Will Barton on High Dividend Opportunities

0:10Will Barton:Will Barton from High Dividend Opportunities. It's great to have you back on Investing Experts. Welcome back. Oh, well, thank you for having me. Share with our audience what you guys focus on at High Dividend Opportunities. Obviously, dividends are a part of the picture, but specifically how you approach that part of the income investing strategy and market. And then share your own, if you would, investing experience or what brought you together with the other analysts at High Dividend Opportunities. That'd be awesome. Well, our focus at High Dividend Opportunities is obviously the high dividends, right?

0:46But where this really comes from is a foundational belief in investing. When you reach retirement, you don't need to have a million dollars, two million dollars. You know, obviously we'd all love to have a billion dollars, but what you're losing when you retire is a monthly income. You're missing that paycheck that was coming in every other week, once a month or whatever it was. And our goal is to replace that income with the nest egg that you've built up over the years. And so our focus is on investments that are providing you with a high yield right now and are going to produce enough cash flow into your portfolio so that you can withdraw the income from it every month without having to sell a single share.

1:35We all know about the dot-com crash, the great financial crisis. The stock market goes through large swings. If you're in your investing years and you're just adding money in, that's no big deal. You shrug it off, you move on, you know it's going to recover eventually, you buy more when you can. If you're retired and you're taking money out every single month, it can be a very big issue for you. And so our goal is what we call the income method, where you have a portfolio that's yielding 8 % to 10%, which is consistent with the market's long-term returns. and you're getting most of your total return in cash flow every single month.

2:19You can then reinvest a portion of that cash flow to keep your income growing, keeping pace with inflation, and you can withdraw what you need and take it out and use it for your living expenses. And you never have to sell a single share. I started getting involved with HDO back in 2018. 2018. And I was at a point in my life where I left a job. I had left my nice cubicle career that was paying me a decent salary. And I jumped into the wild unknown of saying, you know, I don't want to do this anymore. I have enough money. I'm going to be able to take care of my bills. And I was just managing my own investments.

3:08And I was kind of following along this trend of, let me build up my dividend income. Let me get it enough that it's covering my bills so that I don't have to sell shares. And that's when I met Rita. He brought me on at HDL and I've been working for them ever since. My investing career started like most people. I had a few thousand dollars. I put it in an account. It was a lot of money to me at the time. And I'd put it in and I'd get scared and I'd, you know, oh no, let me sell, take my wins before I go. Or I'd see something fall a lot and it was, you know, very stressful for me. Well, me being me, I kind of got the idea early on of, well, why don't I just get these dividends?

3:55Let me try out these stocks. Back throughout the early 2000s, it was let's buy something that's going to pay me. Then life started happening. I started working. I had a career. I wasn't watching my investments like a hawk. I was just like everybody else, just let's throw the money in. And I let it build up and I kind of really trended towards this idea of, hey, I don't have to sell. For me, a very foundational moment was the great financial crisis. I was a real estate guy. I worked in real estate. I lost my job like many other people who worked in real estate. I was going through a divorce at the time.

4:37I totally ignored my investment portfolio. And it went through a huge swing because I was invested in REITs. I was invested in utilities. I was invested in all sorts of companies that were very dependent on land assets and using debt. But life was happening. And so I didn't pay attention to my investment account. And when it came up the other side, it's probably a good thing that I wasn't paying attention to it because if I had, I might've done something stupid and I might've sold everything. I learned that lesson that, hey, it's going to come back. Your dividends are going to keep coming in. Stuff goes through hard times.

5:16It comes out. Usually when it comes out, the other side is stronger than it was before. And so for me personally, that was really a transformational moment of where I realized, you know, you don't have to be watching over the stock market every minute. You don't have to be trying to sell high and catch the waves and try to predict what's going to happen in the world tomorrow because none of us do. You know, we can't predict what's happening in our personal lives tomorrow, let alone what's happening in the rest of the world. And so, you know, over the years, I've worked very closely with Rita and we worked on really formalizing the income method, which is kind of a combination of everybody on the team.

6:02Um, you know, everybody's experience all combined. We started laying it out with a set of rules, you know, things that you do want to do, things that you don't want to do. The arena is a big fan of diversification, having no more than two to 3 % in any one particular investment. Uh, a lesson that I learned the hard way. He was right. We created a very comprehensive plan so that we're not just out there investing willy nilly. We know what we're investing in. We know why this stock is good for our portfolio. We know what it's doing for us right now and what we hope it's going to do in the future.

6:42And everything we do is approached with that broad plan of, okay, this is the income method. Our goal is 8 % to 10 % current yield and to make sure that we keep our income growing every single year. Now, how do we go in the market and achieve those goals?

6:58Will Barton:I should say at the outset, by the way, for those that are familiar with Seeking Alpha, you're probably very familiar with High Dividend Opportunities and Will Barton and Rita Morwa. It's our number one income investing group. So a lot to benefit from that service and from the strategy. When you are talking about the yield that you're concentrating on, what would you say in terms of contextualizing that? Like in terms of, let's say, with the rate cuts going up or down, are there things that you're paying more attention to or that you have more in focus? When you're looking at REITs, is there something that you're doing something slightly differently than you would a regular stock?

7:43Will Barton:Maybe if you could offer us some context vis-a-vis the yield conversation, I think that might be helpful. Yeah. And when we say, you know, 8 % to 10 % average yields, you know, that number is derived because we believe that's a reasonable amount of return that you can expect to get out of the stock market over the long term. you know within any particular individual investment we're going to have some more variety you know we a yield means nothing if the company isn't going to be able to continue paying it and so we construct our portfolio and we adapt with the times you know based on what's happening with overall market you know for example interest rates have gone up a lot and we started seeing a lot of fixed income opportunities that were in that 8 % to 10 % range.

8:33Fixed income like bonds, preferred equity, which pays a predetermined amount every single quarter. And so we've been loading up on those because A, they're safer, right? Preferred has to be paid before the common stock gets paid. Bonds have to be paid. Otherwise, the company's going bankrupt. And so you have a very stable and secure amount of cash flow that's coming from it, which suits our needs and our goals that we discussed before. And so with interest rates going higher, it has the effect of making everything that is based on cash flow cheaper. Because if you can go invest, if you can go buy U.S.

9:17Treasuries for, you know, 4%, well, you need you want your fixed income to be yielding more than that. Otherwise, just buy treasuries. They're more direct competitors in terms of what they do for your portfolio. And over the last two, three years, we've really focused on the preferred equities in particular. We built up a portfolio of over 50 preferreds. And that was in part driven by our overall goal of making sure our income is stable. And also because it was just a great opportunity to lock these yields in before interest rates come back down. And we've kind of seen that, you know, the opportunities are less today than they were last year.

10:00We have to work a little bit harder to find them, but there are still good opportunities there. And turning to the second part of your question, when we're looking at company to company, like if we're looking at a REIT compared to like Verizon is a company that we bought late last year. With something like a REIT, you're looking at an investment where a very large portion of the total return is going to come from the dividends. Price upside is going to be limited because they're required by tax law to distribute 90 % of their taxable income. As a consequence of that, they're not retaining the capital.

10:39They're giving it to you. So when you're looking at those investments, you're really looking at what's the income? Is it sustainable? Is it going to be variable? example, when we talk about mortgage REITs like AGNC, for example, where they're buying agency mortgage-backed securities, we know that business model is going to have quite a bit of variation in the income, right? They're making an investment. They're sending you the profits. The investment isn't going to have the same return every single year. There will be periods where it's really good, periods where it's a little bit lower, it will generally always be high in terms of yield.

11:23It'll always be in that used to be 8 % to 10 % range. Recently, they've been in that 13 % to 15 % range. So we're always looking to balance out those opportunities with the opportunities like a Verizon where the market just panicked, the yield is high because the market thinks, oh, no, something's going wrong. And you just have a good deal with a company that is going to have the capability of growing their price consistently over time. And so that provides you a nice little balance where you're getting your income, but you also have those holdings in the portfolio that are also going up in price and providing you a little bit more capital to work with in the future.

12:02Will Barton:How do you allocate or are there different portfolios for different time horizons. How do you think about the portfolio and the allocation factors, questions? Our portfolio really has four parts to it. We have two parts that are more on the equity side and two parts that are on the fixed income side. On the equity side, we have our core one portfolio, which is funds. We have a strong bias towards closed-end funds, although we do have a couple of ETFs in there. And those are our source of diversification. Funds allow us to invest in sectors where you don't have a lot of dividends. For example, sectors like commodities or the oil majors, and also some that are just correlated with the S &P 500.

12:52So we get exposure to that upside and the closed end funds will convert it into cashflow for us. And then we have our core two, which is our individual picks, you know, those are going to be stocks that are more like REITs, MLPs, usually they're companies that are going to be producing high amounts of cash flow consistently. Every once in a while we have, you know, the Verizons of the world where we can go out and we can buy a corporation that is just, is paying a high yield because the price is low. And so, you know, we put all those in our core two bucket. And then on the fixed income side, we have our maturity ladder, which is mostly baby bonds.

13:35We do have some traditional bonds and some term preferred. And the idea behind that is we set it up in a maturity ladder structure so that every year you have some that are scheduled to mature. and that provides your portfolio with lump sums of income as those securities mature consistently over time, helps protect against interest rate risk because you're getting that capital back on a schedule and being able to redeploy it at whatever the current market rate is. And then on our preferred portfolio, we keep that separate because like I said, we have 50 holdings in it now. When HGO first started, there was four.

14:14We've grown it up over time because preferred equity takes on a little bit more risk than bonds, but you get that fixed, you know, predictable return or not return, but rather cashflow that's coming into your portfolio on a regular basis. And so it really provides a good base of income for you to start from when you're making the more, you know, the higher yielding, the more speculative investments, where you're swinging for the fences and you're dealing with the risks of the stock market could crash, the economy could crash, things can go downhill.

14:51Will Barton:What else would you say why you favor CEFs over ETFs? Like when and why? The great thing about CEFs is that they trade based on the market forces. Rita loves to talk about one of the annual letters that Warren Buffett wrote for Berkshire. I can't remember exactly what year it was, but in a letter he talks about how the liquidity of the market should always be a benefit to a patient investor. Because it's like your neighbor. If your neighbor is shouting at you every single day, hey, I'll sell you my farm for X dollars, you can decide to sell it. If you think he shouted a good price, you could decide to hold your farm.

15:38If he shouts a bad price, you can decide to buy his farm if he shouts a price low enough for you. And that's kind of how CEFs are, right? Their shares trade freely in the market, but their net asset value is based on their actual underlying performance. That's what the managers are managing. And so there's a lot of opportunities when the market gets very pessimistic, when people get panicked, they'll be selling it at large discounts. And if you can buy cheaper, you're going to have a higher total return. And so there's a lot of opportunities among CEFs to buy into the fear and be able to take advantage of that neighbor who is just shouting prices at you.

16:29You know, when they shout a good price, go buy it. If it gets expensive, back off a little bit, hold on to it, sell it if it gets high enough. You know, we had one this year that we exited last month because it just got too expensive for us. And we're kind of opportunistic in that respect. You know, the yield starts getting down to 5-6%. It's not achieving our goals anymore. And, okay, if you guys want it for that, it's yours. And that's kind of how we approach that. And CES provide that opportunity more than ETFs do. ETFs always trade very close to now, usually within pennies, which has its benefits.

17:13But it also means that you're always paying what is currently a fair price. We like to buy things for unfair prices.

17:20Will Barton:And what would you say or would you be willing to share an example of a preferred from last year that looked really good, that's done really well, and maybe one that you've looked at this year, like to your point that they don't look as good this year, that you looked at and was like, no thanks. It's not unfair enough of us. Yeah, I would say one of the things that we jumped on was AGNC. They came out with a new preferred last year. AGNC is a company that is just flush with cash, right? They're in a business where they're buying assets that are, you know, banks buy for liquidity purposes. Agency MBS is super liquid.

17:58They can sell it at any time. You know, AGNC themselves routinely has billions of dollars of cash on hand. All right. When they had AGNCZ that they issued at an 8.75 % coupon, that's just a coupon that is way high, you know, for what they should be for considering the risk that they're taking. You know, we consider the preferred of these companies to be very low risk, you know, relative to other opportunities in the market. And so we snapped it up. It's trading above par right now. It's still not a horrible buy. The market's figured it out.

18:30Will Barton:Any more context to share about this year in particular when it comes to income investing or different vehicles or things that you're particularly noticing about this year specifically? This year, much of our focus this year is on tangible assets. We've seen what we call a rotation to value that's been kind of occurring early in the year here. Investors, even with some of the large cap stocks that are performing very well objectively, even with the meeting expectations, they're seeing their prices sell off. You know, investors are starting to realize that valuation does matter. And so our focus this year is really on tangible.

19:22On investments that have tangible assets, real estate is something that we're really looking forward to right now. And we haven't really pulled the trigger on a lot of REITs where they're kind of on our watch list because we want to buy them. We're just waiting for the best opportunities. We think that energy is, we have a few energy holdings in our portfolio that have been doing extraordinarily well. We just had an announcement that they're going to raise the dividend for an MLP Western WES. And so we're focusing on energy, utilities, real estate, those kinds of companies that have large amounts of physical assets.

20:06that they are benefiting not only from the rotation into value, but also interest rates have been really high. And all of these companies, the basic business model when you zoom out is we're going to buy assets, we're going to take out debt to fund it, and that's going to enhance our dividend stream. And so what happens when interest rates go up, they're paying more to borrow, their profits get reduced a little bit. For the high quality ones, we've seen a lack of growth. For some of the ones that were a little bit pushing the edge a little bit, we've actually seen them pulling back a little bit.

20:44And so our focus this year is really going to be on taking advantage of those opportunities. As interest rates come down, they're going to be able to refinance at lower rates. And they're going to be able to buy assets where the prices have already adjusted to what interest rates are. And that's our main focus for 2026 right now, what we're watching for and the types of holdings that we're going to be adding throughout the year.

21:12Will Barton:Do you guys use like anything in our quant system, like the dividend scorecard? Is that something, or do you focus on any of the factors that our quant system focuses on? Is that something that you evaluate yourselves to or it's not really a part of your strategy? We really don't. I'm a stats nerd. I dive into the 10Qs and the 10K and go through the cash flow statements line by line. It's one of the things that I think really sets us apart from the other services that are available out there is during earnings season, we don't sleep. companies are reporting and we're diving into the numbers and looking at the numbers, trying to determine what it means for our cashflow, which is ultimately what protects our dividends.

22:03And so I think it's the best way for us to do that is to sit down and grant your way through the paperwork. I've experimented with having AI try to read me a 10Q and stuff. And the problem is, I don't know when it's giving me an incorrect answer until I dive in and read it myself. And if I have to read it myself, I might as well have just read it myself. So that's my approach. You know, for me, fundamentals is everything. I have gotten to the point where I simply don't care what happens to the share price. It's one of those things that when I started working for Rita, I kind of had to curve myself and learn a little bit that, you know, for a lot of people, share price is still everything.

22:48We'll publish an article and if the stock price is down 5 % the next week, people are in the comments laughing at us. Oh, you just lost. And it's like, well, the price is down. So what? That's not where our returns come from. Over the long term, substantially, all of our returns are going to come from dividends. And so, you know, when you start looking at an investment that you've held for, you know, three, five, 10 years, the price becomes a diminishing portion of whatever the total return is. You know, whether the price went up or down, it goes from being 100 % of your total return within the first month is going to be the price going up or down.

23:29but then you get that first dividend. Well, now you're going to have 99 % of your price is going to be explained by the price moving up and down. And then you get another dividend and now you're down to 97 % of your price is explained by the price moving up and down. And that diminishes to the point where you get down to 10, 15, 20 % of your total return is explained by whatever the price did and everything else is the dividend that you received. So for me, the fundamentals are everything. Is the company going to do well? Are they going to continue producing cash flow? Is that going to continue to translate into a dividend?

24:09And as long as it is, I'm willing to hold through that 50 % downswing or 60 % downswing or whatever scary number the market wants to deliver. The question is, how much money is the company producing? Is it going to continue you're producing that. And if it is, the rest is just noise. At the end of the day, two prices matter. The price you paid when you bought it, the price you paid when you sold it, everything else in between is just noise and doesn't matter to your total return.

24:39Will Barton:When you're following this strategy or as you're following this strategy, have you been recently surprised by a dividend cut that despite your certainty, there's been a dividend cut or some other nefarious factor coming at you that you weren't anticipating? Absolutely. You know, we have a portfolio, you know, where usually we have around 50 holdings in our common and our funds. And, you know, you're going to have surprise dividend cuts. That's one of the reasons why we always emphasize diversification. You know, keep your holdings within two to three percent of your portfolio because then it's not a huge life-changing impact when you are surprised.

25:24We were recently surprised by a sector where I didn't think they were going to cut their dividends as much as they did. Oxford Lane Capital, everybody loves to talk about it because when things get dramatic, they love to talk about it. We did have a situation here where they cut their dividend by 50%. I wouldn't have been surprised to We've seen a 10 or 15 % cut because we knew that their cash flow was getting squeezed a little bit by spread tightening. But they decided to get very aggressive with it. You know, they cut their dividend by 50%. They were yielding. They were one of those nosebleed yields for us, right?

26:01They were, they've been yielding 20 to 30 % for the past year. You know, so it was a very high dividend to start with. Call you shocked when it gets cut. That's what everybody says, right? But when you look at why they cut, it comes down to the company was paying out all of their cash flow. So they weren't retaining anything that they could keep back to grow. Everything was going into the hands of shareholders. All the value was disappearing into our pockets. And they made the decision that with the prices declining and their NAB declining so much that they wanted to retain some capital. And so they cut the dividends enough so that they can retain capital, so that they can rebuild NAV, and so that they can be active in the market fine while prices are low.

26:48It's hard logic to argue against. Obviously, with our focus on the dividends, we like to get as much cash up front as soon as possible. But it was a remarkable strategy change for them compared to what they've done in the past. and, you know, when management changes their strategy, then you have to make a decision. Is it something I still want to stick with? Is it something I want to exit? In the case of Oxford Lake Capital, we've decided to stick with it because, you know, the yield is still very good. And, you know, we believe that, you know, their strategy of let's go ahead and rebuild NAV, the price is going to come back.