Where the best income opportunities are now

0:10Will Barton:Will Barton from High Dividend Opportunities. Great to have you back on Investing Experts. Thanks for coming back on. Thanks for having me, Reena. It's great to have you. So first things first, you have some sale news happening at High Dividend Opportunities. I think that's a great place to start because a lot of people are looking at the market, wondering how to play it. You're going to be talking about, obviously, some high dividend opportunities and how you're thinking about things. But let investors know, let listeners know what you have going on at your service, please. Right now, we have a Memorial Day sale.

0:45It is 28 % off of an annual membership. So that's$536 for the year. And we're going to be running that sale through May 26. and it's an opportunity for people to get the first year at a discount and really give our service a full year to try it out and check out our ideas. We find that most people who join for a year, they tend to stick around for a long time. We're a very long-term focused service focusing on investments over three to five-year investment horizons rather than a daily trading service. So to get the most out of our service, we find that giving people an opportunity to try us out at a reduced price for a full year gives them that opportunity to really check out all of the tools and everything that we have to offer.

1:35Will Barton:Appreciate that. I think that notion of long-term investing is, or relatively, let's say, relatively long-term investing, I think is a good place to start because, you know, this volatility in the market, a lot of questions about price and value and how to properly value companies. How are you thinking about the long-term nature? And do you even look at the VIX? Are you paying attention to market volatility? Maybe let's start there in terms of how you think about the long-term nature of investing. Our strategy is an income focused strategy, right? So our goal is to have an 8 % to 10 % average yield on our portfolio at any given time.

2:19And to have that solid, steady income stream coming in so that you have enough money to withdraw some if you need some, if you're in that retirement age and you're actually taking money out of your portfolio to live off of, and you have enough left over to reinvest. We recommend that even if you're retired, you plan on reinvesting at least 25 % of the income that's coming into your portfolio so that you always have money available to be buying stocks. And in that respect, we really are permables. We are always buying something. As things change, we change what we're buying. We buy things that we believe are relatively good values right now based on current conditions.

3:05But we're always buying stocks, right? We're never going to say, hey, sell your whole portfolio and let's just hunker down into a turtle and hope that the market doesn't keep going up.

3:19Because I think the market today is kind of an example of how if you go back to like early March when the whole Iranian war started, if you would have told people that the Strait of Hormuz is still going to be closed in May. Anybody would have told you, well, you should sell all of your stocks. And yet we're sitting here today with, you know, the market pushing all time highs. The market doesn't always do what you're expecting, even if you happen to have a crystal ball and know what the future is. And I can't tell you what the news is going to be tomorrow. And so we really focus on what's the opportunity that we can buy today?

3:57What is the market giving us? What holdings do we have that are getting too expensive? and the market's giving us a good price to exit and deploy somewhere else. Because even in an expensive market like today, there are still a lot of great opportunities out there to take advantage of.

4:15Will Barton:So what opportunities would you highlight right now? Right now, the area that I really like right now is commodities. And in particular, we have some oil royalty companies, for example, Dorchester Minerals, DMLP. is a royalty company. They make money from American oil that's being pumped and sold. And even if everything works out great and the Strait of Hormuz opens up tomorrow, the price of oil has fundamentally changed for certainly the next year or two. And so they're a direct beneficiary of that. They don't have a lot of hedges. So as oil prices go up, that's going right to their bottom line.

5:04And so we expect to see a lot more dividends coming out of them. They pay a variable dividend, so it's completely dependent on quarter to quarter, how much the oil price is. And we expect to see a lot more flowing out of them. So that's probably one of the most immediate examples of, hey, the market is giving us an opportunity here to buy income. It's still at a very reasonable price, and we can expect it's going to be higher for the next year or two.

5:37Will Barton:And what makes you get out of that? Well, the last time we actually ended up exiting when oil prices were still high because the price just got high, especially with these variable dividend companies. What you often see is when they declare the higher dividends, people start buying it like crazy. They look at, oh, well, the yield's high now, so now I'm going to buy. Well, okay, but it's variable. So when oil comes back down in price, the dividends will come back down. And so we exited that, you know, when it was trading in the mid thirties and we just decided that, okay, well, our forward outlook is, is that the distributions are going to be smaller and it no longer fits our investment profile.

6:23We started buying it back last December when oil was low. And we've had kind of a little fortunate bounce in oil crisis, but the price was lower. And even at the lower crisis, we determined that, okay, the distribution still makes sense, still achieving our goals, still helping us hit our targets. And now, even right now, I think today it's trading around 28-ish. It's still a very good price to be buying to take advantage of what you can expect the distributions to be over the next year or two.

6:57Will Barton:How much does the interest rate conversation affect how you're looking at things? And does that correlate at all to dividend cuts? Do you see that being a correlation at all? We have a new Fed chair. There's a lot of talk of expectations being changed, that rate hikes are coming, how much does that play into your thinking? We generally don't try to predict what interest rates are going to do in terms of choosing our investments. It's one of those things that, yes, it has a direct and immediate impact, but predicting them is hard. We have our market outlook every week where we try to predict what's going to happen.

7:36And just like everybody else, we can be as wrong about rates as anybody else can, right? So what we do, again, is we kind of go back to that, taking the opportunities that the market gives us. The 30 years up a lot today, we're buying municipal bonds. We have a couple of municipal bond funds in our portfolio. Is the current height going to be as high as it goes? Who knows, right? It could keep going to 6 % for all I know. But what I do know is that when you're getting 5.1 % on municipal bonds, compared to the last 20 years, that's a really good interest rate to be receiving. If it keeps going up, the price will keep coming now.

8:20But again, we're investing for the dividend. So when we get the dividends, we're reinvesting 25 % of it. If the price is lower in the future, we're happy to just average down and get higher yields. In the grand scheme, when you're at 20-year highs on interest rates, in the big picture, they're going to be lower at some point in the future. We're still going to be investing at some point in the future. So I'm very eager to be taking advantage of higher rates because they manifest themselves as lower crisis for income investors. You see a lot of dividend stocks are lower in price because interest rates are high, because traders are using that calculation of, well, I can get X percent from the U.S.

9:04treasuries and I'm only getting X percent from this dividend stock. So I'm going to sell off this dividend stock and go invest in treasuries today. And for those of us who are just buying the dividend stocks with the plan of holding them for the next three, five, 10 years, we're buying at a lower price than we've been able to buy in the last three to five years. And that's in an environment where the stock market itself is trading at multi-decade high valuations. So for income investors, high rates are great, right? We're getting paid interest rates. That's what generates our income at the end of the day.

9:41It's coming from interest rates. Higher interest rates means we're getting higher income for every dollar that we're able to invest today. And we should be taking advantage of that because maybe it goes on for the next year or two. Maybe it could continue for the next five years. I doubt it, but possible. But at some point in the future, I guarantee we're going to be looking back at, you know, 2025 or 2026 and say, boy, I wish I would have bought more dividend stocks back then because they were so cheap.

10:08Will Barton:What is something in your portfolio that you would say you're at the tail end of the three to five years thought process in terms of holding it? What might be something that investors might be surprised to know that you still hold or maybe something that That is a good example of holding on to something despite what market sentiment might be telling you. I would say the example right now that is probably going to be reaching that tail in the next couple of years is our agency mortgage rates. And, you know, we bought those, you know, as the prices were collapsing, they were becoming very unpopular because they are very interest rate sensitive.

10:57And, you know, what we saw in prior cycles is when interest rates get cut down and you have that huge spike, you know, where the 30 year mortgage and the overnight Fed rate has a huge gap. You'll see a big, huge spike up in the prices of these. You know, we've seen a couple of the last year and a half since about early 2025, they've really been spiking up. They're starting to trade at a premium to book value now. And they're starting to gain more favor among traders. We believe that we have a lot more upside to go. but probably within the next year or two, especially if we have a situation where the U S economy breaks and the fed starts cutting rates like crazy, um, they'll have a blowout.

11:48And at that point, we're going to have to make the decision whether we want to hold through the cycle or whether we want to sell an exit. Um, you know, most recently, uh, an example that we exited, we actually ended up exiting it a lot earlier than we intended to, was Lion Del Visso, the LYB. Because of the situation in Iran, their price just ran away from us. We predicted fair value was between$80 and$90, and it got there. So, okay. Love you. Goodbye. Mostly goodbye. And we redeployed that money where it can make us more dividends later.

12:26Will Barton:How did you arrive at the 25 % figure in terms of reinvestments? We did that through a combination of our experience and we did some pretty extensive backtesting using a tool called Portfolio Visualizer that lets you test with a portfolio what it looks like as you're withdrawing money. And our goal was to ensure that the amount you're taking out is low enough or high enough that it can absorb any dividend fluctuations, natural dividend cuts that you're going to get through a crisis situation. And so we back tested it against both the great financial crisis and through COVID with actual holdings that we actually held to make sure that you had a solid cushion of reinvestment there so that the dividend cuts never actually impacted your ability to withdraw money.

13:20and then also ensure that you are reinvesting some at all times so that you can build up that cushion. And so we did that through a combination of both comparing notes from all of us at High Divinity Opportunities. We compared our holdings and what we experienced with our own personal drawdowns and then did some backtesting using the portfolio visualizer tool to make sure that there was a big enough cushion of safety there. And, you know, obviously nothing is 100 % certain. You can't predict the future. But for the great financial crisis and for COVID, which was two of the largest dividend cut runs in the history of the stock market, it was sufficient for those.

14:11and really from our perspective, it gives you that even if you went over that 25%, right? Cuts went deeper. You found yourself starting to run low. You found yourself it wasn't enough. It gives you that warning signal that you can say, hey, I need to change something in my portfolio. I need to change something about what I'm withdrawing and you can do that very early on and all financial problems. If you know there's a problem and you address it sooner, it's a lot easier to fix than if you wait until you're in mid-disaster. The sooner you solve financial problems, the easier they are to solve, the less you have to sacrifice.

14:58And you don't want to be finding out when you're 90, 95 years old, oh, hey, my portfolio is not going to last the rest of my life. I mean, right at this moment, most people are feeling invincible, right? Stock markets at all time highs. They're looking at these big balances for people who have went through the dot-com bust, who went through the great financial crisis. I think a lot of investors today who are in their 60s, 70s, they live through them, but they weren't necessarily investing a lot through them because they were still in their working years. And in your working years, it's very easy to close your eyes and ignore the losses and just keep contributing more money because you have income coming in, right?

15:40And it becomes a lot more challenging when you don't have a job that you can just go, oh, okay, well, I can just throw a few more thousand dollars in every paycheck and be fine. You don't have that option and you don't have the distraction of, oh, I have to go to work and I'm not paying attention to what's happening in my portfolio. I'll see what next quarter, Right. And when you get to be in your 60s and 70s and you actually start living off of the money and you're watching that portfolio value every single day. You know, I think a lot of people look at it and they're looking today and they're going, oh, wow, we're everything's great.

16:14You know, I have I have lots of money. I've made so much money in the past five years. You know, stock market pretty much rebounded from COVID very quickly. It wasn't an extended drawdown. So I think people have a false sense of confidence that, you know, well, whatever, if it goes down for a few months, I'm fine. I have six months of reserve. I have, you know, 12 months of an emergency fund or whatever it is. I can pay my bills. The stock market will recover. You know, the dot-com bust, it took 10 years for it to get back to even without you withdrawing any money. And if you withdrew any money at all, it took even longer.

16:50Well, if you're 70 years old when the dot-com bust happens, 10 years is a long time to go without withdrawing any money from your brokerage account. And I think a lot of people just don't have that perspective that that can happen again because they lived through it, but they weren't investing through it. They weren't dependent on their portfolio through it. And that gives them this false sense of confidence that, oh, that's not going to happen to me. Like it's something that you can't understand until you're in that position. And when you're in that position, it's too late.

17:24Will Barton:Is there something that you mostly hear from subscribers like in a market like this? Are you getting a lot of questions? What do you what's mostly the feedback that you get from subscribers or what are the most asked questions? The most asked questions inevitably take the format of given this news story and they'll pull up some news story, whether it's about Iran or whether it's about interest rates or, you know, whatever the president tweeted this morning, you know, given this news story, how should this impact how we invest? That's probably the most frequent question that I see. And sometimes people will give me a little bit of pushback and resistance when I say it doesn't matter.

18:09You know, We're not investing because of what we think the news cycle is going to be. I'm not buying something going, okay, well, I think interest rates are going to go up 50 basis points, so I'm going to buy this. No, I'm buying it because I think it's cheap. If interest rates go up, maybe it gets cheaper. If they go down, it's going to go up. Eventually, interest rates are going to go down. I don't know when. and I don't need to predict when because I'm getting paid a dividend to sit there and collect money. Eventually things will go or we'll turn around. You know, I mentioned DMLP earlier. And when we underwrote that, we said, okay, are we happy with the distribution that they will pay if oil is$55 a barrel?

18:58We said, yes, we didn't know oil was going to go up to$100 a barrel when we bought that. We had no clue. If I had to guess, obviously at some point in the future, I can predict that something's going to happen somewhere in the world at some point, and oil is going to go up to$100 a barrel. I don't think that's a hard prediction to make. I had an economics professor who liked to say, it's very easy to predict what will happen. It's extremely hard to predict when it's going to happen. And so we just position ourselves to be buying. And we know that at some point in the future, conditions will change.

19:37We know that at some point in the future, oil will go up, interest rates will come down. And we position ourselves for those eventualities. And we're collecting dividends the whole time that we wait. And when they happen, then we'll make that decision, you know, whether or not to sell.

19:54Will Barton:You mentioned REITs before, and I know that's one of your main focuses at high dividend opportunities. What would you say about the real estate space right now and any other points to highlight for investors when it comes to REITs? Well, real estate is a very interesting investment right now because it is one of those that high interest rates are bad, right? In the real estate world, everybody borrows money. It doesn't matter how wealthy you are or how much cash you have on hand, you're going to use leverage. You're going to use mortgages. You're going to leverage it because that's how money is made in real estate.

20:33And it's an asset that's very easy to borrow against. And so when you have interest rates high like they are right now, we've seen a big pullback in commercial real estate of money moving in. People have been buying less. We're starting to see some private equity start taking big stakes in real estate now, and that's been kind of a tailwind for values. But they're buying because the cap rates, the capitalization rates, which is essentially how much money you're getting from that real estate compared to how much you pay, are at 20-year highs. And so they're buying low. And then on the other hand, you have the factor that real estate is considered a relatively safe asset.

21:19It's a hard asset that people like to buy when there's instability. And so that kind of positions real estate right now to see a big recovery through the combination of interest rates coming down and generalized fear about the economy. And there could be moving from what's a very low price today you know, potentially go much higher in price. And so real estate's one of those assets that we really like right now. The options for high yield in real estate are not what they used to be. There used to be a day, you know, back in the early 2000s, REITs were a fringe alternative investment that only crazy people invested in.

22:07And it didn't really get tracked a lot of attention. So you could get 8%, 9%, 10 % yields was the normal. Even today at today's lower prices, you're more in that 3 % to 6 % range for most of them. You know, there's a few pockets of opportunities where you have a little bit of distress, where there have been some real issues with tenants having trouble meeting their rent obligations and stuff. And so that creates lower prices and higher yields. And, you know, I think those areas are potentially really good opportunities. Obviously, you have to deal with the risk that, you know, the tenants could continue to see deterioration in their ability to pay their rents.

22:51And so you've got a little bit of risk to go with that reward right there. But the overall picture, REITs are in a position to see some big improvements in valuation. You have realty income. Oh, that's out there trading for 14, 15 times FFO. It's rock solid, high quality REITs you can get. They shouldn't be trading that cheap. They should be trading in the high teens, low 20s. but you know especially when you compare them to the rest of the S &P 500 that is traded at those higher multiples and it's just dirt cheap right now so definitely something that's worth adding to it becomes a little bit of a struggle for us with our eight to ten percent goal because a lot of the REITs just aren't paying those high on dividends right now but you definitely have some great dividend growth opportunities there.

23:47And if your portfolio is already high yielding and you can afford to hold some of those lower, you know, 5-6 % yielders, there's a lot to choose from in that ballpark.

23:57Will Barton:When you talk about the factors that you're looking at in terms of how high the yield is and structures that prevent you from getting into things, are those absolute red lines that you adhere to? Are there any exceptions that you make to those rules? We definitely do. Our goal is an average of 8 to 10%, right? So we want the whole entire portfolio to be averaging in that range. In the current environment, we're able to have some very high yielders, which also then gives us room to go on the low end and hold some of the lower yielding companies that have some dividend growth. Usually if we're looking at something that's below 7%, we want to have a growth component or an expectation that this is a company that will be able to grow its dividend in the future.

24:49We don't draw a hard line, but we are always conscious of what is this doing to our overall portfolio yield because that's what we promise our members is that we're going to find a way to keep our portfolio averaging in that 8 % to 10 % range and growing your income every year. And that's, you know, in some environments it's easier than others. Currently, there's a lot of high yield options out there and that's made it a lot easier for us to take on some of the lower yielding picks and take advantage of being able to realize some capital gains and have some capital gains growth as well. In addition, you know, we go back to an environment like 2021, we were struggling to hold the 7 to 8 % line, right?

25:38Because the yields were just, everything was so expensive. And it was a very different interest rate environment. And so, you know, depending on the environment, depending on what the market gives us, we will take advantage of opportunities where we see them, but we're going to remain very steadfast on averaging that 8 % to 10 % through the portfolio as a whole.

26:04Will Barton:Last time you were on, which was at the end of February, you were talking about being interested in high-yield preferreds. Anything to note there or any updates to make there? You were talking about AGNCZ. And we're still kind of in that zone, right, where preferreds have actually come down a little bit in price. Yields have gone up a little bit. We've talked a lot about PFFA, Fertus InfraCap, and that's a preferred ETF that really kind of mirrors our strategy in the preferred space. They have a lot of overlap with our holdings and they invest in preferred on a leverage basis. So that's an ETF that is kind of really a great place to start to get invested in the preferred right away and have exposure to a wide variety of them.