High Income NOW securities have performed very well over the last 1-2 months as they often do during bouts of market volatility (as we have seen for stocks in general over the last 1-2 months). The High-Income NOW Portfolio and Top 10 Tear Sheet have been updated, with no major changes, but some important commentary below.
For starters, here is the link to the updated portfolio and tear sheet:
There have been no new trades, however a few important updates worth considering, mainly related to the continuing strength of high-income investments.
Utilities Stocks:
Typically boring utilities stocks are known for steady dividends and lower volatility than the rest of the market. Interesting, this year utilities have outperformed the broader market (i.e. the S&P 500) as the group is receiving increasing attention related to the energy demand that new Artificial Intelligence computing is placing on data centers. We are playing this onging opportunity through two utility sector focused Closed-End Funds (“CEFs”) UTG and DPG. Both funds offer big yields (7.4% ad 7.5%, respectively) and they do so by adding a little leverage (or borrowed money) to magnify the steady income and price returns of the sector. Both funds have been strong performers lately and we expect this to continue. Long UTG and DPG.
REITs and Interest Rates
Another high-income sector that has been due from some strong performance is real estate (and real estate investment trusts (“REITs”) in particular) especially as interest rate hikes appear to be over and the market appears headed towards interest rate cuts ahead.
Interest rate cuts will make REIT property tenants more able to afford rent and operations (which is good for the stability of REIT investments), but it will also make REIT income (from dividends) more compelling versus other opportunities (such as short-term US treasuries and simple CDs at the bank—both of which are already experiencing yields decreasing from unusually high levels over the last 1-2 years).
We expect continuing strength from the REIT sector (it’s overdue) and we still like industrial REITs (such as PLD, STAG and EGP) more so than other REIT sub-sectors). RQI (a REIT CEF) is another way to play it (we continue to own a large position, despite recent strength—which we expect to continue).
Bonds
A lot of people believe bonds are somewhere between “boring” and “ugly.” Boring because long-term yields remain low (and headed lower) and ugly because they had terrible returns in recent years (thanks to unusually negative returns for bonds in 2022, as the fed hiked rates so fast).
However, bond prices may be headed higher if/when interest rates cuts arrive (i.e. as rates fall, bond prices rise, all else equal). And Bond CEFs (such as those from PIMCO and BlackRock) take advantage off opportunities by leveraging up on bonds (thereby significantly increasing the income/distributions to investors).
We really like the following bond CEFs, and continue to rank them (and their big distribution payments) highly in our Top 10 High-Income Tear Sheet: PAXS, PDO and BTZ.
BDCs
Business Development Companies (“BDCs”) are another high-income corner of the market, but unlike other high-income opportunities, BDCs are uniquely sensitive to high-yield interest rates and more particularly credit spreads (i.e. the difference in yield on low-risk and high-risk bonds).
BDCs lend to smaller middle market companies (which can involve unique risks), and as the stock market has gotten jittery over the last 1-2 months, BDC prices have been a bit more volatile.
In our view, this has created more attractive entry points in names like Ares Capital (ARCC), Main Street Capital (MAIN), and Blue Owl Capital (OBDC), as we have noted in our updated Top 10 Tear Sheet.
The Bottom Line
High Income investment performance has been strong recently, and we expect it to continue to be strong, and we expect the dividend income to also continue to be high and healthy.
As an income investor, this is exactly what most people are looking for (i.e. steady high income with far less price volatility).
Disciplined, goal-focused investing remains a winning strategy.