Retire Early With Passive Income: 3 High Yield Top Picks

While there are many paths to early retirement, we believe that none offer the ability to truly live life on your own terms better than generating passive income from a diversified portfolio of dividend stocks.

While the rental property investing path is appealing in many ways, it really is no different than buying your own business, so it is not truly passive investing. There are also increased risks ranging from personal liability to a lack of sectoral and asset diversification.

Another highly popular path – index investing in low-cost funds like the SPDR S&P 500 Trust ETF (SPY), the Vanguard S&P 500 ETF (VOO), and the Invesco QQQ ETF (QQQ) – certainly excels at the passive and diversification portions of the early retirement equation. However, these funds are near all-time highs, often overdiversify (“di-worsify”) by holding many bad stocks alongside the good ones, and – perhaps most importantly – generate miniscule dividend yields under 2%. This makes it extremely difficult to generate sufficient passive income from them to retire early without become very wealthy.

As a result, early retirees have to depend on the 4% Rule or something similar, which essentially leaves them vulnerable to market crashes. In the current high-inflation and high-uncertainty environment, this is a very risky and unsettling outlook for those thinking about retiring early.

As a result, we believe that investing in a portfolio of 25-30 high yield securities, diversified across a variety of sectors and even geographies offers the best overall approach to early retirement. Studies have shown that this is an optimal number of holdings as it provides the vast majority of the same diversification benefit as that offered by large index funds, but also still allows you to know what you own and focus on the best opportunities available in the market.

On top of that, a portfolio of this size offers much better diversification than a rental property portfolio and is also far more passive given that you do not need to deal with tenants, toilets, or trash and also avoid the personal liability risk.

Last, but not least, the combination of the high income yield with the easy liquidity provided by being publicly traded securities means that the income stream is very lucrative and – if the stocks are chosen successfully – likely to grow over time. This is because – on top of any dividend growth in the stocks themselves – capital recycling between securities as they fluctuate with the moodiness of the market makes it easy to give oneself a de-facto dividend increase.

That said, high yield investing is not easy as Mr. Market – despite his moodiness and inefficiency at times – is not stupid. There is no such thing as a free lunch (or in this case, early retirement), so investing in high yielding securities requires a lot of work and effort. At High Yield Investor, we spend thousands of hours per year and tens of thousands of dollars to scour the market for the very best opportunities in the High Yield space in order to generate outsized returns without taking on outsized risks. In today’s article, we will share 3 of our top high yielding picks in order to help you get started building a passive income machine for yourself.

#1. Energy Transfer (ET)

ET has already generated enormous returns for our portfolio since we added it back in December of 2020. However, we believe that it has much further to run. Management has recently stated that their top priority is restoring the distribution to its pre-cut annualized level of $1.22. Given that the current unit price is $11.82, that implies a mouth-watering income yield of 10.3%.

On top of that, ET has a lot of other great things going for it.

Its expected distributable cash flow for 2022 is $2.27, which means that it has a clear path to raise its distribution back to pre-cut levels in the near future while simultaneously continuing to deleverage, fund growth CapEx opportunities, and possibly even buy back units if it chooses to.

ET also continues to have growth projects coming online and also has much of its pipeline contracts linked to inflation. This combination along with reduced interest expense due to paying down debt should help offset recontracting headwinds and push distributable cash flow per unit higher.

Furthermore, the continued reduction in debt and increases in EBITDA should help leverage continue to decline, potentially setting ET up for a credit rating upgrade in the next year or two from BBB- to BBB.

Last, but not least, despite its recent strong unit price performance, ET remains deeply undervalued relative to investment grade MLP peers. Its EV/EBITDA ratio of 8.42x remains quite discounted compared to Enterprise Products Partners’ (EPD) EV/EBITDA of 10.07x, Plains All-American’s (PAA) EV/EBITDA of 9.77x, and Magellan Midstream Partners’ (MMP) EV/EBITDA of 11.66x.

Given its attractive and safe yield and strong fundamental and valuation upside, ET makes a great candidate for a passive income portfolio.

#2. STORE Capital (STOR)

STOR is a great wealth compounder. As a triple net lease real estate investment trust, it boasts a broadly diversified portfolio of high quality real estate backed by very conservatively structured contracts. On top of that, it has been expertly managed and as a result has an impressive track record of dividend growth and generating total returns that have beaten the broader REIT index (VNQ).

After underperforming over the past year, STOR now yields over 5.2% with continued mid-to-high single digit annualized growth prospects for the foreseeable future. On top of that, it has a BBB credit rating and overall a very strong balance sheet and high quality real estate portfolio. For investors looking to compound wealth and income over the long-term STOR is an excellent choice at the current price.

#3. Patria Investments (PAX)

Last, but not least, PAX offers asymmetric risk-reward as a high-growth and high-yielding alternative asset manager. The company is well-positioned to become the Blackstone (BX) of Latin America as it enjoys commanding market share in the region and largely avoids competition with the only other major alternative asset management player in the region – Brookfield Asset Management (BAM) – due to different investment themes and asset size focuses.

PAX pays out 85% of its distributable earnings each quarter to shareholders – a similar policy to what is employed by BX – and offers a forward yield of 5.1% compared to BX’s forward yield of 3.9%.

On top of offering a more compelling immediate yield and valuation, PAX also has substantially greater growth potential as it has less competition in its target market, operates in a highly underpenetrated and fragmented region, and is operating off of a much smaller base. The company has guided for strong growth in 2022 and the analyst consensus is that earnings-per-share will increase to $1.45 by the end of 2023, up from $0.47 in 2020. That puts the current P/E valuation based on 2023 expectations at a mere 11.7x, with an expected dividend payout of $1.20 in 2023 as well. That means the yield on cost by the end of 2023 if analysts forecasts come true will be a whopping 7.1% with more growth to come following that.

While it is true that PAX does have more risk given that it is operating in Latin America, the company has no debt, plenty of cash on its balance sheet, and insiders own a large percentage of the company with lengthy lock-up periods on much of their equity. Furthermore, PAX has a multi-decade track record of generating substantial outperformance in its funds despite facing severe economic, geopolitical, and foreign exchange headwinds over that span.

Investor Takeaway

With many paths to financial independence and early retirement, investors can pick which one works best for them and their desired lifestyle. For those looking to truly enjoy passive income and live life fully on their own terms as soon as possible instead of being tied down by managing a large real estate portfolio, having to work longer to generate enough passive income from ETFs, or worry about market crashes wiping out their equity when they go to sell shares to fund living expenses, investing in a diversified portfolio of 25-30 high yielding stocks is a great path.

At High Yield Investor, we enjoy a safe and growing weighted average dividend yield of 5.3% at present along with substantial stock market outperformance. STOR, ET, and PAX each occupy large positions in our current portfolio and we believe will continue to play a major role in providing attractive, safe, and growing current income alongside substantial long-term total returns.