Co-produced with Treading Softly
The market has been unkind to the passive ETF investor this year. If you're reading Seeking Alpha, likely you are a bit more sophisticated than the millions of passive ETF investors. Or perhaps you are among those who saw your 401(k) crash, and that is the motivation for you to be reading here today and asking yourself, "Is there a better way?"
We all have to start somewhere, and we're all on a journey of learning that will encompass our entire lives. We never stop having experiences, and we will never stop learning from them.
When prices drop, many investors panic. Especially those who have only known a bull market. You can find excellent opportunities to lock in income for decades to come. I am always amazed at how many ways there are to glean income from the economy to line your coffers. Even more amazing is how many people run away from those opportunities out of fear.
As you approach retirement, the question of whether you can afford to retire begins to loom large over our heads. Social security is a large part of the puzzle for many. The rest is covered by selling off your 401(k), spending your savings, and even getting a second job. Too many are "retiring" only to go to work at a lower-paying job. Many leave the best option off the table entirely, largely because they don't know it exists or don't understand how it works.
I started High Dividend Opportunities to help bring it back onto the table for as many retirees as possible. Instead of selling off your ETFs and stocks, a viable and excellent option is to live off of income generated from an income-based portfolio. Put that money to work instead of liquidating your assets month after month, hoping that your nest egg is large enough to outlive you. Invest it in companies that pay you to own their stock — providing you with a recurring income without selling a single share.
Don't panic about your nest egg shrinking when the market sells off. The markets will rally again, and prices will head to new highs. Instead, focus on finding the opportunities to invest your capital into income-producing securities at lower prices. The less you pay, the higher your yield for life!
Today, I want to examine two great REITs dipping along with the market and offering very attractive covered dividends.
Let's dive in!
Pick #1: WPC - Yield 5.1%
W.P. Carey Inc. (WPC) is a diversified "triple-net" lease REIT that reported a very solid Q1. AFFO at $1.35/share was up 10% year over year and WPC reaffirmed its previous guidance of AFFO being between $5.18 and $5.30 for 2022, with $1.5-$2.0 billion in acquisitions planned.
The triple-net lease is a superior lease structure to have during inflationary times. In these leases, the tenant gets lower rent but is responsible for most property-level costs. Things like property insurance, taxes, and routine maintenance are the responsibility of the tenant. As a result, the landlord has minimal exposure to expenses that might be driven higher by inflation.
At the same time, most leases have some kind of provision for raising the rent, these are often tied to CPI. (Source: Investor Presentation)
These rent increases are not instantaneous. In other words, rent doesn't go up the month CPI is reported. Instead, they are used to calculate rent increases at predetermined times. For example, a lease might reset rent annually based on the average CPI over the past year.
In Q1, we saw confirmation that inflation is starting to have a positive impact on WPC. With same-store rent growth going up 2.7%, compared to 1.8% the prior quarter, this growth will accelerate as more leases hit their reset date.
Once raised, future rent increases will be calculated on the new higher base rent. So high inflation is a benefit that will drive WPC's same-store earnings for years, even after inflation starts to moderate. WPC's average remaining lease term is 10.8 years, a couple of years of high inflation will result in those leases being far more profitable than originally expected.
Meanwhile, WPC's largest expense is interest. Like most REITs, WPC uses fixed-rate debt. If a REIT has to refinance at higher interest rates, that is a headwind to FFO and cash flow. Here too, WPC is well positioned, having taken advantage of historically low-interest rates to refinance debt as far out as they could. WPC has no meaningful maturities until 2024.
That refinancing risk won't be an issue until 2024-2026. Who knows where rates will be then? Many are projecting that a recession will happen by or before 2024, in which case we can expect rates to come back down by then. Regardless, WPC has a few years for inflation to work its magic on its revenues before rising expenses become a possible risk.
WPC reports a strong quarter, shows that inflation is benefiting its current income, reaffirms guidance, and because Amazon (AMZN) had a lousy earnings report, WPC sells off with the rest of the market. We'll take advantage of this opportunity and buy some more before the price goes out of reach!
Pick #2: SACH - Yield 10.1%
Sachem Capital (SACH) is a "hard money" lender based in Connecticut. Hard money loans are short-term mortgages that are secured by real estate. A "regular" mortgage might have a term of 15-30 years. A hard money loan will usually be 1-3 years. These loans are much higher interest and are underwritten based on the value of the collateral property, allowing for a much quicker process from application to financing. These loans are primarily used by real estate investors who are looking for short-term financing to fix up a property before selling it, or to take advantage of a great price while they wait for longer-term financing to be approved.
Over the time we've watched and provided coverage on SACH, they've grown from a small area hard moneylender to one that has loans in 14 states with a primary focus on Texas, Florida, and Connecticut. This steady stream of growth and development has been financed through careful decisions by SACH's management team.
Firstly, SACH does issue common shares when accretive, but unlike other small mortgage-focused REITs, they are not so desperate to grow that they put common shareholders' interests aside. So they don't constantly flood the market with common shares - which would also be extremely expensive for SACH, capital cost-wise. Instead, they have taken to routinely issuing fixed-rate baby bonds - of which SACH just announced the issuance of another. We find this choice commendable for a couple of reasons. Firstly in a rising interest rate environment, getting fixed-rate debt at reasonable pricing is intelligent. Secondly, SACH has been able to systematically lower its cost of capital with each issuance.
The exception is Sachem Capital Corp 7.75% Notes Due 9/30/2025 (SCCC) which were issued mid-2020 at a level still cheaper than issuing common shares.
Every time SACH gets more cash in, it is rapidly put to work. Their portfolio's yield is 11.57% as of the most recent earnings release. This means if their debt is being issued for 6% interest, they have a spread of over 500 bps.
Earnings have continued to cover their ongoing dividend to common shareholders after a period of building up to 100% coverage.
While the market is turning downward, SACH has continued to follow its proven path of success: issue fixed-rate debt, originate loans for real estate, and provide strong dividends to its shareholders.
Conclusion
SACH and WPC are both paying covered dividends, and they are finding routes to grow themselves with shareholders' benefit in mind.
When it comes to retirement, having to sell shares to fund your retirement seems like a great idea when the market is climbing and seems to smash through any resistance level. It looks like a terrible idea when the market dips. While historically, the market has risen over the long haul, the ocean of the market is anything but smooth sailing. There have been market crashes that have taken many years to recover. The average retiree can't go a year without cashing out part of their portfolio, let alone several years!
Often the best course of action is to sell nothing when the market is falling. Stay patient, wait out the fear, and wait for the rally. When your retirement plan relies on selling shares to fund your income, you don't have time to wait.
Why not take a route that reduces your stress? Why not let your portfolio generate income that it injects into your wallet without you having to do anything? Stop worrying about when and what to sell to fund your retirement. Focus on increasing your exposure to the most amazing wealth generator in the history of the world - the economy of the United States.
Let your retirement be fueled by passive income. If the market dips, take a portion of your income to reinvest for the future. You'll be paid to wait for the next rally without selling a single share.
The ability to open your account and routinely see your cash balance growing without having to do anything at all can be yours. Sounds amazing, right? That's what can be achieved through income investing.
You just have to choose to set up your income-producing portfolio. These two opportunities can be your first steps towards this. Hundreds of other great companies will pay you to own their stocks, allowing you to set up a diversified income portfolio. I hunt for them every day.
If you want full access to our Model Portfolio and our current Top Picks, join us for a 2-week free trial at High Dividend Opportunities (*Free trial only valid for first-time subscribers).
We are the largest income investor and retiree community on Seeking Alpha with over 5300 members actively working together to make amazing retirements happen. With over 40 individual picks yielding +8%, you can supercharge your retirement portfolio right away.
We are offering a limited-time sale off your first year! Pay less than $1 a day for your first year of High Dividend Opportunities.
Start Your 2-Week Free Trial Today!
