nd lien debt. If you read a 10-Q or 10-K from a borrower, you will see it described as a “term loan”.
After building an attractive portfolio, the manager then seeks to sell “slices”. Institutional investors who are willing to pay a premium are on the front line. When the underlying borrowers pay, the senior “A” level tranches are paid first, then the “B” tranches, etc. Since the investors who buy the tranches pay a premium, the result is that the amount paid to the debt tranches is much less than the amount the borrowers pay on their loans. This excess goes to the “equity” tranche, which is primarily held by the fund manager but can also be traded on the secondary market. These “equity” tranches are what OXLC buys.
The cash flow from these positions is nothing short of incredible, as OXLC has benefited from buying CLO equity positions at very low prices thanks to the COVID pandemic, combined with historically low default rates on noteworthy loans. of leverage. OXLC receives a cash return of 29%! (Source: Investor Presentation Quarter ended December 31, 2021)
OXLC rakes in cash in hand, and core earnings offer dividend coverage of over 200%. The best part is that OXLC has already invested in new positions that are not paid yet. By December, more than 30% of OXLC’s holdings had failed to make their first payment.
Most of these positions ($358 million) are expected to make their first payment by June 2022. This will further boost OXLC’s earnings.
So what is the risk? The most significant risk for CLO equity positions is a spike in defaults. When a borrower defaults, the equity position absorbs the impact. OXLC is well protected against occasional defaults, with a highly diversified exposure to 2,051 loans to 1,650 borrowers. No borrower represents more than 0.91% of OXLC’s assets.
Default rates have been near record highs and are expected to remain low, with Fitch forecasting 1.5% for 2022 and 1.25-1.75% for 2023, noting that the fate of a handful of larger borrowers could lead a default rate of less than 1%. These low default rates mean that OXLC’s cash flow will continue to exceed expectations.
We anticipate that OXLC will continue to retain its excess capital to reinvest in new opportunities. However, as a CEF, OXLC is required to distribute most of its taxable income, so a dividend increase is definitely on the table.
2022 will be a successful year for OXLC, and we can reap an impressive return of 12.9% in the meantime!
Choice #2: BRSP – Yield 8.4%
As investors, we often depend on the management of the companies in which we invest. If your name is Carl Icahn, you can buy enough of a company to get a few seats on the board and exert significant influence over the management of a company. For those of us who aren’t billionaires, we have the ability to vote our stocks, but generally we don’t have enough clout to sway direction. Sometimes management decides to go in a completely different direction than you prefer. It’s a harsh reality of investing that management doesn’t always share your goals.
For this reason, I like companies that set clear priorities, and I especially like when those priorities align with mine. BrightSpire Capital, Inc. (BRSP) did not consult me when choosing a new ticker. Still, I’ll forgive a clumsy ticker that tempts me to apologize every time I speak to the HDO team if management’s priorities align with mine. (Source: Q4 2021 Investor Presentation)
BRSP is a phoenix rising from the ashes of Colony Credit Real Estate (CLNC). It has new management, an entirely new portfolio, got rid of its former external manager, reinstated its dividend and increased it quarterly in 2021. It was a good year, both for capital appreciation and for revenue growth.
In 2022, dividend growth remains high on BRSP’s priority list. Words that were backed up by actions when BRSP raised the dividend another 5.5% to $0.19/quarter in March.
BRSP is a commercial mortgage REIT focused on senior and multi-family mortgages. BRSP has significantly improved the quality of its portfolio in 2021.
Most notably, it got rid of its non-performing loans, drastically reduced development loans which were higher risk and loans which paid “PIK” (payment in kind), where interest is added to the principal of the loan instead of being paid in cash. These loans often have higher returns, but they carry higher risk. Developers vacate a vacant property if they decide the deal doesn’t make financial sense. The PIK is only good if the borrower can possibly pay the principal. Cash on hand is king, especially in a high inflation environment.
BRSP has steadily increased earnings, with adjusted distributable earnings rising from $0.20/share in Q4 2020 to $0.27/share in Q4 2021. BRSP continues to trade at a massive discount to value accountant, even if the cash represents more than $2/share of his assets!
As 2022 progresses, BRSP will continue to deploy its available cash. They generate higher profits and support a higher dividend while maintaining a responsible approach. BRSP invests in variable rate mortgages, so rising rates will lead to even higher cash flow.
We love the whole mREIT business sector right now, and BRSP is hands down the best value at its current prices.
OXLC and BRSP offer you high yields right now and the prospect of dividend growth in the future. This is the perfect opportunity for an income investor. Even without dividend growth, both now provide you with income above inflation and allow you to compound your income month after month and quarter after quarter.
So what will you do with producing your income portfolio when you retire? The sooner you get income, the greater the income production will be. Are you 20 and only have a few dollars to save? Get started and let that money pay you dividends for decades. You will be amazed at how quickly your income grows.
Ready to retire today? With returns of 8-12%, you can withdraw what you need and have a surplus to reinvest and grow your income. There is no need to sell your stocks and cannibalize your portfolio.
You are now writing the preface to your retirement journal. How will this start? Some of history’s greatest novels have powerful opening sentences, will yours be “I got rich, then I got lost”?