Retiring in 2020 may feel more challenging than ever before. We just underwent a market crash, which depleted many retirement portfolio.
Moreover, the yields of treasuries, corporate bonds, and traditional stocks are down to just 0-3%:
Unless you have a multi-million dollar portfolio, you will probably need a much greater yield in retirement. And this is really the challenge:
Finding yield in today’s yieldless world.
At High Yield Landlord, this is exactly what we attempt to do. We look for high income opportunities in overlooked asset classes that are often ignored by other investors.
The main goal of our Retirement Portfolio is to maximize safe income. Note the emphasis added on the word “safe”. We have no interest in earning a 10% dividend yield if it is highly risky. We much rather earn a safe 6% yield that we can rely on. In the long run, this will result in superior total returns as we avoid dividend cuts and other disasters that lead to significant capital losses.
In this sense, our number #1 goal is to avoid dividend cuts. And our number #2 goal is to maximize income while keeping the first goal in mind.
This has led us to invest heavily in three specific asset classes that we will discuss in this article:
#1 –Preferred Equity Backed by Real Assets
Preferred equity is different from common equity in that it has a fixed, stated dividend that must be paid ahead of the common dividend. Moreover, in case of liquidation, the preferred shareholders have priority and must be made whole before common shareholders get a penny.
Most importantly for retirees, it produces safer and more consistent income.
But just like with other stocks, you need be very selective when investing in preferred shares if you want to avoid losses.
At High Yield Landlord, we favor a specific kind of preferred shares that are cumulative, backed by real assets, coupled with the REIT structure, and discounted relative to par:
- Cumulative shares: This means that even if the preferred dividend was temporarily suspended, the company must still pay all the missed dividend payments at a later date before it can resume the common dividend. It motivates the company to pay the preferred dividend in full and on time.
- Backed by Real Asset: As long as the value of the preferred equity is more than covered by valuable real assets (ex: buildings), the preferred equity can be made whole even in a liquidation. We only invest in preferred shares that are backed by real assets and offer good margin of safety even if things go south.
- REIT Structure: The REIT corporate structure forces companies to pay 90% of taxable income in the form of dividends. We find that for this reason, REITs are even less likely to suspend their preferred dividend payments. They need to pay it to avoid tax consequences. Moreover, REITs will generally own a lot of valuable properties which lowers risk in case of liquidations.
- Discounted Relative to Par: We always attempt to find high quality preferred shares that trade at a discounted value. This results in better margin of safety and long term appreciation potential.
We have found that by combining these 4 factors, we are able to achieve better risk-to-reward from our preferred share investments. Our Retirement Portfolio has never suffered a dividend suspension and it is able to generate an ~8% average yield from its preferred share investments.
One great example is Global Net Lease Series A Preferred Shares (GNL.PA). GNL is a diversified net lease REIT with valuable real assets that generate steady and predictable cash flow.
The preferred shares are cumulative, trade at a 5% discount to par and pay a 7.5% dividend yield. Assuming that the shares are called in 2022, investors would earn a nearly 10% annual total return, which is very attractive for a relatively safe investment in a yield less world.
#2 – Real Estate Investments
We also invest heavily in real estate to generate steady rental income. After all, the name of our investment community ends with the word “landlord” (High Yield Landlord).
Today, it is easier than ever before for individual investors to invest in income-producing real estate investments without having to deal with the ugly 3 Ts: tenants, toilets and trash.
There exists ~250 REITs and a large portion of them are publicly traded. You can buy shares in them, just like you would buy shares in any other company, and get indirect exposure to a real estate portfolio that will throw consistent cash flow to you the owner.
However, it is crucial to understand that not all REITs are created equal. Some are heavily leveraged, others are not. Some own hotels, others own apartments. Some enjoy strong track record, others don’t…
You need to be very selective to identify REITs that are suitable for Retirement Portfolios:
Source: High Yield Landlord
At High Yield Landlord, our Retirement Portfolio only invests in blue-chip REITs with:
- Strong Track Records: They have significantly outperformed other REITs over the past many decades.
- Defensive Properties: They own well-diversified portfolios that generate steady, recession-proof cash flow from long leases.
- Investment Grade Balance Sheets: We only invest in BBB, BBB+ or A-rated companies with significant liquidity and good access to capital.
In most cases, they have managed to sustain and grow their dividends for many years in row. As an example, Federal Realty Trust (FRT) owns a Class A portfolio of mixed use urban properties with apartments, essential retail, office and entertainment space. It has an A-rated balance sheet and a track record of significant outperformance.
Finally, it has a 52-year track record of consecutive dividend increases:
It suffers in the near term because of the economic shutdown. However, as we reopen the economy, rents will start flowing again, and the company is highly unlikely to cut its dividend as it would ruin a 52 year track record.
Right now, the dividend yield is a generous 5.5% and we expect 70% upside potential as it returns to previous highs in the recovery.
#3 – Private Lending
Bonds and treasuries pay close to nothing in the public market.
However, in the private lending market, there exists some great opportunities to generate much higher income if you do not need to access daily liquidity.
At High Yield Landlord, we diversify our REIT and Preferred Share Portfolio with crowd-sourced private loan opportunities. More specifically, we invest in loans that are backed by valuable properties that serve as collateral.
Example of collateral for one of our loans:
Source: High Yield Landlord Loan Article
They lower the risk of our Portfolio and they also boost its average yield. Historically, they have earned us an 11% annual yield and we are yet to suffer any losses. This may sounds “too good to be true” in today’s market, but there are some risk mitigating factors that need to be taken into account.
First of all, the loan-to-value of these loans is never above 65% and we always have an independent appraisal of the collateral. As such, even if the loan went into default, we have good chances of getting our principal + interest.
Secondly, the loans have a short duration. Generally, the loans mature within 12 months. It allows us to recoup our capital within a short time period and reinvest it in other opportunities .
Finally, the lenders will generally have to give up personal liability for the loans, and most of them are successful real estate entrepreneurs.
To be clear, you cannot earn a >10% yield without risks, but we believe that the risk-to-reward is very attractive. They are not risk-free, but they are certainly safer than stocks that pay >10%.
Our Retirement Portfolio invests up to 20% of its capital into these loan opportunities to boost its yield and diversify risks.
Unfortunately, a lot of retirees were seduced by high yielding opportunities that proved to be very risky over the past years. As an example, MLPs (AMLP), BDCs (BIZD) and mREITs (REM) have ruined many portfolios in 2020:
“Everyone has a retirement plan until they get punched in the face.”
To survive this crisis and achieve strong retirement income, you better have a game plan. At High Yield Landlord, we do not attempt to maximize income at all cost. We much rather earn a safe 6% yield than a risky 10% yield that eventually leads to massive capital losses.
Is our Retirement Portfolio immune to losses? It sure isn’t, but we believe that it offers the best mix of yield and safety in today’s market.
Investing in regular stocks and bonds does not generate enough income.
Investing in most high yield sectors is too risky.
Our Portfolio combines the best of both worlds to maximize safe income.
Launch of Retirement Portfolio!
At High Yield Landlord, we recently launched our Retirement Portfolio to target undervalued blue-chips with sustainable dividends. It currently yields 6% and has up to 50% upside potential.
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Disclosure: I am/we are long FRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.