Co-Produced with Treading Softly
When polling and research are done, the economy often reigns supreme on people's minds. Inflation has become a major pain point for us all, and as such, American's want their government to sit up and pay attention.
Based on Pew Research Center's polling in January, 80% of Americans think that the economy needs to be the primary focus of the government. While they're busy fighting over changing filibuster rules and trying to enact voting legislation, they're actively ignoring what Americans see as the largest problem. This is only compounded by the Federal Reserve's consistent denial about inflation being persistent as it rises to decade highs.
I have learned in my life it's best to be as self-reliant as possible. In investing this means recognizing the global trends, political environment, and economic situation when making adjustments and additions to my portfolio or positions.
Today I want to consider opportunities to benefit from inflation now, and additional strengthening of the economy later.
Let's dive in!
Pick #1: AWP - Yield 7.8%
Aberdeen Global Premier Properties Fund (AWP) is a CEF that invests in REITs. An investment category that's going to thrive in 2022 as the stars align to create one of the best investment environments for real estate ever seen.
When we consider the macro outlook for the economy, two features leap out at us for 2022 as very safe bets.
- Inflation will be well above average.
- The 10-year Treasury rate will remain well below average.
Even the Federal Reserve is projecting inflation in 2022 will be 2.7% using their "Core PCE" measure. We believe that's much lower than is realistic, but even if we roll with 2.7%, inflation is being sustained at a much higher rate than it has seen in nearly 30 years.
Similarly, the 10-year rate is "rising" but it's only high relative to recent history. It's still lower than it has been for most of the past decade.
Why does this matter? Above-average inflation is good for REITs. It has become very common for landlords to negotiate leases that have "escalators" that are tied to inflation measurements - usually CPI.
The reason is simple, neither the landlord nor the tenant benefits from the time and expense of negotiating rent every single year, but the future is uncertain. A lease with escalators creates a dynamic lease that will adjust with economic conditions and parties can agree to 10+ year commitments.
In addition to existing leases, new rental agreements are based on prevailing rents which usually go up with inflation and often at a faster rate than inflation. So with above-average inflation, REITs will see rents rising more quickly with existing leases that are tied to inflation and are likely to see higher rents from new leases as well.
Another common aspect of REITs is that they borrow a lot of money. In fact, interest expense is usually the largest single cash expense for them. Being able to borrow at low interest rates is fuel for the engine of REITs, allowing them to buy more properties, collect more rent, and reduce their largest single expense. In short, the combination of above-average inflation and below-average interest rates directly leads to above-average revenue and below-average expenses. You don't have to be a professional analyst to realize higher revenues + lower expenses is a great combination! For REITs, this combination is going to be a reality in 2022.
AWP holds a lot of top-quality REITs that are going to be able to take advantage of these dynamics.
AWP's largest holding is a great example of these impacts already occurring. Prologis (PLD) owns industrial properties, and on their most recent earnings, cash rents were up 12.9% on properties that signed new leases or renewed their leases. Meanwhile, their interest expense declined 20% year-over-year thanks to refinancing $2 billion in debt with new bonds at rates ranging from 0.5% to 1.625%!
In 2022, we can expect that rents will continue to rise, and those who renewed leases last year will probably start considering their rent "low." Over the next few years, escalators in PLD's portfolio will trigger causing rents to rise and new tenants will pay even higher rents.
The bottom line for investors? Profits are booming and dividend hikes are going to be huge. PLD doesn't yield enough to fit the HDO portfolio, but we can buy it, along with other premium REITs, at a discount by buying shares of AWP.
AWP is trading at a 5% discount to NAV, meaning it's cheaper to buy these quality REITs through AWP than buying them directly! On top of that, we get to collect a 7.8% yield and will experience more NAV growth as REITs experience a phenomenal year. Buy AWP before the market figures out how great of a year it will be for REITs!
Pick #2: BKEPP - Yield 8.4%
Blueknight Energy Partners Preferred Units Series A (BKEPP) is a preferred security issued by Blueknight Energy Partners (BKEP). Currently, BKEPP and BKEP have the overhang of a potential buy-out offer by its General Partner.
BKEPP is being offered to be bought out for $8.46 per preferred share. This has created a very stable price situation where BKEPP stays near its buyout offering price.
So what does BKEP do? They are an asphalt terminal owner and operator.
These terminals are in essence the way station between where asphalt is produced at a refinery and where it's used by construction companies. BKEP has 95% take-or-pay contracts providing it clear revenue looking forward.
As the government has been focused on improving infrastructure via spending to repair and replace it, BKEP is well established to benefit from it in the long run.
This steady revenue has provided plenty of coverage for BKEPP's dividend. The preferred dividend is covered 1.73x by BKEP's distributable cash flow.
So why is BKEPP worth buying? The buyout offer from BKEP's GP is keeping the price largely stable while it pays out a strong dividend. If the deal goes through you'll get your cash back, if it falls through, BKEPP will continue paying you an excellent dividend and likely climb higher from here.
Note: BKEPP issues a K-1 at tax time. High Dividend Opportunities strongly advises using limit orders and not buying any shares above $8.46
Conclusion
Today we looked at two strong dividends that you can buy today and enjoy as inflation rises and the government eventually makes moves to help the economy strengthen further.
AWP will see income from its position rise as its rents are tied to inflation, furthermore, its real estate holdings will rise in value as inflation drives values higher.
BKEPP gives us a unique arbitrage opportunity to see a stable share price and eventual buyout occurring while paying excellent income to its holders. If the buyout falls through, the income will continue to pour in due to BKEP's contracted revenue. An extra boost from infrastructure spending by the government to repair and update the roadways in the United States will ensure the dividend is secure.
This all boils down to providing a stable and reliable income stream for your retirement, allowing you financial flexibility and financial self-reliance.
If you want full access to our Model Portfolio and our current Top Picks, feel free to join us for a 2-week free trial at High Dividend Opportunities.
We are the largest income investor and retiree community on Seeking Alpha with over 5100 members actively working together to make amazing retirements happen. With over 40 individual picks yielding +7%, you can supercharge your retirement portfolio right away.
We are currently holding a limited-time sale with 15% off your first year!
Start Your 2-Week Free Trial Today!
