Co-produced with “Hidden Opportunities”
If you watched Seinfeld, you might remember the episode “The Opposite”. George Costanza, realizing he hasn’t succeeded in his ways, turns his life around by doing exactly the right thing contrary to his usual instincts. Although his approach yielded some hilarious moments, he had a streak of success, including landing a job with the New York Yankees. As an investor, have you ever thought you should start doing the exact opposite? Sell when you want to buy and buy when you want to sell?
The stock market is a psychological battleground where success is achieved by following well-defined principles without succumbing to emotional pressures. No matter what type of strategy you follow, those who are the best at any market strategy are those who control their emotions.
When the markets soar, emotional beings buy and manifest their greed. When markets crash, they sell in fear and are ready to absorb the losses. Investors, including so-called experts – fund managers are fearfully holding the highest amount of uninvested cash since 2001.
In his 80+ year investment career, Warren Buffett has always done what George Costanza did in an episode, unlike any ordinary investor, and he has done it with remarkable success. While everyone is busy selling in fear, the Oracle of Omaha continues his shopping spree, buying up his favorite picks. Tracing Mr. Buffett’s footsteps through wars, recessions, acts of terror, and presidential assassinations, I can’t find a single time he praised silver as a meaningful investment. He always taught to buy and hold productive assets.
“You’ll be much better off owning productive assets over the next 50 years than owning scraps of paper” – warren buffet
We follow Mr. Buffett’s principles and teachings in a way that makes sense to us. Our goal is to buy fear into various income-producing stocks in order to produce reliable income from our assets.
“Be afraid when others are greedy and greedy when others are afraid” – warren buffet
With that in mind, we have two picks with yields of up to 7.2% at extremely favorable valuations.
Choice #1: UTG, yield 6.7%
Demand for utilities (electricity, water, waste collection, gas, internet, wireless telecommunications services, etc.) remains relatively stable even as the recession hits, businesses close and unemployment rises. The utilities industry experiences inelastic demand and generates consistent, predictable revenue in tough economic conditions. Reaves Utility Income Fund (UTG) is a CEF (Closed-End Fund) superstar that has stood the test of time since its inception in 2004.
UTG has demonstrated an impressive increase of approximately 11% in net asset value, with no reduction (or reduction) in distribution since inception, and has generated very reliable returns for shareholders. The CEF also paid an occasional special dividend and provided an impressive average annual return of 8.9% over 17 years. (Source: Portfolio Visualizer)
Today, UTG trades near par with NAV, presenting an attractive entry point into this quality CEF. UTG has a modest leverage of 20% and a modest expense ratio of 1.2%. The CEF maintains a portfolio of 41 stocks which are among the most defensive names in the market.
UTG pays $0.19/month, an annual return of 6.7%. CEF distributions have doubled since inception, making it an excellent dividend growth choice for your income portfolio. The fund has always earned its distribution through active management of earning assets, and there has been no return of capital (“ROC”).
UTG presents the best of CEF. Use the fear of this market to increase your income with this 6.7% return!
Choice #2: RLJ-A, Yield 7.2%
After two years of pandemic restrictions, Americans are looking to travel. Data from the Kayak travel website tells us that searches for domestic travel are up 78% year-over-year. As a result, flights, hotel rooms and other types of accommodation have become much more expensive and consumers are not backing down.
“When you have two years of people not traveling the way they want to and you’ve accumulated a lot of savings during that time, the prices can be really high and people say, I don’t care. I just want to travel I want to go somewhere.” – Glenn Fogel – CEO, Booking Holdings
RLJ Lodging Trust (RLJ) owns and operates 95 hotels with approximately 21,100 rooms in 22 US states. With approximately 46% of its EBITDA, it is generated by the Sunbelt locations, which are among the top summer vacation destinations in the country. The most attractive risk-reward opportunity is presented by $1.95 Series A Cumulative Convertible Preferred Shares of RLJ (RLJ.PA).
Why is RLJ-A interesting? It has no call date to start, making it an almost perpetual slot and giving it almost unlimited upside potential. In theory, RLJ-A is convertible into 0.2806 common shares of RLJ (at the initial conversion price of $89.09 per common share). However, RLJ can only force the conversion if its common stock trades at 130% of the conversion price for 20 of 30 consecutive trading days. So for RLJ-A to be forced into a conversion, common units must be trading at $115.82, a whopping 750% increase from current levels. When that happens, RLJ-A shareholders will receive $32.5/share, about 20% more than current levels.
Until this unlikely situation occurs, you can collect $1.95 in annual dividends, a yield of 7.2% at the current price of RLJ-A. At the end of the first quarter of 2022, RLJ had $480 million in cash on its balance sheet, which covers preferred dividends for 19 years!
The REIT has no significant debt maturities through 2025, making the preferred units secure for revenue as hotels return to normal operations after two years of the global pandemic.
The REIT achieved ~74% of its 2019 RevPAR (revenue per available room) and FFO (funds from operations) profitability in the first quarter. With over $1 billion in liquidity, including cash and an undrawn line of credit, RLJ is well positioned to respond to the meteoric return of the US travel industry. We are here to sit back and collect dividends.
No one has ever won a game of Monopoly by holding the largest amount of uninvested money. While it’s tempting to sit down with money, if you don’t invest in real estate, utilities, or railroads, you’ll end up losing the game. Winners earn income by accumulating valuable assets.
Warren Buffett knows this well and has never resorted to raising money in times of economic uncertainty. He started buying shares of Apple (AAPL) in 2016, when they were down more than 20% from their record highs, thanks to the end of quantitative easing with the first rate hikes . The greatest investor of all time has always done the opposite of any retail investor or fund manager – he bought value-oriented productive assets when there was blood in the streets.
Regardless of the circumstances, when the sentiment is overwhelmingly negative, it also means there are opportunities in the right places. High-quality income-producing assets are trading at discounted valuations, allowing us to collect dividends despite the turmoil.