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Co-produced with Treading Softly
Here at High Dividend Opportunities, we don’t believe in sitting on our laurels. Now that doesn’t mean we are running in, full steam, looking for trouble.
We’re not ignoring the signs of the market or blindly surging ahead without more information. We’re not looking to fight an impossible fight and bring others down with us. We say all that to say we’re not Leeroy Jenkins.
Who is LJ? Leeroy Jenkins became an Internet phenomenon of 2005 fame when he caused his raid time to die by rushing into battle, without a plan, and getting his whole team killed in the massively popular World of Warcraft. WoW, as it is known by many, is a game released by Activision Blizzard (NASDAQ:ATVI).
How does this relate to investors and retirees? Well, Leeroy rushed into battle unprepared and caused harm to himself and others. Digitally speaking, he killed them all. When investing, we are putting our hard-earned capital to work and others may be counting on us to make wise decisions.
I believe in crafting my watchlist on a regular basis. Lately, I have been doing so weekly due to market volatility and new information coming out. I have been sharing my best picks and watchlist with members of High Dividend Opportunities so they can benefit as well. You could get my lists, but even so, you should be crafting your own that meets your individual investment objectives and needs.
Some of My Picks for Your Consideration
Imperial Oil (IMO) – yield 4.2%: Oil has gone from negative $30/barrel and is now approaching $30. As the world economy starts back up, oil should continue to experience tailwinds, especially with so many companies forced to cut back production.
IMO is the best way to play the rebound in oil without worrying about solvency issues. This is because IMO has one of the most solid balance sheets with an investment-grade credit rating. The company can generate tremendous cash flow at very low oil prices. Imperial yields only 4.1%, but it has historically returned its excess free cash flow to shareholders via buybacks, and we expect it to continue to do so. This is a great pick for investors who want some exposure to oil but are wary of the excessive volatility and risk we have seen throughout the sector. While its yield is low for most income investors, it remains a strong buy for those investors who do not mind a 4.2% yield.
Altria (MO) yields 9%: MO is now cheaper than it has ever been and yields around 9%. The stock has taken a hit on volume worries, COVID-19, and also on Anheuser-Busch’s (BUD) issues. These have been more than adequately discounted and the company is priced well here. At the current price, MO offers a nice upside potential in addition to a well-covered dividend.
Dynex Capital (DX) – yield near 7%: I’m a big fan of the agency MBS sector in this environment. MBS prices have stabilized thanks to the Federal Reserve stepping in and buying. 10-year Treasury rates have settled into a narrow trading range, and short-term repo rates, the cost mREITs pay to borrow, have collapsed more than 90% since the beginning of the year. This means the spread between the yield that mREITs receive and the cost they pay for debt will be larger than it has been in many years. This means that the profitability of these agency mREITs is enormous today and likely to remain so in the coming years.
DX, in particular, controlled losses in March by selling substantial assets for a gain before the market became volatile. At only -10.7%, DX’s book value loss was half of any of its competitors and will be much easier for it to regain on the rebound. It is leveraged at only 4x equity, meaning that it has a lot of dry powder to invest. While much smaller than NLY or AGNC, DX’s management has been proving it can make very smart decisions. Book value is over $16.07, so it is trading at a 20%-plus discount.
Note: Yield percentages are at the time of writing and will change.
Conclusion
Having a watchlist keeps you from rushing blindly into battle without a plan. Being prepared and careful in this environment can lead to tremendous gains and long-term income. As long-term income investors, this market provides us with the chance for our income generation to grow explosively as yields on various securities are extremely high, not driven by fundamentals, but by fear and panic in the market.
We face a world with many unknowns. We can’t say how long we will have restrictions in place for COVID-19, and we can’t know for sure how it will impact the lives and mindset of investors for the decades to come. We can, however, craft watchlists to carefully and meticulously invest our capital to see both capital gains and dividends.
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Disclosure: I am/we are long IMO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
