Buy The Fear Like Buffett: 2 Bargains Yielding 7%

Buy The Fear Like Buffett: 2 Bargains Yielding 7%

Buy The Fear Like Buffett: 2 Bargains Yielding 7%

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Co-produced with “Hidden Opportunities”

If you have watched Seinfeld, you might remember the episode “The Opposite.” George Costanza, who realizes that he has been quite unsuccessful in his ways, turns his life around by doing the exact opposite of his usual instincts. While his approach yielded hilarious moments, he had quite a successful streak, including landing a job with the New York Yankees. As an investor, have you ever felt like you should start doing the exact opposite? Sell ​​when you want to buy, and buy when you want to sell?

The stock market is a psychological battleground where success is achieved by following well-defined principles without succumbing to emotional pressures. It doesn’t really matter what kind of strategy you follow, those who are the best at any market strategy are those who keep their emotions in check.

When markets soar, emotional beings buy and exhibit greed for more. When markets crash, they sell in fear and are ready to absorb losses. Investors, including the so-called experts – the money managers are fearfully holding the highest amount of uninvested cash since 2001.

BofA Global Fund Manager Survey

BofA Global Fund Manager Survey

In his 80+ year investment career, Warren Buffett has consistently done what George Costanza did in one episode, the opposite of every ordinary investor, and he has done so with remarkable success. While everyone is busy selling in fear, the Oracle of Omaha continues his shopping spree, buying into his favorite picks. Tracing back in Mr. Buffett’s steps during wars, recessions, acts of terror, and presidential assassinations, I can’t find a single time where he has praised cash as a meaningful investment. He has consistently taught to buy and hold productive assets.

“You’re going to be a lot better off owning productive assets over the next 50 years than you will be owning pieces of paper” – Warren Buffett

We follow mr. Buffett’s principles and teachings in a way that makes sense to us. We aim to buy the fear in various income-producing stocks to produce reliable income from our assets.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett

In that spirit, we have two picks with yields up to 7.2% at extremely favorable valuations.

Pick #1: UTG, Yield 6.7%

The demand for utilities (electricity, water, waste collection, gas, internet, wireless telecom services, etc.) remains relatively stable even when recession strikes, businesses shutter, and unemployment rises. The utility sector experiences inelastic demand and generates predictably consistent earnings through difficult economic conditions. Reaves Utility Income Fund (UTG) is a superstar CEF (Closed-End Fund) that has stood the test of time since its inception in 2004.

UTG has demonstrated an impressive ~11% increase in NAV, with no distribution cuts (or reductions) since its inception, and has delivered highly reliable income for shareholders. The CEF has also paid the occasional special dividend and has provided an impressive average 8.9% annual yield over 17 years. †source: PortfolioVisualizer)

PortfolioVisualizer

PortfolioVisualizer

Today, UTG trades almost at par with NAV, presenting an attractive entry point into this quality CEF. UTG is modestly leveraged at 20% and comes at a modest 1.2% expense ratio. The CEF maintains a portfolio of 41 securities that are some of the most defensive names in the market.

Fact Sheet

Fact Sheet

UTG pays $0.19/month, a 6.7% annual yield. The CEF’s distributions have doubled since its inception, making it an excellent dividend-growth pick for your income portfolio. The fund has consistently earned its distribution through active management of productive assets, and there has been no Return of Capital (‘ROC’).

UTG presents the best within CEFs. Use the fear in this market to boost your income with this 6.7% yield!

Pick #2: RLJ-A, Yield 7.2%

After two years of pandemic restrictions, Americans are looking to travel. Data from the travel website Kayak tells us that domestic travel searches have increased by 78% YoY. As a result, flights, hotel rooms, and other types of accommodation have become significantly more expensive, and consumers are not pushing back.

“When you have two years of people not traveling the way they want to travel and you have a lot of savings built up in that time period, prices can be really high and people are saying, I don’t care. I just want to travel. I want to go somewhere”. † Glenn Fogel – CEO, Booking Holdings

RLJ Lodging Trust (RLJ) owns and operates 95 hotels with ~21,100 rooms in 22 US states. With ~46% of its EBITDA is generated from sunbelt locations, which are among the top summer vacation destinations in the country. The most attractive risk-reward opportunity is presented by RLJ’s $1.95 Series A Cumulative Convertible Preferred Shares (RLJ.PA).

Why is RLJ-A interesting? It doesn’t have a call date for a start, making it an almost perpetual cash machine and giving it nearly an unlimited price upside potential. In theory, RLJ-A is convertible into 0.2806 common shares or RLJ (at the initial conversion price of $89.09 per common share). However, RLJ cannot force conversion unless their common shares are trading at 130% of the conversion price for 20 of any 30 consecutive trading days. So for RLJ-A to be forced into a conversion, the common units must trade at $115.82, a whopping 750% increase from current levels. When that happens, RLJ-A shareholders will receive $32.5/share, ~20% upside from current levels.

Until that unlikely situation happens, you can collect $1.95 in annual dividends, a 7.2% yield at RLJ-A’s current price. At the end of Q1 2022, RLJ had $480 million in cash on its balance sheet, which covers the preferred dividends for 19 years!

The REIT has no significant debt maturities until 2025, making the preferred units safe for income while the hotels return to normal operations after two years of the global pandemic.

May 2022 Investor Presentation

May 2022 Investor Presentation

The REIT has achieved ~74% of its 2019 RevPAR (revenue per available room) and FFO (funds from operations) profitability in Q1. With over $1 billion in liquidity, including cash and an undrawn line of credit, RLJ is well-positioned to cater to the roaring return of the American travel industry. We are here to sit back and collect dividends.

Shutterstock

Shutterstock

conclusion

No one has ever won a game of Monopoly by holding the largest amount of uninvested cash. While it is tempting to sit with cash, if you don’t invest in some real estate, utilities, or railroads, you’ll eventually lose the game. Winners collect income from hoarding valuable assets.

Warren Buffett knows this well and has never resorted to collecting cash during times of economic uncertainty. He began buying shares of Apple (AAPL) in 2016, when it was down over 20% from its all-time-high levels, thanks to the end of quantitative easing with the first few rate hikes. The Greatest Investor of All Time has consistently done the opposite of every retail investor or money manager – he purchased value-oriented productive assets when there was blood in the streets.

Whatever the circumstances, when the sentiment is overwhelmingly negative, it also means there is opportunity in the right places. High-quality income-producing assets are trading at discounted valuations, enabling us to collect dividends through the turmoil.

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