Retire Early With These 2 High-Yield SWANS

Co-produced with “Hidden Opportunities”

Early retirement handwritten in a note.

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The stock market is a complex institution driven primarily by two emotions: fear and greed. Succumbing to these emotions can profoundly harm investor portfolios. This is why successful investors need a higher emotional quotient (“EQ”) than an intellectual quotient (“IQ”):

A lot of people with high IQs are terrible investors because they’ve got terrible temperaments – Charlie Munger

When markets tremble in fear and experience selling pressure across the board, most investors start building cash reserves and wait for the market to rebound before they deploy additional capital. While this sounds comforting, this approach often leads to inferior returns in the longer term.

Looking at the 30 years of market performance since 1980, we can see that staying invested through the chaos produced better returns than various attempts to buy the market bottom. (Source: Edward Jones.)

Market Timing Doesn't Work (40 year study)

Edward Jones

There will always be some factor troubling the markets. If it is the Fed’s hawkish pursuits to decelerate inflation today, it will be something else tomorrow. If you are waiting with cash today, there is a good chance you will be waiting for an unhealthy amount of time. Remember, it is time invested in the market that matters, not market timing.

I’ll tell you why I like dividend-paying companies. When the price of a 5% yielding company drops by 30%, it now yields 7%. This means a $1 million cash investment that would otherwise produce $50,000 can now produce $70,000 annually. I realize that I can’t redeploy my already invested assets at this reduced cost basis, but I can buy more to build upon my current income stream. If you are interested in retiring early, why not get started with getting more bang for your buck? Use selloffs to grow your income. We have two fundamentally strong picks with yields of up to 12% to fuel your pursuit of early retirement.

Pick #1: TPVG, Yield 12.9%

We are amidst a terrible market for companies to go public. Valuations have shrunk considerably, causing founders to shrug at the idea of raising capital at these levels. As of mid-August 2022, only 27 companies have gone public in the U.S., raising a total of $4.2 billion, according to PitchBook data. That is a massive decline from 185 companies that went public during the same period last year (raising $538.5 billion).

Make no mistake, just because it is a bear market doesn’t mean innovation has stopped or that growing startups don’t need money. Young companies that were eager to go public this year have been forced to put those plans on ice amid the market meltdown. They are looking elsewhere for their financial requirements.

This brings us to the good news – leading venture financing firms are reporting a surge in debt financing inquiries from these pre-IPO companies. Venture lenders often require a first lien on assets such as intellectual property or the company itself. They primarily make money through interest payments, fees, and warrants. Venture debt is typically floating rate and short-term in nature, with the period averaging three years and accompanied by the expectation that most borrowers will service the full interest and fee payments and repay the full principal well within that period. To sum up, venture debt is a founder-friendly form of growth capital that involves no board seats and no personal guarantees and doesn’t come at the cost of reduced ownership (or decision-making authority) in the company.

TriplePoint Venture Growth (TPVG) is a unique Business Development Company (“BDC”) specializing in early-stage companies’ venture debt financing. TPVG’s portfolio comprises debt (88%), warrants (6%), and equity kickers (6%), and this BDC has been comfortably earning over its distributions since its IPO in 2014.

Distribution coverage since IPO

TPVG Investor Presentation (June 2022)

With an IPO price of $15.55, TPVG has paid $12.58 in cumulative distributions until Q3 2022, including $0.35 in special distributions. The BDC currently pays a $0.36/share quarterly dividend, a sizeable 12.9% annualized yield!

TPVG has been growing its portfolio at record levels due to the depressed equity markets and rising interest rates. The BDC has made more YTD investments than in previous years and is well-positioned to continue as the Fed continues its hawkish approach to arrest inflation.

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TPVG Investor Presentation (June 2022)

While TPVG’s assets are floating-rate, 79% of their debt is Fixed Rate. This bodes well for the BDC in this rising rate environment as shown by the company’s projections. 59% of TPVG’s asset portfolio is floating rate with 3.25% or higher Prime Rate Floors. The Fed’s short-term rate increases are tailwinds for TPVG’s Net Investment Income (“NII”).

TPVG Debt Profile

TPVG Investor Presentation (June 2022)

Effect of rising rates on TPVG NII

TPVG Investor Presentation (June 2022)

Here is what the CIO had to say during the recent conference call:

Our performance during the second quarter doesn’t include the full impact of the prime rate change on June 16, which will contribute more significantly in Q3, along with the additional prime rate increase in July. – Sajal Srivastava, CIO

We are in October now and have seen two more rate increases since this quarterly call. We expect Q3 NII to be well above the quarterly dividend, providing significant dividend safety to investors.

For a business that continues to execute strongly, TPVG is undervalued, trading at an attractive 20% discount to NAV. This may be a bear market, but some companies are performing well. We should seek market price disconnects and opportunistically add to our income portfolio. TPVG is one such BDC that has multiple tailwinds in this macroeconomic climate. With substantial exposure to floating-rate assets and rising demand for venture debt amidst the tech market collapse, the undervalued TPVG is well-positioned to out-earn its distributions and reward shareholders through volatile market conditions.

Pick #2: O, Yield 5.1%

Realty Income Corporation (O) needs no introduction. This real estate investment trust (“REIT”) has trademarked itself as The Monthly Dividend Company and has a stellar track record of 27 consecutive years of dividend increases. With the recent sell-off, it is a great option for those who are looking for a high-quality dividend growth pick.

The Dividend Aristocrat maintains a massive portfolio of 11,427 properties with triple-net lease arrangements with over 1,125 clients. Notably, ~94% of O’s tenants represent industries resilient to economic uncertainties, and these services primarily rely on their physical location to pursue operations.

43% of O’s rent comes from investment-grade clients, and their portfolio has a weighted average lease term of 8.8 years. At the end of Q2, the REIT reported occupancy was 98.9%, its highest in over ten years, indicating strength in the company’s fundamentals. (O Investor Presentation.)

O - Portfolio Composition

Realty Income Investor Presentation (August 2022)

As a business, O thrives during recessions. They strategically make acquisitions at higher cap rates to expand their asset base and improve the value proposition to shareholders.

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Realty Income Investor Presentation (August 2022)

Hence, it is no surprise that the company is increasing its 2022 acquisitions guidance to over $6 billion. O’s balance sheet carries A3/A- credit ratings by Moody’s and S&P, with 93% fixed-rate debt with staggered maturity. This is a tremendous benefit during an economic climate with rising rates. The REIT has a healthy weighted average term to maturity of notes and bonds of 7.6 years.

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Realty Income Investor Presentation (August 2022)

O is a monthly dividend payer, the monthly $0.248/share payment represents a 5.1% annualized yield. During the Q2 conference call, management reaffirmed the 2022 adjusted funds from operations (“AFFO”) per share guidance of $3.84 to $3.97, representing nearly 9% annual growth at the mid-point. The midpoint of this AFFO guidance indicates that the dividend comes at a healthy payout ratio of 76%.

O is well-positioned to grow its dividend annually and maintain its Dividend Aristocrat status. The market sell-off presents an attractive opportunity to lock in a 5.1% yield from this dividend grower. We expect the REIT to continue strategic acquisitions in these weak market conditions and reward shareholders with growing income over the longer term.

Dreamstime

Dreamstime

Conclusion

They say dead people have the best portfolios. Fidelity reviewed the performance of its customers between 2003 to 2013. This analysis found that the best returns were from its customers who were either dead or inactive. These customers either passed away and had their assets frozen or forgot about their investments. Doesn’t this tell you that the best method to pursue the stock market involves making money passively?

Equity markets can be nerve-wracking. It is easy to get caught up and make emotional decisions that may give you relief today but are bad for you in the longer term.

The great fortunes in the investment world are often made by buying things at discounts. – David Rubenstein, Co-founder, Carlyle Group

Retail investors carry this delusion that the market bottom will be this magical moment when every media outlet will flash buy signals, billionaires will give interviews about the stocks they are buying, and hedge funds will wrap up their short positions. Funding the market is a guessing game with very few success stories. Is it a bottom, or is it a dead cat bounce? No one knows. Most often, the bottom is confirmed weeks after it has happened, and you are settling for far less if you buy at that point.

Market sell-offs are tremendous opportunities to increase portfolio income by spending less to buy quality securities. Some companies continue executing well and are reporting record profitability during these supposedly challenging times. This translates into shareholder benefits in the form of increasing dividends. Taking advantage of these market drops and buying such quality names is instrumental in building large fortunes, achieving financial independence, and positioning yourself well for early retirement. Two fundamentally strong picks with up to 12% yields to get you started down this path.

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