Coffee. A cup of coffee. A cup of mud. He has many names. All over the world, it is a drink that people are becoming obsessed with. Some people say coffee renews their soul and is delicious and luscious. Others can’t even start their day without a cup of coffee in the morning. Many consider themselves coffee connoisseurs or coffee addicts, looking for that powerful hit that caffeine can deliver!
Well, let me tell you the truth, I’m a drug addict.
But no coffee, oh no! I love the sound of coffee pouring into my coffee maker as much as you do, but that’s not my real addiction. I’m addicted to seeing dividends flow into my account. Some people are addicted to the sweetness of chocolate, others to the taste of coffee, but my guilty pleasure is the dividends.
Every day I open the “Dividend Tracker” built by the High Dividend Opportunities team to check when my next paycheck is. Knowing when I will be paid makes me happy and gives me a boost! A recurring and stable income is essential for retirees and a dream for all investors, as it helps you plan ahead!
Lately, I’ve been buying what the market was selling heavily. No, I don’t buy the dips to resell them in a few days. My strategy is to generate additional income. I can’t help but hit the buy button when I see strong companies and funds with great fundamentals at a great price.
Today I want to share two choices that I buy for their strong future earnings, knowing that I will be paid by them in the next few days.
Choice #1: WPC – Yield 5.3%
WP Carey Inc. (WPC) is a “triple-net” REIT. This means that the tenant is responsible for most of the costs at the property level. Insurance, routine maintenance and taxes are the responsibility of the tenant.
This is an ideal structure in an inflationary environment for the owner. Expenditure on real estate is also the most impacted by inflation. As far as expenses are concerned, inflation is not significant for WPC. On the revenue side, WPC is 57% exposed to CPI-related rent increases. 37% of them are “uncapped”, which means that the rent will increase regardless of the increase in the CPI. (Source: WPC Investor Presentation)
Inflation increases revenue while having a minimal impact on expenses, which puts WPC in a strong position to benefit from inflation in the US and Europe, where inflation is proving even more robust.
For many years, WPC’s same-store rent growth was only 1-2%. In the second quarter of 2022, this represents up to 3% and will increase even more next year as inflation continues to rise.
For more than a decade, same-store rent growth has been anemic, making it a weak contributor to overall earnings growth. That is changing, with growth of over 3%, WPC will experience solid growth even before investing in new properties.
WPC has a fantastic dividend record, increasing every quarter for over 20 years. However, the magnitude of these increases has diminished in recent years due to slow rental growth. WPC is well positioned for even more aggressive dividend growth as rents rise faster. The next ex-div date is September 29 for $1,061.
When the market is bleeding red and selling “everything”, high quality companies should be at the top of your shopping list. WPC dipped below our buy under, I’m going to grab a few more shares before it goes back up!
Choice #2: ECC – Yield 17.2%
Eagle Point Credit Company (ECC) has a “problem” for an EFC, it has made “too much” money and has not distributed enough of its taxable income. CEFs are required to distribute most of their taxable income. ECC is therefore solving this “problem” by paying investors an additional extra dividend of $0.25, on top of their regular monthly dividend of $0.14 in October.
Despite this, ECC is trading at a discount to its August NAV of $11.27 to $11.37. What are investors so worried about? One thing I often hear is that investors are concerned about the quality of loans. CLO equity positions are volatile because they are leveraged. CLO equity is the first tranche to realize losses, so the big risk with CLO equity positions is if borrowers fail to repay their loans. Of course, defaults will happen, that’s the reality of lending, and some borrowers won’t repay. The other reality is that if the return received is high enough, it more than compensates for the shortcomings. So when we talk about ECC, the biggest question we need to answer is “what is the risk of default”.
Is ECC exposed to “particularly risky” loans? With such a high yield, that’s what many assume. Yet when we look at the loans in ECC’s portfolio, they are trading at an average price of $94.13. In this environment, it’s average.
In fact, ECC’s exposure to loans below $80, a line that’s typically used as a “rule of thumb” to determine if the market thinks it might be in trouble, is less than 4%. These are not “poor quality” loans. These are very average leveraged loans. Prices have gone down because the price of all debt has gone down. We can see this if we compare it to ECC’s portfolio in Q4 2019.
The “average” loan price was higher at $96.49, but the risk was higher, with 4.2% of loans trading below $80. And it’s a wallet that came through COVID-19 with few flaws and fully recovered.
ECC produces an immense amount of cash flow relative to NAV, with $1.12 of recurring cash flow last quarter. The $0.42 dividend was easily covered by many excesses.
What does ECC do with that other $0.43 of extra cash flow that hasn’t been paid out in dividends? Reinvest in new positions in CLO shares. ECC has been a net buyer of assets. Who benefits from low prices? Buyers!
That’s why we don’t panic when ECC’s book value goes down. This is not an indication of a great risk. These are mostly loans that are trading in the $90s because interest rates are rising and credit spreads are high. This means that existing loans are cheaper. For ECC, it just means they might have the same “problem” as before – their income might be “too high” and they will have to pay more dividends.
Don’t worry, I’m happy to take those excess dividends off them!
ECC pays monthly – next ex-div date is October 7th for $0.14 + a special distribution of $0.25, for a total of $0.39.
Today we looked at two good coffee choices. With ECC, we get a monthly income. Something to enjoy every month, as stable as my morning coffee. With WPC, we get quarterly revenue, which continues to grow and climb over time. The next dividend increase is coming in the next quarter!
Retirement should be a time to relax and enjoy life. For many, starting the day with a cup of coffee is the start of a great day. Maybe they’ll watch a beautiful sunrise while sipping their cup of coffee and planning their day.
With reliable income from monthly and quarterly payers, you can plan your life without wondering, “How am I going to afford this?”. Your response is coming soon in the form of another dividend filing.
Do not trade in this volatile market as it could ruin your day by making you angry or even worse, causing you to lose your hard earned money.
Focus on financial freedom and gather solid, cheap dividend picks such as WPC and ECC to enjoy a happy, stress-free retirement! That way, every morning when you brew your cup of coffee, that dripping sound of freshly brewed goodness reminds you of those amazing dividends pouring into your account!
You can do it. I believe in you.
Oh, and save me a mug!