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Burgess COMMENTARY Peter Burgess | ||
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BDC Buzz
BDC Buzz
Sustainable Dividends ... Build a portfolio with sustainable dividend yields ranging from 8% to 12%
(20,006 followers)
Summary
WisdomTree and Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, are encouraging investors to consider alternatives to the traditional '60% stock, 40% bond allocation' in this recent CNBC interview: We believe that the old 60/40 model just won’t be able to cut it anymore. This environment of low interest rates is not going to change. The dividend yield on the S&P 500 is higher than the U.S. 10-year Treasury’s 1.5% yield. How is (that) ... going to give you enough income? That’s why we recommend 75/25 as the equity/fixed-income allocation. It would be the best way for those approaching retirement to establish their assets to get enough income and gains so they can maintain spending through retirement.” Siegel cited “powerful demographic factors” such as the aging of the global population, longer average life expectancy, a broader inclination to avoid risk and slower growth in the overall markets as additional depressants for Treasury yields. All these factors are going to keep these interest rates in these levels very long, and you cannot survive on a one-and-a-half-percent nominal interest rate. It cannot maintain spending streams at all. Dividends on stocks are going to be the new bond in terms of thinking about retirement.” Investors Need To Be Prepared For Lower Interest Rates The following chart is from 'Visualizing the 700-Year Fall of Interest Rates' showing the historical declines in interest rates: The article concludes that interest rates have continued to decline due to:
Source: VisualCapitalist So Where Can Investors Still Get Higher Yields In This Environment? Business Development Companies ('BDCs') were created by Congress in 1980 to give investors an opportunity to invest in private small and mid-sized U.S. companies typically overlooked by banks. These companies avoid taxation at the corporate level, allowing them to pass along ordinary income and capital gains directly to the shareholder. BDCs distribute more than 90% of their profits/gains to shareholders providing returns that are significantly different when compared to stocks and bonds. Most BDCs are publicly traded with a highly transparent structure subject to oversight by the SEC, states and other regulators, with higher than average dividend yields (most between 7% and 13% annually, see details below). Roth IRAs and BDCs As discussed in 'Tax-Free BDC Portfolio Yielding 10%' I use a Roth IRA for a few reasons including the flexibility to take the money back out if needed (without penalties/taxes) and no taxes on income earned down the road. The U.S. government is growing the federal deficit by more than $1 trillion annually during low unemployment which I believe is not sustainable and there's a chance of increased taxes and lower benefits. The goal is to have aggressive income-producing assets in Roth IRAs to grow this savings account as large as possible given that the IRS only lets you contribute $6,000/$7,000 annually. As mentioned earlier, BDCs pay higher than average returns that will never be taxed as long as you do not withdraw before turning 59½. This means that these returns will be compounding and growing your portfolio faster than typical investments, assuming that you carefully choose the components for this portion of your portfolio. Please see the previously linked article for a discussion of the following tables showing the compounding of an $85,000 IRA portfolio with $7,000/year contributions and average annual returns of 10% and 15%: Sources: BDC Buzz and 'math' Key takeaways are that these investors have (after 20 years): $1.0 million to $2.2 million of tax-free savings. Earning $100,000 to $300,000 annually tax free for life. Obviously people have more or less than $85,000 already in retirement accounts, making 10% to 15% annually sounds too good to be true, and 20 years may seem short or long depending on your age. Please do your own calculations. Also mentioned in the article and as my subscribers are well aware, I made 35 purchases of BDC stocks throughout 2018 and 2019 with an average annualized return of 22% (keyword 'annualized'). Those who have invested alongside have done well. Also, I currently have meaningful positions in 13 BDCs many of which I have held for years, buying during volatility and collecting the dividends. Conclusion and Recommendations Start tax-free/deferred accounts as early as possible due to the power of compounding and only being able to contribute $6,000/$7,000 annually. If you carefully choose the components in this account, you will have much higher returns. If you can successfully grow this savings account, you will have a tax-free income stream to support your golden years. Last year, I presented a series of articles assessing the quality and portfolios of many BDCs. Please see Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6 for details. Also, my recent articles (in 2020) have discussed TCPC, HTGC, TPVG, ARCC, CSWC, MRCC, ORCC and TSLX. BDCs have started to report calendar year-end results. Investors should be watching for potential portfolio credit issues that could lead to credit rating downgrades. Lower ratings would likely drive higher borrowing expenses that could put downward pressure on net interest margins and dividend coverage over the coming quarters. ------------------------------------------------------ The information in this article was previously made available to subscribers of Sustainable Dividends, along with:
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Dividend Ideas These Dividend Stocks Are The New 'Bonds' For Retirement Portfolios Feb. 10, 2020 5:12 PM ET|158 comments | Includes: AINV, ARCC, CGBD, CSWC, CSWCL, FDUS, FSK, GAIN, GBDC, GLAD, GSBD, HCXY, HCXZ, HTGC, MAIN, MRCC, MRCCL, NMFC, OCSL, ORCC, PFLT, PNNT, PSEC, SUNS, TCPC, TCRD, TPVG, TSLX
BDC Buzz
| The text being discussed is available at | https://seekingalpha.com/article/4322926-dividend-stocks-are-new-bonds-for-retirement-portfolios and |