2 big dividends for retiring in splendor

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Co-produced with “Hidden Opportunities”

Without a doubt, 2022 has been a scary year for retirees. Stocks plunged and posted nauseating volatility. Bonds, which traditionally hold the fort when stocks falter, also fell. Analysts say 2022 is the worst year to retire, but let’s face it, Wall Street has a reputation for scaring you not to hang up your boots.

Author search

Author search

Fear sells, and Wall Street knows it.

[There’s] much more money made from selling abilities rather than investing abilities. – warren buffet

Let me entertain you with some positive data from Goldman Sachs (GS). The data below shows that high yields provide above-market returns during high inflation regimes.

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Goldman Sachs dividend forecast

Additionally, the investment management firm expects dividends to be higher in the S&P 500 over the next decade. The projection is reassuring for income-oriented investors and is based on historical trends. Over the past two decades, dividends have been the only form of capital return showing steady growth with minimal volatility.

Yardeni

Yardeni

Today we are discussing two picks with yields of up to 8.7% to produce liquidity in this scary market. Without further ado, let’s dive into the recommendations.

Pick #1: JPS, yield 7.2%

The International Monetary Fund (“IMF”) regularly assesses the impact of global shocks on the financial system through its Global Banking Stress Test. The recent test applied with parameters used for a pandemic-like economic event showed an encouraging picture of the resilience of international banks.

Fitch, IMF

Fitch, IMF

With global financial institutions well positioned to weather the economic storms, it’s worth noting that this sector is the largest issuer of preferred securities, a powerful tool in an income-oriented investor’s arsenal. (Source: Nuveen)

Nuvean

Nuvean

Today we will be reviewing Nuveen Preferred & Income Securities Fund (JPS). JPS is a CEF (Closed-End Fund) which aims to invest at least 80% of its assets under management in preferred securities and other income-generating securities, including hybrid securities such as contingent capital securities. Notably, ~86% of securities in JPS’ portfolio retain investment grade ratings, indicating the superior quality of its overall composition.

JPS Fund Page

JPS Fund Page

~65% of the fund is made up of securities issued by banks, insurance companies and capital markets. Global and national regulators are closely monitoring the health and lending potential of these entities to avoid a 2008-like event.

table

SJP Annual Report

JPS is made up of 235 stocks with an average coupon of 6.2%. The fund’s top 10 positions are preferred securities of major global banking names and represent approximately 34% of the total portfolio.

Nuvean

Nuvean

Today, the fund is trading at an attractive 8% discount to net asset value, making it a bargain for income investors and retirees. The fund’s current monthly distribution of $0.0435/share translates to an annualized return of 7.2%.

It should be noted that JPS has paid out $16.79 in distributions since its inception in 2002. In recent years, preferred stocks have struggled with low yields as low interest rates have driven up preferred stock prices. , putting downward pressure on cash flow.

It’s been a similar story for all fixed income investments. While investors are trained to view higher prices as a “good” thing, for fixed income investors higher prices lead to lower cash flow and lower future returns. Rising interest rates are “bad” for prices, but great for future returns when investing in fixed income securities. For many years, dividends and interest from fixed income investments have declined due to high prices and lower yields.

Despite this difficult environment, JPS outperformed the preferred ETF iShares (PFF), as well as ETFs covering other debt classes like high yield bonds, investment grade bonds and treasury bills.

Chart
Data by YCharts

As we look to the future, yields are increasing. Money invested today receives higher dividends from preferred stocks and higher interest from debt. As JPS reinvests principal, it will be reinvested at higher returns, creating a turning point from recent downtrends.

Some worry about a repeat of 2008, terrible for banks. Yet banking firms are much better prepared to weather a sharp recession and maintain their lending capabilities than they were in 2008.

JPS, with its portfolio of quality preferred stocks from the financial services sector, outperformed its benchmarks during a difficult period for fixed income securities. With fixed income securities priced much more attractively today, the prospects for future returns are better.

Choice #2: BST, yield 8.7%

Rising interest rates hurt growth stocks, especially those in the technology sector, due to high valuations and low (or non-existent) dividend payments. Higher rates reduce cash flow and inhibit reinvestment in product innovation and growth prospects. This fear caused the tech sector to plunge in 2022.

But Mr. Market is an ineffectual forward-thinker who tends to swing from pessimism to optimism at the slightest sign of improvement in the macro economy. After all, that’s how markets have behaved during rate hikes for the past ~30 years. They pick up somewhere in the middle of the rate cycle and leave investors wondering.

Dow Jones data

Dow Jones data

BlackRock Science and Technology Trust (BST) is a CEF in which at least 80% of the total assets consist of equity securities issued by science and technology companies. Due to its high exposure to software, semiconductors and the IT sector, this CEF resembles the NASDAQ index but is designed to reward income investors with large distributions. (Source: BST semi-annual report)

BST semi-annual report

BST semi-annual report

Born at the end of 2014, just before the previous rate hike cycle, BST achieved returns comparable to major market indices, with the most significant advantage being that the bulk of the returns were cash distributions instead capital gains.

Chart
Data by YCharts

Let’s look at the revenue generated by BST compared to the S&P 500 and the Nasdaq

Portfolio Viewer

Portfolio Viewer

BST comprises 115 holdings, with its top holdings being among the biggest global names in technology. Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN) are wide-moat companies, and the majority of us interact with their products or services on a daily (or hourly) basis. These four companies represent 17.2% of BST’s portfolio.

Blackrock BST

Blackrock BST

When technology takes a beating, it presents a great opportunity to start buying BST. CEF trades at par with NAV and has an attractive yield of 8.7% with its monthly distributions of $0.25/share. Importantly, BST has maintained a steadily growing payout since 2014, with its current monthly payout 150% higher than its initial return. The CEF has also paid out at least three special dividends during its 8-year tenure, making it a strong ally for income investors.

If you like the long-term growth prospects of technology but want reliable and growing dividends on your investments, BST is a great fit for your portfolio.

The time of dreams

The time of dreams

Conclusion

A typical American working life lasts about 42 years. With over four decades of work experience and even more significant life experience, do you still have to rely on Wall Street analysts to tell you when to retire?

Although dividend-paying stocks are not immune to market price action, when sentiment is bearish it is an opportunity to buy bigger yields on the cheap. These dividends are not intended to offset temporary capital losses, but are intended to provide stable income for your needs. You could withdraw that money to support your retirement lifestyle or reinvest it to buy more stocks.

Our HDO portfolio is designed to achieve an average return of over 8% from high-quality, dividend-paying securities. As long as dividends are coming in, we worry less about everyday prices, except when we buy the sale at the dividend store. The deal in the store is on and these two big returns will fly off the shelves. Grab them before the next person and start taking control of your financial well-being with passive dividend income.

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