georgeclerk/E+ via Getty Images
Co-authored by Treading Softly.
A poem famously opens with:
“‘Twas the night before Christmas, when all through the house. Not a creature was stirring, not even a mouse.”
Written by Clement Clarke Moore in the 1800s, A Visit From St. Nicholas is a highly popular poem in the United States. Many families make a tradition of reading it on Christmas Eve.
As much as I savor this poem, I have always been suspicious about no one and nothing was stirring on that Christmas Eve night. I don’t know about you, but most of the world seems to suffer from higher levels of illness during the wintertime because of the colder weather. So, what they’re trying to tell you is there was not even a single person who was coughing, sneezing, sniffling, or struggling from any sort of illness on this specific night of the year. As a parent to four children, I would love it if that was true – maybe it will be for me this year. Fingers crossed.
When it comes to wintertime, the cold and flu season seems to come hard and fast every year. Now we have to add in the concerns about RSV and COVID-19 becoming seasonal illnesses as well. The fall and winter are times when you need to bulk up on your health. It’s something that you need to be mindful of all year round, but especially when you’re more susceptible to getting sick. It should come as no surprise to long-term investors that the healthcare sector has been a consistent performer, with various names providing strong returns throughout the decades. While I don’t admire to invest solely in capital gains, I look for income for the market. I frequently use funds that allow me to leverage the skills of highly skilled portfolio managers to create income in sectors that usually don’t furnish dividends.
Today, I want to take a look at one fund that focuses on the healthcare sector and see how it can furnish you with strong income for decades to come.
Let’s dive in!
Take Your Income For A Check-Up
abrdn Healthcare Investors (NYSE:HQH), yielding 9.5%, is an old fund with a new owner. Tekla was recently bought by abrdn. Don’t worry, HQH‘s management is staying the same. In fact, the reason abrdn bought Tekla was to gain Tekla’s go through and expertise in the healthcare space.
You will find very few CEFs (Closed-End Funds) that have been going on for over 30 years. And you will find even fewer that have outperformed the S&P 500 (SP500) over such a long period.
Yet, even looking at the long-term chart, you will note that HQH’s performance has dipped from beating the S&P by a lot, to not as much. This is because the medical space has declined significantly in the past two years, and HQH, in particular, is trading at a very large discount to NAV. HQH is trading at its steepest discount to NAV since the GFC:
If we zoom in on the GFC, we can see that HQH traded below a 20% discount to NAV for only short periods:
The bottom line is that HQH is trading at a steep discount relative to its own history, especially if we consider that current market conditions are bullish. When a fund that has a great history of outperforming over the long run is trading at a steeper discount to NAV than it normally does, that should be setting off our instinct to buy.
The medical sector is facing a number of challenges in the aftermath of COVID. Including:
- Higher labor expenses as the shortage of medical staff was amplified by COVID.
- Inflation running ahead of revenues – most companies in the medical sector are restricted from increasing prices through contracts with insurance companies and government regulation. As a result, the benefits of inflation on revenue lag the impact of inflation on expenses.
- Large lawsuits. Litigation is a constant factor for medical companies, but very large and prominent lawsuits against various pharmaceutical companies have dominated the news cycle.
- Repayment of COVID-era assistance. Some segments of the medical industry received “advances” to help during COVID. These funds needed to be paid back and were due in 2023. This put pressure on cash flow and, in some cases, caused companies to take on debt to repay on time.
- Growth investors rotating out of the sector. While Growth investors have always splashed around in small biotech companies, hoping to recognize the ones that will be bought out by the big companies, most medical companies historically fall into the category of “Value” stocks. The reason is that it is a mature industry that produces a lot of current cash flow. During COVID, Growth investors flocked into them, attempting to recognize which company would have the most success with a COVID vaccination. Now they have returned to being cash cows, and Growth investors have little interest.
These are likely the challenges that investors are focused on today as they sell medical companies. Are they really more challenging than what these companies have seen in the past, admire the reimbursement cuts in the late 1990s or the complete overhaul of how insurance works with Obamacare in 2010? No, they aren’t. I’d argue that they are a lot easier challenges to deal with. Investors who held HQH through those periods did well. Investors who bought during those periods when HQH was trading at a double-digit discount to NAV have seen excellent results.
So, while the traders in the market are focusing on the short-term headwinds, I’m buying more shares. HQH pays a variable dividend, which is 2% of NAV each quarter. When the sector rebounds, I can be assured that I’ll get my cut when NAV climbs.
Conclusion
With HQH, I can gain exposure to many high-quality healthcare sector companies and acquire strong quarterly income while doing so. On top of its stellar long-term outperformance of the market, HQH is available at a highly attractive discount to its NAV, meaning I’m getting more value per dollar invested. It’s important to recall that HQH pays a variable distribution, so don’t let headlines get you distracted from the value you’re receiving.
When it comes to retirement, I don’t want you to have to pick between feeding your family and paying for healthcare. Instead, I want you to be able to have the healthcare sector paying you to feed your family and for any care that you may need. You can use a fund admire HQH or others that we hold within our Model Portfolio to glean strong income from this sector and to be able to pay for your retirement simultaneously. True financial freedom is achieved when you don’t have to pick between two necessary things in your life; it’s when you can have both without concern.
That’s the beauty of my Income Method. That’s the beauty of income investing.
