“I’m nearing retirement,” my friend explained after a fun round of golf. (In 2020, any round of golf is a fun round). “And …” he continued.
“Looking to turn your nest egg into regular cash flow,” I jumped up.
Most retirees and future retirees (sensibly) focus on cash flow from dividends. Like my boyfriend, they don’t care about beating the market.
But, with some high yield smart purchases, it is actually possible to beat the market with cash-only payments. This may seem absurd in a world where, at least once a year, investors like you and I are treated to a plethora of media reports indicating that for another year fund managers will not be able to beat their benchmarks. reference.
It’s a bigger task, no doubt. This is because most investors make the mistake of treating indices as an “average”. But they are not average. These are passionless formulas and algorithms that are virtually incapable of human error – nor are they hampered by the actual expenses active managers have to charge in order to make a living.
They have quite the advantage, and it shows.
Percentage of US equity funds outperforming benchmarks
As you can see, it’s not impossible to “beat the market” – in fact, in the short term, more mid and small cap managers have outperformed their benchmarks. But over time, as managers have to time more inputs and outputs, they find it increasingly difficult to beat automated index calibrations.
One way you can try to stay ahead of the game is to stop relying so much on price performance and collect a large chunk of your returns in regular income checks.
But how high should you cross the bar?
Let’s take a look at stocks, Treasuries, and gold to see what investors likely need to beat. very long term. Also consider many bear and bull markets to avoid setting unrealistic expectations at high or low levels.
The numbers to beat:
Returns since 1970
I know what you are thinking, “How can I earn 11.1% a year in dividends only?” After all, it’s roughly six times what the wider market produces!
- You don’t have to beat the market purely on dividends – if you get there most of the time all you need are modest gains to get you over the bar. And,
- The market is comprised of a number of very high yielding stocks and funds that collectively can beat this annual average stock return by around 11%.
To start your path, let’s go over a set of three picks that collectively pay off 10.7% in cash distributions, which would almost get you over the cash-only bump.
If their payments can actually stand up to scrutiny, they will make invaluable additions to your retirement portfolio for years to come.
Newtek Business Services (ASPIC)
Dividend yield: 11.7%
Let’s start by checking with Newtek Business Services (ASPIC).
Newtek is a business development corporation (BDC) – a type of business that Congress established in 1980 to help stimulate investment in small and medium-sized businesses. Like real estate investment trusts (REITs), they are required to pay out at least 90% of profits as dividends, and the returns in this category can reach the sky.
It is a difficult business that has only gotten more difficult in recent years thanks to increased competition. And COVID has made the life of BDCs downright miserable.
But Newtek is not like other BDCs. While most of its peers are just lenders, Newtek offers a range of services designed to help the very businesses it invests in: mobile payment processing solutions, website design, and even payroll and benefits. And during COVID, he suspended his 7 (a) loan program to become a Paycheck Protection Program (PPP) lender.
While Newtek looked more promising than other BDCs in more normal times, the company’s benefits simply weren’t enough to overcome the financial difficulties of small businesses. You wouldn’t know from looking at its first half 2020 results: Adjusted net investment income (ANII) was $ 1.58 per share, up 56% from the prior year period !
Why, then, did NEWTs struggle as much as their peers?
It’s all about PPP. Newtek himself tells investors that “PPP lending activity contributed to record NII and ANII” during the second quarter.
But look at what happened in the third trimester. PPP loans dried up, from $ 1.1 billion in the second quarter to $ 82 million in the third. And the ANII fell off a cliff, going from $ 1.37 a share in Q2 to just 4 cents in Q3, well below estimates.
Another round of stimulus could certainly support NEWTs again, but shareholders seem to realize that this type of loan is temporary, although it helps. The main activity could be painful for a while.
Starwood Property Trust (STWD)
Dividend yield: 10.9%
Starwood Property Trust (STWD) is the largest commercial mortgage REIT in the United States, but what makes this company so attractive are its diverse lines of business.
The business lending business itself involves loans ranging from $ 5 million to over $ 500 million in the United States and Europe on many types of properties. STWD deals with many forms of debt, including first mortgages, bridging loans, mezzanines and more, and even preferred stocks.
But it also invests in high-quality real estate, including medical practices, multi-family properties in Florida and even Irish offices and multi-family assets. It even provides infrastructure loans, including construction loans, acquisition finance, and project bonds.
Starwood took its pieces like the rest of space. The biggest hit was felt in Q2, when core earnings fell 17%.
But all in all, STWD is holding up pretty well. Core earnings for the first nine months of 2020 are actually up 11% to $ 1.48 per share (4 cents more than its dividend obligations so far), including a drop of less than 4% of third quarter core profits.
The key here, and why Starwood might be worth a try, is this multi-pronged business model that allows it to pivot when needed. The company pulled back its deployments in the second quarter to offload $ 1.5 billion in the third quarter, and when it did, it invested $ 1 billion in non-strategic activities– Simply because that is where the most interesting opportunities were.
That kind of flexibility, a wide payback trail, and an efficiency of almost 11% make STWD a potential winner against the grain.
Trust of office properties
Dividend yield: 9.5%
Office Properties Trust (OPI) is a real estate investment trust (REIT) leases nearly 25 million square feet of office space at 184 properties in 34 states and the District of Columbia. It primarily targets single tenants, particularly those with “high credit quality characteristics” – around 65% of revenue comes from blue chip tenants.
Unsurprisingly, OPI was hit hard in the first wave of the pandemic, losing about half of its value from its 2020 high. Stocks are still deep in the red, in fact, more than a quarter since the beginning of the year, even after vaccine developments have sparked a rapid but important race.
No wonder there. Funds from Office Properties Trust (FFO) operations for the first nine months of 2020 fell 11%, including a 15% drop in the second quarter.
It is certainly not well, but let’s give credit where credit is due: OPI is at least a relatively good operator. Third quarter results, although down, were better than expected. The company has $ 800 million in cash. Its quarterly dividend of 55 cents per share is more than 180% covered by FFO.
The occupancy rate fell 50 basis points to 91.2% from the previous quarter, but here is some welcome information from the third quarter report (emphasis added):
OPI has entered into new lease and renewal contracts for a total of 595,000 rentable square feet at weighted average rents (in rentable square feet) 31.0% higher than previous rents for the same space.
That Office Properties Trust shares remain so depressed is a message from the market. They don’t care about the quality of OPI – they worry about a “new normal” in which teleworking gradually reduces the amount of office space most businesses need.
It is not OPI’s fault, but it is OPI’s problem.
Brett Owens is Chief Investment Strategist for Contradictory perspectives. For other great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.