Lock In 2 Fat Dividend Stocks Before The Market Bounces Back

Stock Market


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Have you ever been distracted? We might call it “daydreaming” to soften the rudeness of drifting off when we’re in a lecture or class setting. Having been both a teacher and student, I know what it’s like to drift off in class and also to see others drifting off.

I can distinctly remember sitting in a post-graduate class learning the finer intricacies of ancient Hebrew. My professor was usually very skilled at keeping our attention even on the dullest and most technical aspects of learning another language. Yet that day, my mind drifted away. I was called back into reality when my professor addressed a specific question to me directly. He knew I had drifted. So did I. To this day, I still do not know what he asked me. I do remember the disorienting feeling of returning to planet Earth from my thoughts.

It’s easy to get distracted when investing. There are a lot of different flashing lights to grab your attention and time. We’ve all seen the flashing red lights telling us about the expert who predicted this or that is “warning” everyone to sell.

Life has a way of intruding as well. Ever try to place a trade and have your spouse or children suddenly need your attention, and you can not remember that excellent ticker anymore? I’m sure it happens more than the investor-verse likes to admit.

With all the noise and distractions of politicians talking, Cramer going mad over money, tech stocks burning to the ground, and truckers protesting, it’s easy to lose sight of the goal.

What’s the goal? For income investors, it’s to build a recurring stream of dividend income that is large enough to fund your retirement lifestyle. I have two excellent high yields you need to lock in now and enjoy for years to come that will fill your portfolio with dividends. Do not get distracted! Build your income a dividend at a time, reinvest what you can, and see the magic of compounding grow your income to heights you did not dare to imagine.

Pick # 1: PFFA – Yield 8.4%

We’ve said it before: If HDO was operating a preferred ETF, it would look a lot like Virtus InfraCap US Preferred Stock ETF (PFFA). What sets PFFA apart from its peers is active management and a focus on higher-yielding preferred shares.

Over the past year, PFFA has materially outperformed peers like iShares Preferred & Income Securities ETF (PFF).

Chart
Data by YCharts

Why? Active management. PFF is buying shares just because they’re part of an index. There’s no human looking at it and saying “wait a minute, that price is too high!” In the preferred market, where trading volumes are low and investments can be redeemed by the issuer at par value, it’s essential to buy at a good price. Over the past year, we have seen cases where some preferred were trading at a negative “yield-to-call”, meaning that if the issuer called them investors actually lost money. PFFA avoids this through the very simple means of having someone look at the price and do the quick math to see if it’s a good price.

Additionally, in a rising rate environment, higher-yielding preferred shares are more attractive. An increase from the 10-year Treasury from 1% to 1.8% is huge for the value of a preferred that’s yielding 3%. For a preferred yield of 7% +, how many investors are going to sell the 7% to invest in treasuries yielding 1.8%?

Among PFFA’s top-10 holdings, HDO followers will see some familiar names:

PFFA Fact Sheet

PFFA Fact Sheet

For investors looking for quick exposure to preferred, PFFA is an excellent option. In January, PFFA raised its dividend to $ 0.1625 / month, and the dividend is fully covered by current cash flow.

I do not always buy preferred ETFs, but when I do it’s PFFA!

Pick # 2: ECC – Yield 11.9%

Analysts spend a lot of time pontificating on what the Fed might or might not do. Until it acts, there’s always uncertainty and nobody knows for sure what it will do. One of the cornerstones of our portfolio strategy regarding interest rates has been to ensure that our investments are flexible. We do not want to be “all in” on the Fed not raising rates and be burned when it does. Similarly, we do not want to be “all in” on the Fed hiking aggressively and then be burned when it does not. The ideal investment is one that will benefit if interest rates rise, but also will make a ton of money if they do not. In other words, an investment that will thrive regardless of what the Fed does. Say hello to Eagle Point Credit Company (ECC).

A CEF that invests in CLOs (collateralized loan obligations), ECC is producing a massive amount of cash flow in the current environment. The CLO positions that ECC invests in are floating-rate, while ECC’s leverage is fixed rate. As a result, if interest rates rise, ECC’s earnings will rise as well!

If interest rates do not rise, ECC is already covering its 10% yield, book value is growing and ECC recently issued new bonds at 5.375%, using the proceeds to redeem Notes from 6.6875% – 7.75%. This is interest savings that go straight to earnings available to common shareholders.

We’re seeing the benefit as ECC just raised its dividend 17% to $ 0.14 / month! Additionally, ECC paid an excise tax on undistributed taxable income last year. That’s income that will need to be distributed in 2022, which management expects there will be excess for a special dividend again this year. The cash flow from ECC is immense!

ECC’s earnings are going up even if the Fed does not raise. If the Fed does raise, then higher yields from floating-rate debt will increase ECC’s earnings even more.

The one possible risk to the “good times” for ECC is default rates. Since ECC invests in the “equity” and junior debt tranches, default rates can have a direct impact on returns. Historically, default rates are from 2% -3%, anything below thats great.

TCW

TCW

Default rates are at record lows, and the “Shadow Default Rate” which measures borrowers who have violated a covenant or are rated below CCC by a rating agency, indicates that defaults will likely remain low. Fitch is forecasting a default rate for 2022 around 1.5%. Which is fantastic news for ECC!

Default rates were held low despite COVID because of the massive amount of liquidity in the financial system. That liquidity isn’t going to disappear with a few rate hikes. It will take the Federal Reserve years to remove the excess liquidity in the system, and as we’ve discussed before, the Fed will likely be willing to reverse course on any sign of economic weakness. ECC is one of the best ways to benefit from the Bubble of Liquidity, and get a sky-high yield to boot!

Dreamstime

Dreamstime

Conclusion

Abraham Lincoln is famous for taking forever to make a decision. He would talk, and talk, and talk. He was well known for telling stories and relating to anyone he could. Through this means, he developed relationships, gained insight, and achieved things others have not been able to replicate. Was he a perfect person? Not by any measure. None of us are perfect.

He’s famously quoted as saying:

I walk slowly, but I never walk backward.

As income investors, we may get distracted from time to time. Life has a way of doing that to us all. Yet we should aim to keep growing our income stream and see the best routes to do that through all the distractions in life. Even if your income grows only slowly at times, keep it growing year after year. Do not let it simply go backward due to being caught up with the market’s noise.

Dividends can pay for your retirement. ECC and PFFA offer two excellent high-yield means to get outstanding income while the world sorts out what it wants to panic over next.

Check them out. Do your due diligence. Lock in this income before the market starts climbing again.



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