“Buy and hope” investing has never been so desperate.
As bond yields “moonshot” to 1.8%, they are now looking down on the dismal 1.3% return of the S&P 500. Still, let’s face it, that’s not enough for us to take our pension only on dividends.
Additionally, we are seeing high volatility as the Federal Reserve hits the Pause button of his banknote printer. Basic income investors lose these annual returns in a single trading session!
Fortunately, there are serious dividends under the surface of the market. Today we’re going to highlight five stocks that pay more than 7%. This is a great upgrade.
Let’s go back to the “peak” of bond yields. Just kidding because 1.8% is still not a very high income. Out of a million dollars, that’s only $18,000 a year.
The S&P 500, the US pension fund, is equally risky. He only pays 1.3%, which only brings in $13,000 of that million. Moreover, it is possible to make the entirety of that payday in one bad trading session.
I don’t know about you, but I prefer cash flow. Give me payments of 7% or more. This way we can generate $70,000 out of that million I mentioned. Or $35,000 on $500,000.
And believe it or not, there are 449 stocks and funds earning more than 7% today. There are even 137 who pay more than 10%!
Number of stocks and funds with returns of 7% or more
Note: US-listed companies and funds with market capitalization or assets under management greater than $300 million. Source: S&P Global Market Intelligence
Many of them are what I call “dividend traps”. It is the paper payment tigers that are in trouble. They are cheap for a reason.
It’s our job as contrarians to figure out which of them are unfairly cheap. Let’s look at five with big dividends between 7.4% and 16.1%. This is the kind of homework that will indeed allow us to retire with dividends and leave those 1%+ returns behind.
Global Net Lease (LNG)
Dividend yield: 10.6%
Global Net Lease (LNG) is a commercial real estate investment trust (REIT) which operates not only in the United States, but also in developed Europe, offering a diversified portfolio of properties that helps it both grow and hedge against inflation.
What diversity are we talking about?
The company currently operates in 12 countries, including the United States, United Kingdom, Germany, the Netherlands and Finland, where it has 312 properties across 134 tenants in 48 sectors. GNL does everything from financial services to automotive manufacturing to technology and healthcare.
Tenants include the likes of McLaren – yes, this McLaren–FedEx (FDX), Whirlpool (WHR) and ING Group (ING). And even in the midst of a recovering economy, LNG properties boast a high 99.1% occupancy rate.
The “net lease” part of its name is a real draw. GNL specializes in net leases, which means they are “net” of insurance, maintenance and taxes – this REIT only collects the rent and leaves the rest to the tenants. This eliminates three major variables. The result is that Global Net Lease profits are more predictable and reliable than they would be without net.
The nearly 11% dividend is secure, requiring around 90% of Adjusted Funds From Operations (AFFO). (REITs can pay up to 90% of their AFFO or FFO in dividends.)
LNG: cheap compared to VNQ?
Saba Capital Income and Opportunities Fund (BRW)
Dividend yield: 12.6%
Saba Capital Income and Opportunities Fund (BRW) is a relatively new closed-end fund (CEF) which we discussed in August.
Lean on BRW:
Saba Capital Income & Opportunities Fund has only been known by this name for a little over a month. Prior to June 22, it was the Voya Prime Rate Trust (PPR). So what happened?
A proxy battle.
Saba Capital Management LP is a hedge fund manager and activist investor that had Saba-appointed board members elected to Voya Prime Rate Trust last year. These board members then selected Saba to replace Voya Investment Management Co. as the fund’s investment adviser beginning in June this year.
The new BRW will primarily invest in high-yield credit, but it also says it “will also opportunistically target other investments, such as registered closed-end funds and special purpose acquisition companies.”
SPACs make up nearly half of the portfolio, followed by Senior Loans and a mix of corporate bonds, short-term investments and other CEFs.
Recently, at the end of December, the company announced that it was aiming for a 12% annual return. The fund therefore increased its monthly dividend to 4.8 cents, which is good.
Aberdeen Emerging Markets Equity (AEF)
Dividend yield: 7.4%
Aberdeen Emerging Markets Equity (AEF) is managed as a basic index fund. He has an emerging markets portfolio of just 80 stocks and covers some of the biggest names in the game: Taiwan Semiconductor (TSM), Alibaba (BABA), Tencent (TCEHY) and more.
China leads with nearly 30% of assets, followed by India and Taiwan with 13% each, all within a few percentage points of the category average.
Where AEF really stands out, however, is its performance. Emerging markets have traditionally been a source of growth, but Aberdeen’s closed-end fund manages to derive more than 7% yield – typically all dividend income, not capital gains or returns of capital – from the world emerge.
Total returns are a little disappointing, however. When AEF is on, leverage helps amplify good management decisions, but the fund has had a few long lulls that have really hampered long-term performance.
Aberdeen has been better of late but is struggling to get through the dips
Dividend yield: 16.1%
Orchid Capital (ORC) belongs to one of the most productive segments of the market: mortgage real estate investment trusts (mREITs). These so-called paper mills are different from traditional REITs in that they do not invest in physical properties, such as shopping malls or hospitals, but in securitized mortgages.
Orchid Capital, for example, invests in residential mortgage-backed securities (MBS) – issued by Fannie Mae and Freddie Mac – on a leveraged basis. It makes a profit on the difference between the return on its mortgage assets and what it costs to borrow. And in general, the threat of higher yields (and the actual rise in Treasury rates) has not been good for space.
mREITs lag as Fed turns hawkish
Unfortunately, ORC struggled on this front long before COVID. As I said in April:
“Quarterly earnings with gains/losses removed reached 70 cents per share in 2017, but have since fallen between teens and 30s over the past year-plus. This has resulted in a sharp drop in the monthly dividend; ORC has trimmed its payout four times since 2017, from 14 cents a share then to 5.5 cents until mid-2020, before bumping it up to 6.5 cents now.That’s just too much dividend variability, no matter how important the overall return is, for anyone planning more than a few years into the future.”
Not only has the stock fallen by double digits since then, but last week the company announced a 15% discount on the payout, to 5.5 cents per share. The stock is still yielding an impressive 16%, but I’m concerned about the time until the next dividend cut.
Western Asset II High Income Fund (HIX)
Dividend yield: 8.7%
Western Asset II High Income Fund (HIX) invests in high-yield companies and emerging market debt, then optimizes its choices using leverage (currently 28%). It holds approximately 270 different debt issues with an effective term of 6.25 years. Top holdings right now include Dish Network (DISH) bonds with a coupon of 7.75%, and Range Resources (RRC) debt with a coupon of 9.25%.
Over the past five years, HIX has beaten its popular ETF cousin, the SPDR Bloomberg High Yield Bond (JNK) ETF, by a healthy margin of 44% to 27%.
Live dividends forever with this “ultimate” retirement portfolio
These five payers are an interesting starting point, but if you’re thinking of retiring with dividends today and want to play in a timely manner, I recommend the “triple play” stocks of my 7% Return “No Withdrawal” Retirement Portfolio-have so much more to offer.
We all know that you need enough income to cover all your regular expenses. And we all probably know intrinsically that we should own high-quality stocks. But investors often overlook the importance of grow your savings in retirement – that way, if the unexpected happens, you won’t cripple your dividend-producing potential to get out of trouble.
Go to Google and search for a collection of “best stocks” by some of the major financial outlets. I have – and after some quick analysis of these “pro” pick sets, I have calculated probable total returns of between just 3% and 5% per year, based on average dividends and potential stock appreciation equities from paltry estimated earnings growth now that the “recovery bump” is starting to take hold.
These types of returns will have you bleeding your nest egg dry just a few years after retirement. And you’ve worked too hard, for too many years, just to have financial hardship in retirement.
My Wallet “without withdrawal” presents the best of several high income assets. Of course, only a handful of stocks and funds meet my rigorous standards for this versatile strategy. But the result is an “ultimate” dividend portfolio that gives you…
- An average portfolio return of 7%
- The potential for more than 10% annual capital gains
- Robust dividend growth that will keep up with (and outperform) inflation
This wallet will allow you live solely on dividend income without ever touching your nest egg. You won’t have to worry about paying the mortgage or other monthly bills, or wondering how you’ll survive a financial disaster.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.