Investing Experts Live: Steven Bavaria and Samuel Smith's top income picks for 2026

0:09Steven Bavaria:Good morning, good afternoon, good evening to everyone attending. We are very, very excited to have you here for our Investing Experts Live Top Ideas for 2026. I will be leading the first session with our stalwart income investing group analyst Samuel Smith. Stephen Bavaria. You know them. You love them. Their analysis has been very, very informative and compelling for many, many years. This year, I think we could all do with some insight, with some cogent analysis. We are in some perplexing, some distressing, some compelling times. There is bad news. There is good news. There are questions. There are some answers, probably more questions.

0:57Steven Bavaria:Are we in a valuation reset? Is this a market correction where overextended asset prices, particularly in high growth sectors, are they going to sharply decline to more sustainable levels? That's one question. I opened up the Wall Street Breakfast podcast and newsletter today. I saw gold surging past 5 ,000. I saw silver notching new highs. The U.S. Consumer Confidence Index declined today, almost 10 points in January. The chief economist at the conference board said confidence collapsed in January as consumer concerns about both the present situation and expectations for the future deepened. All five components of the index deteriorated, driving the overall index to its lowest level since May 2014, surpassing those COVID-19 pandemic deaths.

1:48Steven Bavaria:The former Kansas City Fed president recently said that inflation is likely to increase after this year's midterm elections. Yes, we're in another election year driven by the substantial fiscal and monetary stimulus currently fueling the economy. President Trump is leveling tariffs across the globe, along with recurring threats on trade. Some countries are looking for deals of their own, given this new business environment. Canada's Mark Carney came back from China, looking to reset relations there, which triggered a backlash from our White House. Trade blocs are looking to ink their own deals, like the free trade agreement signed between the EU and South America.

2:27Steven Bavaria:Another one just wrapped up, which has been referred to as the mother of all deals involving 2 billion people in the landmark pact between the EU and India, which represents about one third of global trade. We're seeing a lot of earnings this week. Apple, Microsoft, Meta, Tesla, Boeing, Visa, MasterCard, Exxon, Chevron, so many things to get into before we even get to midweek and the Fed meeting, which comes on Wednesday. The market is already heavily pricing in the chance that rates are going to be a hold. That's 99 percent. Kim Kahn, our favorite host of Sunday's Wall Street Brunch and Wall Street Lunch, our podcast from Wall Street Breakfast.

3:07Steven Bavaria:He asked the question that the question that Chairman Jerome Powell is going to be asking is about the criminal investigation launched by the White House into Powell's tenure and the Fed about the renovation of the central bank's headquarters. So many things to get into politics, economy, stocks, investing. Analysts on Seeking Alpha and elsewhere have called these times unprecedented. There is so much to digest. I myself, you may know me as host of our Investing Experts podcast. We've had Stephen and Samuels on a few times to great reception. I've been at Seeking Alpha since these scary old days of 2008.

3:49Steven Bavaria:And for some context, those were some scary times. Those were some confusing times. We did not know what was going on. we saw a great financial crisis, a pandemic, a green rush, a gold rush, a silver rush, a chip rush, panic selling, mad amounts of hopium all along the way. There are so many things to discern from these times. One of my favorite Seeking Alpha writers is Scott Galloway, and he wrote this almost nine years ago in 2017. And he said, and we're getting to the crux of the presentation in a couple minutes. Bear with me as we lay out the intro. Jamie Dimons, this is what Scott Scott Galloway said, Jamie Dimon's definition of a financial crisis is something that happens every five to seven years.

4:33Steven Bavaria:An asset bubble is a wave of optimism that lifts prices beyond levels warranted by fundamentals ending in a crash. I promised myself that I'd be smarter the next time. Next, meaning on the cusp of a pop or a recession. So how do you identify when we've entered the danger zone and how should you adjust your behavior and or your actions? That is what we are here for today. As I mentioned, the first session coming up right now is with our fantastic income-focused investing group leaders, Samuel Smith and Stephen Bavaria. In our second session, hosted by the fantastic Daniel Snyder, we will have Andre Cardinal and Beth Kindig.

5:13Steven Bavaria:And just to kind of segue into what we will be talking about and where we're coming from, I thought that I would quote from one of America's founding fathers, Mr. John Adams, who said, all the perplexities, confusion, and distress in America arise not from the defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation. In that spirit, I hope that you enjoy these presentations. I've always called, since I've been here, always called Seeking Alpha, Seeking Alpha University. you can afford yourself so much knowledge for very little price, and you really, really get some knowledge and insight.

5:54Steven Bavaria:And my favorite thing of all is context. So with that spirit in mind, I would like to introduce Stephen and Samuel. We're going to start with Stephen's presentation of his investing strategy and his number one pick for 2026. You will find very different strategies coming at you right now, even though they're both under the column of income investing. Stephen, I'm so, so delighted to have you here again. Thank you for making the time. Please share with listeners your strategy and your pick and what else you have to say on this momentous year of 2026. Thanks again. Wow. Thank you, Rena. That's a hard act to follow.

6:32Steven Bavaria:In a way, you've given away, not given away, but you've given much of what I was going to say. I take a very cautious approach all the time because I agree with Jamie Dimon, at least about crises coming regularly. We never know exactly when they're going to come, but you have to be prepared for them. So my investing approach, and all of this is in an article, by the way, that will be available publicly within a couple hours after this presentation. And also, I'm going to talk a bit about my income factory philosophy first, because none of what I invest in or my pick for the year probably would make much sense if you don't understand the unusual, but not as unusual as it used to be, philosophy that I have of investing that I call the income factory.

7:27Steven Bavaria:When I started talking about an income factory about, oh, 10 or 12 years ago, I got a lot of pushback from readers and other writers that it was sort of heresy that you can only, the only way to grow if you're investing for the long term and you want to grow your income and your investment for the future, say for when you're retired for a lot of us, is to do it through growth stocks. And my income factory strategy was basically a way to create your own growth of your income stream by reinvesting and compounding high cash yields. So you wouldn't be as dependent on capital gains as you are in a traditional equity growth strategy.

8:16Steven Bavaria:And a lot of people said, well, you can't do that. You gotta have growth stocks. But eventually basic math, you know, math is math. And that prevailed. If you understand the total return is dividend yield plus capital gain or loss. You can have a 10 % yield and a 0 % capital gain or a 10 % capital gain and a 0 % yield. And they'll both give you a 10 % total return or 5 % and 5%. So now years later, I've got 20 ,000 followers. Inside the income factory is fortunately number four now of your 131 investment services on Seeking Alpha. and McGraw-Hill was kind enough to publish my book, The Income Factory, about five years ago.

9:04Steven Bavaria:So we've come a long way. What advisors don't tell their clients, because why would they, is that you really can't, I mean, you can seek alpha all you want, but if alpha is defined as being above average, you're not going to achieve it if the average person won't beat the average or the average wouldn't be the average. But more than that, most investors who try to beat the average actually do worse than the average for all kinds of reasons. They try to market time, they bail out at bad times. So they're not necessarily in the market when it takes off. You know, when the train pulls out of the station, in the investment train, there's no conductor to say all aboard.

9:49Steven Bavaria:You know, so if you've been out of the market for various reasons and you're not in it, you know, a mistake like that can hurt your investing for a lifetime, if you know, a few of them. So successful investing and Nobel Prize winners have written about this and over many, many years, the best way to invest long term for the average person is to index. And this is what Vanguard and John Bogle, it was created on this idea years and years ago. So if you want to achieve the long term equity average of nine or 10 percent and you do it through indexing by holding tight year after year or decade after decade you'll double your money and then redouble it every eight years at nine percent so you've quadrupled your original money in 16 years you've got eight times whatever that's called octuple i don't know in 24 years 16 times in 32 years that's how you can really build you know for the long term and yet even that The reality can be challenging, as we say.

10:52Steven Bavaria:Even indexing can be very scary for a lot of people because the S &P average yield is only about 1 % to 1.5%. So to get your average, even whether you're indexing or in growth stocks, you've got to have an additional 7 % or 8 % in capital gains on average every single year. And that means you're up 15 % one year, you're down 10%. It doesn't come all in a consistent, your average is just your average. It's not consistent. So the biggest mistake that index investors make, just like other investors, is they get defensive, they lose their nerve, they don't stick with it. And really, that's hard. And again, all it takes is a few timing errors and you've crippled your lifetime investing program.

11:41So I came up with the

11:43Steven Bavaria:income factory i call it building wealth without the angst and the wealth i'm building is your income your future income by creating your own growth by reinvesting and compounding now if you do that with corporate loans high yield bonds utility stocks and i do it all through funds you can generate consistent interest and dividend income which might be depending on what you choose might be 6-7%, might be 8-9-10%. Currently, it's even been higher that in various high yield funds. But that's net investment income is what the accountants call it. I call it business as usual income. It's the income you get from a portfolio in cash every year, regardless of what the market price has been doing.

12:36Steven Bavaria:So since you're not relying on capital gains, even during periods where the price is down, you're still collecting that steady cash. And if you're reinvesting and compounding to create your own growth, you can take that sort of river of cash, as I call it, reinvest it. And when markets are down, you're reinvesting it at bargain prices and getting even higher yields than you perhaps were six months earlier. So it's not a strategy for everyone, but the emphasis on cash income rather than market price has changed thousands of people based on what I'm hearing from my readers and everybody out there.

13:18Steven Bavaria:You know, for thousands of people, it allows them to sleep better at night and not worry so much about market ups and downs. You know, this sounds great in theory, but what about this year? And, you know, I could not do a better job or even as good a job as Rina did in listing all the things that concern us all, whether we're investors or just citizens, about, you know, what's going on in our world geopolitically, politically here in America, economically, the impact of the political and geopolitical things on our economy, you know, tariffs and going to war with our own best friends. in NATO, that sort of, you know, those kinds of things, they're not going to help, let's put it that way, the investment climate.

14:04Steven Bavaria:So when I think about, you know, what's our best pick, if I had, I wouldn't pick just one pick, obviously, for the year. But if I had to come up with one, you know, ideal candidate, I'd want something, you know, with a demo, a real demonstrated record of performance is not going to be this is not going to be an exotic or glamorous pick, certainly, from me. Anyone who knows me knows that the income factory is really about kind of finding a way to watch the grass. It's kind of like watching the grass grow, but you got to have the right grass. And, you know, so I want a demonstrated record of performance, you know, something that'll certainly do well if markets do well, but will also muddle through and be stable, you know, give us at least as much stability as we could hope for if things go south.

14:58Steven Bavaria:So here we go. For me, my pick of the year is the Cohen and Steers Closed End Opportunity Fund. It's a closed end fund. Its symbol is FOF. And what it is, is a fund of funds. So you've got this closed end fund that holds over 100 other closed-end funds. So in that sense, it's an instant income factory. But more important, it's actively managed by Cohen and Steers and by a management team, the head of which has been doing it for years and years. A very solid total return record, most important for the past year. While it's earned over 10%, both measured by its market price return and its NAV return, net asset value return, which is how most mutual funds are measured.

15:52Steven Bavaria:It's earned over 10 % for a year, for years. But it's also, and we'll see, it's got a very nice total return. But I want to mention over the past year, its market price return has been 13.3%. But its net asset value, the assets, you know, the value of the assets within the fund has actually increased by 20%. And that means the market hasn't given it nearly as much credit as it sort of deserves, given its 20 % NAV return. And that means it's a better, much better buy today in terms of its price than it was. It was at a premium a few earlier last year, where now it's at a slight discount. And then many of the funds it owns are also at discounts.

16:45Steven Bavaria:So you get some discounts on discounts when you buy a fund-to-fund that owns other closed-end funds because your fund that you're buying can be at a slight discount. But if it's buying other funds that are at even bigger discounts, you get those discounts as well. So anyway, FOF has a fully covered, it's around 8 % normally. It's about 7.7 % now. It's cash distribution. It's the same exact distribution it's paid for almost 20 years, which means it doesn't push it. Some funds, they'll take their distributions up, but then they have to bring them back down again if they're not earning it. FOF makes a point of keeping their dividend very attractive, close to 8%, but then they don't push the envelope.

17:38Steven Bavaria:They keep some of their return in the fund, so they're actually maintaining and building their net asset value over time. It's tax friendly, so it's great in IRAs, but it's also good in a taxable account in that it's about 50 % or so of its recent distributions have been tax deferred, which is great. And then, as I said, lots of diversification. She's got a lot of equity funds, but also fixed income funds, some commodity funds, which it's moved into recently, which tells you it really is actively managed because there's been a lot of interest in silver and gold and other commodities lately. and FOF gives you a, you know, a foothold in that as well.

18:26Steven Bavaria:The bottom line here, you know, just to recap, it's got a great record. And I think it's demonstrated its ability over time that if things go well this year, and a lot of people are saying that despite all the BS going on in the rest of the world and in our politics, that our economy and our stock market may just muddle through and do well. And I hope it does. If that happens, FOF will do fine because it's got a great record over time and it does well in good markets. But it's also conservative enough that I think it's, and a lot of the funds it owns, their distribution rates, even if they have to bring them down a little, it's not going to be drastic.

19:11Steven Bavaria:So you're going to see what I'd call the sort of muddling through adversity, even if things go south, that I look for. So that's exactly what I'm looking for and hopefully won't be a turbulent 2026. But if it is, I think this sort of an investment will make me and, you know, will make us ready for it. Thank you for sharing that. And thank you for sharing your insights. You know, I'm never disappointed by what you have to say. I don't think our audience is either. That's some cogent analysis for these times, I would say. Thank you for that. We're going to get back to Stephen after we hear first from Mr.

19:53Steven Bavaria:Samuel Smith, investing group leader of High Yield Investor. Talk us through your investment strategy and your pick for this year, please.

20:00Samuel Smith:Yeah, awesome. Great to be with you, Reena, and thanks for that presentation, Stephen. Good to meet you in person, so to speak, or at least virtually in person. I've read your book. Great stuff. So yeah, just to build off what both Rina and Stephen have said, I too am not one of these, I'm just going to pick one stock type of person. At High Yield Investor, we definitely implement portfolio diversification. For example, the past several years, for some of those reasons you mentioned at the introduction, Rina, the growing geopolitical risks and tensions, the growing fracturing of the, you could say, say the unipolar world, the decline of the dollar, the de-dollarization trend, et cetera, really in late 2022 in the wake of Russia's invasion in Ukraine, that trend had started.

20:43Samuel Smith:And so we had been diversifying into various income opportunities and precious metals, gold and silver. Those have obviously done very well for us. But our bread and butter at High Yield Investor is dividend stocks. And in particular, as you can see there on the slide, our investing strategy is to target primarily high quality companies. And by that, I mean, companies that have strong balance sheets, ideally durable and defensive business models. So we do occasionally dabble in some cyclical opportunities when we see that they are really out of favor and attractive, yet somewhat sustainable dividends.

21:16But we primarily focus the durable and defensive business models that are still performing well fundamentally,

21:22Samuel Smith:but are facing various headline driven pessimism. And we drill down into those opportunities, interview the management teams, deep dive into their earnings calls, their presentations, their financials, to find where their industry dynamics, to find disconnects where there is negative press, but the underlying business is actually strong. And we feel like the risk reward is very attractive. And then we diversify. And some of them, the pessimism is justified. But many of them, in fact, the vast majority of them end up being big winners for us. And that's what's driven our strong performance over time.

21:59Samuel Smith:And we find that with these opportunities in many cases, even if some of the pessimism is justified, if it's trading at a deep enough discount, it becomes a coin flip scenario. I don't know how many of you guys are familiar with Manish Pabrai. He's a famous Indian investor who's modeled his approach after Warren Buffett's in many respects. He's a value investor. You can see him on YouTube and other places. Good interview is always worth listening. He's also got some good, a good book to read. But basically, it's a coin flip. Heads, I win. Tails, I lose, but I don't lose much. And so that really gives us an attractive asymmetric advantage in our investments.

22:35Samuel Smith:And so today, I'm going to be presenting Blue Owl Capital. It's not OBDC, the BDC. It's ticker symbol OWL. It's an alternative asset manager that manages BDCs like OBDC. And they also have another publicly traded one, Blue Owl Technology Fund, OTF. And I believe that this opportunity gives us an attractive current yield and a deeply discounted valuation along with significant growth potential so that even if it massively underperforms what both the consensus analyst estimates and management's guidance indicate for growth, when you factor in the yield and its deeply discounted valuation, it should still very likely deliver double-digit annualized total returns.

23:16Samuel Smith:But it has potential to deliver really big total returns if everything plays out nicely. So as I said, it's an alternative asset manager, has over$295 billion in assets under management. That puts it into the tier of large asset managers, obviously lower AUM by a considerable margin than, say, the largest ones like Blackstone and Brookfield in the alternative asset management space. And obviously KKR is a big player, Carlyle Group, Aries, Apollo, et cetera. But it's in that club of big boys. And what really sets it apart is that it has about 75 % of its assets under management are in permanent capital, and 86 % of its fee-related earnings come from permanent capital.

23:57Samuel Smith:So that gives it a much more stable and recurring fee stream than many of its peers. In fact, not only that, but it also does not have exposure to carried interest. All of its earnings come from fee-related earnings. And so as opposed to Blackstone, for example, that generates a lot of its earnings from carried interest, Blue Owl Capital is more defensive and durable in terms of its fee stream. I think it's also worth mentioning, you know, this means that they don't have to re-raise expiring funds as much because what they do with their permanent capital funds is they typically have a liquidity event where the people invest in them can then sell out of the fund, but it just goes to another investor.

24:37Samuel Smith:For example, their permanent vehicles like OBDC, the BDC, you have complete liquidity there. But unless the company, the manager decides to buy back stock, which they do on occasion, that fund is, they still own it regardless if the shareholder changes hands. So that's really beneficial for them. Another thing that does benefit them is that they can invest with a long-term time horizon. Instead of saying, oh, this fund ends in five years or it's coming towards its end, I'm going to need to take measures to try to ensure that I get a decent return in the short term so that the client has a good experience that they'll come back again to reinvest.

25:13Samuel Smith:They say, oh, well, I have a long time to stay in this fund because it's permanent capital. And so they can invest for maximum risk adjusted long term total returns because they can take that long term approach. That's a competitive advantage they have as well. And not only that, but the assets that they invest in primarily are more defensive in nature, like senior secured first lien loans that they allocate to triple net lease re uh reinvestments to um investment grade counterparty so very very you know defensive think like a realty income or an agree realty type strategy or even but even more conservative because they're almost entirely invested in investment grade counterparties or even their data center leases where they they own a data center or they finance a data center and the counterparty is meta or some other high high high-rated, very cash-rich company.

26:02Samuel Smith:And so they have a more defensive approach. And so that also sets them up for a more defensive setup. And on top of that, as an alternative asset manager, they run a balance sheet-like business strategy. And that means that they are very cash-generative. Instead of owning the actual assets themselves, they simply manage the funds. And so their clients own the real estate, their clients own the loans, et cetera. And so they simply just earn, like I said, that stable stream of fees from the funds that they manage. And they have very limited capex requirements. And much of their growth is either via them issuing shares to acquire another business on an accretive basis.

26:42Samuel Smith:And of course, the company that they're buying receives those shares typically has a long lockup period to ensure alignment as they join the company, or they may borrow some money, or they may use some of their return earnings to buy companies. But most of their growth is through organic fundraising. And so that's very capital light. That's a very high return on invested capital type venture. And so they can return virtually all of their cash flow, and they do, to shareholders via buybacks and dividends. And they primarily do so through a dividend. And so that is a big advantage because it enables them to have a high payout ratio and therefore pay out a high dividend yield, which currently it's at a 6.2 % yield, while also generating very strong growth.

27:23Samuel Smith:And so Blackstone's done that. Burkfield's now doing that with their BAM. KKR has done that, et cetera. And those companies all have phenomenal long-term total return track records largely due to this. They can give you the best of both worlds, the high yield and the strong growth. And also importantly, they also have a strong balance sheet. So they are asset light. So that, for one, reduces the capital requirements. Like you'll see a lot of companies that may have an attractive dividend and even fully cover it with earnings. Like, for example, AT &T a number of years ago. But they had to cut their dividend because they had such heavy CapEx requirements and they had a lot of debt that they had to take over the years to support that business that they had to cut the dividend to retain capital to fund their CapEx and to pay down debt, whereas OWL doesn't have that.