Yes, You Can Retire On Dividends, 2 Big Yields Up To 11%

Co-authored by Treading Softly.

For decades, retirement planning focused on the “retirement stool.” This would be a three-pronged approach to try and have a sustainable retirement. One leg would be Social Security – the government-defined benefit they should receive for the rest of their life. Another leg would be at their pension plan – their company-provided benefit that they, again, should receive for the rest of their life. The last leg was their personal savings.

Over time, however, this three-prong approach has slowly been eroded. Direct company-defined benefit plans – pensions – are gone. So now, you don’t have a stool; You have just two legs. Unfortunately, many people who live their daily lives aren’t saving for their retirement, whether in 401k from their workplace or in personal savings, which leaves many people wholly reliant upon the government’s Social Security plan to pay for their retirement. But many people don’t realize that Social Security is designed to replace only 30% of a retiree’s income. It’s not meant to be something you live on alone. It’s meant to give you a small boost to help you. At one point in time, over 50% of Americans said that they were not saving for retirement at all. Typically, those numbers climb percentage-wise as the economy weakens and enters into a recession. Simultaneously, more retirees are created from companies shutting down or slimming down their operations, forcing people into a retirement that they may not have even planned for and might be wholly unprepared to have.

I often get a question from a panicked, new retiree or a close-to-retirement individual, asking the same question: Can you really retire on just dividends? The answer is yes! Yes, you can.

With my unique income method, I don’t have you create just a three-pronged stool. I help you create a method where you receive income streams from over 40 unique investments. That’s along with your Social Security and whatever other savings you may have. This many income sources means that if one of those legs happens to fail, your chair isn’t falling over. Instead of selling off your investments and your savings to try and pay for your daily bread. let those companies pay for your daily bread themselves, all while you maintain your ownership.

Today, I want to look at two great options that you can invest in today and enjoy income for decades to come.

Let’s dive in!

Pick #1: BGR – Yield 6.3%

With the 10-year Treasury (US10Y) rising, the threat of war in the Middle East, and continued uncertainty over the Fed, few investments are off to a good start for the second half.

One notable exception has been oil companies. BlackRock Energy And Resources Trust (BGR), a closed-end fund (“CEF”) that focuses on investing in large-cap oil companies, has a NAV that is near its 3-year high.

These NAV gains are in addition to a 6% dividend yield that it pays out. BGR has a straightforward investing strategy – it buys big oil. Exxon Mobil (XOM), Shell PLC (SHEL), and TotalEnergies SE (TTE) make up over 36% of its portfolio. Source.

BGR isn’t really exercising some special investment acumen here. It is buying big oil. Then it sells covered call options to get a bit more income, usually on about 30% of its portfolio.

It is a great time to be in the black gold business, with oil prices showing no signs of coming down. Escalating violence in the Middle East only increases the possibility that oil goes back over $100/barrel. Even if it doesn’t, oil companies are thriving on $70-$90 oil after facing sub-$60 prices for most of 2015-2020. Free cash flow is high, providing oil companies an opportunity to deleverage, buy back stock, and raise dividends.

Why not just buy oil companies directly? While it’s a very reasonable decision, the yields are too low to achieve my income goals. BGR’s 6% yield is a better fit for my goals than XOM’s, which is slightly over 3%.

While BGR’s NAV has been climbing, the trading price for BGR is much lower. Why would I pay $14.28 when I can buy the same assets for $12.51?

With BGR, I can invest in the strong fundamentals of oil, I get to buy at a steep discount, and I receive a higher yield. This makes BGR a great option for an income-focused portfolio.

Pick #2: HQH – Yield 11%

I’ve been doing a lot of comparisons of current conditions to the period preceding the “dot-com” bust. The data I look at tells me that there is a lot in common between right now and that period. Often, I’m not even looking for it. For example, Tekla Healthcare Investors (HQH) is trading at a 19% discount to NAV. This is a level we haven’t seen in the past decade, except for a brief moment in March 2020. (On Nov. 2nd, Tekla Healthcare becomes abrdn Healthcare.)

HQH is one of the oldest funds in my portfolio, with a history going back to the 1980s, so I wondered if this size of discount ever happened before. Turns out it did; from 1999-2001, HQH’s discount to NAV was greater than 20%:

History might not repeat, but it sure does rhyme!

If history is going to rhyme some more, we love the tune. From 2001, HQH enjoyed 20 years of outperformance before the recent headwinds brought it down.

What are these headwinds? Well, they aren’t so different from the headwinds seen in 2000. High interest rates, elevated inflation, and government regulations.

1. High interest rates: Like many businesses, most healthcare companies rely on debt to fund capital expenditures. With the costs of debt rising, higher interest expense impacts cash flows. Companies either need to operate at lower levels of leverage or pay the higher interest expense. Either decision is a headwind to earnings available to investors. This is a story that is playing out in all mature industries.
2. Elevated inflation: When businesses experience inflation, they typically pass it along to the consumers. However, how quickly a business can pass along inflation is not uniform. In some industries, inflation is passed along to consumers almost immediately. For example, if you drive by a gas station, you are keenly aware that prices will change quickly. In other industries, there is a lag. Healthcare is one of those industries where there is a significant lag between when the company experiences inflation and when the prices to the consumer are increased. The reason is that for many healthcare companies, most of the bills are paid by insurance companies or the government. Insurance companies negotiate rates well in advance, and until contracts expire and new ones are written, the price remains fixed. The government imposes rates it is willing to pay, often using information on what insurance companies are paying. Providers can do little but wait for the increases to be approved. Revenue will catch up, but there is a period where expenses rise faster than revenues, which many businesses in healthcare have experienced over the past two years.
3. Government regulations: Healthcare is always a hot-button political topic, and with government payments accounting for a large chunk of healthcare spending, that isn’t going to change. The regulatory landscape for companies in the healthcare sector is always changing as the political landscape changes. Historically, healthcare companies have always adapted as a group, and the healthcare sector has provided very strong returns to investors despite numerous regulatory changes over the decades.

HQH has a variable distribution policy. It pays out 2% of NAV each quarter. As a result, the dividend will change every quarter and will go up or down with NAV. Keep in mind that HQH’s dividend is based on NAV, not on the market price investors are paying. So, when we buy at a discount, we get the benefit of a much higher yield. We expect the Q4 dividend will be $0.38.

HQH is trading at its largest sustained discount to NAV in over 20 years. Even during the GFC from 2008-2009, HQH’s discount was greater than 20% for only a few months. This is a fantastic opportunity that I am happy to take advantage of and buy more shares.

Conclusion

Both BGR and HQH provide you with income from longstanding industries and sectors. Both of these funds allow you to enjoy a steady income stream that will allow you to enjoy your retirement to its fullest. These aren’t companies that are standing on shaky legs, worried about the next change in interest rates or the next war that might break out. These are also companies that are not worried about when their next debt is going to mature and how they’re going to pay for it. These funds invest in companies that are in a sector that is long-standing and have survived through recessions, wars, and depressions. As technology advances, they are able to create higher levels of profit from their discoveries. The demands for healthcare continue to rise as our population ages. The demand for commodities continues to rise as we shift from being an oil-focused society to being one that has so much plastic they don’t even realize that there’s going to be the same fossil fuel demands. While you may enjoy a renewable energy source, plastics are still created from the same source that you previously used for fuel.

When it comes to your retirement, the best thing that you can do for your retirement is to not create a stool of just three legs. There’s a reason why we encourage investors to be diversified. That’s because, in that diversification, there is safety. Safety that so many retirees crave so that they can lay their heads on their pillow at night and sleep peacefully. If you’re not able to have a restful sleep because you’re worried about your financial future, then it’s time to change your investment method. I’d love to help you do that.

That’s the beauty of my Income Method. That’s the beauty of income investing.