According to Bank of America’s chief investment strategist, Michael Hartnett, it’s “no longer politically acceptable [for central banks] to stoke [the] Wall St. bubble,” likely setting up for a “big top” in stock markets this fall.
At Blue Harbinger, we believe the stock market is going much, much higher over the long-term, but we also know many investors simply cannot stomach short- and intermediate-term volatility, and thereby prefer to focus their investments on safe income-generating opportunities instead of simply very long-term capital appreciation.
This article highlights 10 high-income investments opportunities that we believe are worth considering.
Alluvial Fund August 2020 Performance Update
The Qualitative and Quantitative Backdrop:
Before getting into the 10 high-income opportunities, it is helpful to examine the current state of the market in terms of a narrative and then actual data. The narrative is that central banks are reducing the easy monetary policies (low interest rates, quantitative easing) that helped lead the world out of the 2008-2009 financial crisis. And as the volume of that narrative increases, the data show the multi-year market rally is flashing serious signs of capitulation. For example, consider the data in the following table.
Specifically, we see three groups of data that strongly support the narrative that the rally is capitulating. First, growth (IWD) and technology (QQQ) (XLK) stocks have been underperforming the rest of the market over the last week and the last month. And as the data in the above chart show, this is the exact opposite of what has happened over the last one, three and five years. And this data fits the narrative that the fed’s extended period of easy money (which favors growth and technology stocks) is expected to dissipate (i.e. the market is forward-looking).
Second, international (non-US) stocks (EEM) (EFA) (ACWX) have been beating US stocks so far this year, and this is the exact opposite of what has happened over the last three and five years. And as the narrative goes, the US led the world into the financial crisis, and they’ve lead the world out of it too. And considering the "connectedness" of global markets, it would have been unreasonable for US central bank monetary policies to be drastically different (more hawkish) than non-US monetary policies (i.e. even if the US wanted to tighten sooner, it would have been unreasonable because the rest of the world was still easing to deal with more challenged economic condition). And now that the rest of world is stronger (or at least expected to be per strong international equity market performance), it makes sense for the US to tighten monetary policies. And the data fits this narrative.
Third, highly-levered and high-dividend-paying REITs (VNQ) have been underperforming the rest of the market over the last week, month and year, and this is both a signal and an opportunity. First, it is a signal that REITs, which rely on debt to grow, will likely face more expensive financing costs in the years ahead as interest rates rise. However, this is also an opportunity, because not all REITs are created equally (the weak will struggle, the strong will flourish) and the recent REIT sell-off (see the chart above) has created an attractive opportunity to invest in select REITs that have inappropriately sold-off (more on this later).
And with that qualitative and quantitative backdrop in mind, here is the list...
10. Welltower (HCN), Yield: 4.8%
Welltower is a big-dividend, blue chip, healthcare REIT that is well-diversified across senior housing (triple-net and operating), outpatient medical, and long-term post-acute. And as the following chart shows, its shares have performed poorly over the last year and especially over the last week.
The narrative against Welltower is that not only will it face the same challenges as REITs in general as described earlier (i.e. rising interest rates will make it more expensive for HCN to grow), but also the company faces unique challenges related to efforts in the US to repeal and replace Obamacare (i.e. a lot of the customers of Welltower’s tenants rely on government-sponsored reimbursement, which could be reduced under changes to the law). However, despite the challenges, Welltower’s price to FFO has dropped to a compelling level, its dividend is very well covered, and the long-term demographic trends (i.e. a growing population of healthcare needs) are strongly in favor of the company over the long-term, in our view. Plus the big dividend yield and value stock status of Welltower put it right in the sweet spot of a market style shift that we expect to strengthen over time (i.e. the markets long-term reversion to favor income/value stocks over growth stocks).
9. Verizon (VZ), Yield: 5.3%
Verizon is another stock that we expect to benefit from the long-term reversion to a market that favors value and income stocks over growth stocks. And given Verizon’s recent underperformance (as shown in the following chart) now is an excellent time to consider investing from a contrarian standpoint.
Clearly Verizon has faced challenges in recent years, ranging from the slow death of wirelines, to the slowing growth of wireless, and more recently to the troubled acquisition of Yahoo. Howerer, the company still generates lots of free cash flow to support the dividend. Plus we believe it has been taking appropriate steps (such as the Yahoo acquisition) to transform itself to be more relevant in a constantly evolving marketplace. We’ve written about Verizon several times this year (for example: here and here). And considering its recent poor performance, combined with market conditions that we believe will favor value and income stocks (i.e. the end of easy money by the fed), we believe Verizon is an attractive “Dog of the Dow” that is worth considering.
8. Realty Income (O), Yield: 4.7%
Another high income opportunity that investors may want to consider is Realty Income. Not only has this REIT sold off over the last year as rising interest rates stoked fears of more expensive and challenging growth, but value and income investments in general have been out of favor as growth stocks have been dominating over the last year (as shown in our earlier table).
We believe the market narrative has driven Realty Income’s price too low, and it now presents an attractive opportunity for income investors. Specifically, Realty Income is a large steady REIT that invests in commercial and retail properties across the US. And as fears of retail challenges have spooked investors, Realty Income has sold off hard. However, the company has a reasonable level of leverage, and plenty of liquidity to keep supporting its big growing monthly dividend payments which have now been increased for 78 quarters in a row. We wrote about Realty Income earlier this year, and we believe it remains a particularly attractive opportunity for income-investors now.
7. Teekay Offshore Series-B Preferred Shares (TOO-B), Yield: 11.3%
Shifting gears from common stocks to preferred stocks, we believe the preferred shares of marine transportation company Teekay Offshore are worth considering. Not only is the dividend big and safe (i.e. we believe the company has plenty of financial wherewithal to support the dividend), but we believe market conditions favor this company going forward because it will benefit as the market shifts from growth to value stocks. Further, we believe the maritime shipping industry is showing signs of improvement and continued recovery. We wrote about these shares over a year ago, and the price is again attractive, in our view. If you’re looking for big safe yield that will benefit from current market conditions then Teekay preferred series B is worth considering.
6. New Residential (NRZ), Yield 13.1%
New Residential is a big dividend REIT that invests in mortgage backed securities, and we believe now is an attractive time to consider investing considering it just raised its dividend but the shares are down over the last two weeks as shown in the following chart.
It may seem counterintuitive to invest in anything “residential mortgage related” right now considering interest rates are expected to continue rising and that will make it more expensive to buy a residence with a mortgage. However, NRZ owns powerful Mortgage Servicing Rights (“MSRs”) giving it the right to service a pool of mortgage loans in exchange for a fee, and NRZs MSRs have the ability to continue delivering big returns (12-20%) despite our current rising interest rate environment. In fact, as interest rates rise, less people pre-pay their mortgages thereby allowing NRZ to collect income on its MSRs for an even longer period of time (i.e. this is a good thing). If you are looking for an attractive high-income opportunity in our current rising interest rate environment, New Residential is worth considering.