Earn Big Like Bill Gates: Earnings in Good and Bad Times
Co-produced with “Hidden Opportunities”
Is your portfolio chasing growth a little too obsessively? Did you know that investing in stable, slower growing businesses can be predictably rewarding? Dividend stocks are a smart way to diversify your portfolio and add predictability to the equation. After all, these Securities help generate income in good times and bad, especially in times of high inflation and fears of recession.
Everyone knows Microsoft (MSFT) co-founder Bill Gates. But did you know that a tech mogul like Bill Gates invests in many dividend-paying stocks? His portfolio followed by Cascade Investments generates more than $135 million annually through dividend payments. Whether that matters enough to Mr. Gates is unknown to us. Still, it is undoubtedly a significant amount of money that is generated without any reduction in the ownership of these shares.
Income through good times and bad is my motto, and while I like the stock picking criteria Cascade has adopted for their dividend picks, my goals are different from those of Mr. Gates. Thus, I pursue similar sectors through a different choice of securities for my portfolio. This article discusses two great dividend-paying stocks I hold in my portfolio for income. With yields of up to 10.8%, these keep me sleeping well at night despite the sentiment in financial spheres. Without further ado, let’s review the income choices.
Choice #1: SLRC, Yield 10.9%
Believe it or not, Bill Gates has invested in several start-up and established pharmaceutical, biotech and life science companies over the years. Additionally, Caterpillar (CAT) and Deere (DE) are important positions in Gates’ portfolio. These companies are the leaders in industrial, construction and agricultural equipment. But did you know that equipment financing contributes significantly to the turnover of these companies?
We are talking SLR investment company (SLRC), a business development corporation (“BDC”) that invests in life science companies through debt financing arrangements. In addition, SLRC also seeks sponsor financing for non-cyclical industries, equipment financing, corporate leasing and other debt investments. Let’s be clear – a BDC like SLRC will never be part of the portfolio of a billionaire like Mr. Gates due to his small market capitalization and the fact that he already has a well-paid team to manage his portfolio. It wouldn’t make sense for him to pay his team to buy SLRC. (Source: SLR investment company)
Nonetheless, we believe SLRC mimics the characteristics of Cascade’s dividend portfolio picks and presents a double-digit return opportunity from a quality BDC. In Q2 2022, SLRC reported a net leverage ratio of 0.96x, an increase from the previous quarter, which tells us that BDC is taking advantage of rising rates by increasing leverage. SLRC continues to remain at the lower end of its target leverage range of 0.9x to 1.25x, which means we can expect it to continue to look for more opportunities as rates rise.
Almost 50% of SLRC’s $1 billion debt is senior unsecured fixed rate notes at a weighted average annual interest rate of 3.9%. And 65% of their assets are floating rate investments, making SLR a beneficiary of rising rates. The best part is that 97% of their asset portfolio is made up of senior secured loans, indicating better downside protection during problematic situations such as recessions.
Earlier this year, SLRC completed the acquisition of a smaller BDC – SUNS. This transaction improves the diversification of SLRC’s portfolio between cash lending, non-cyclical sectors and asset-based lending. This allows BDC to continue to increase its leverage, take advantage of rising rates and hedge its distribution. SLRC has maintained a regular distribution since 2013 and recently transitioned to becoming a monthly payer. BDC is currently paying $0.137/share every month, which works out to a healthy 10.9% annualized return.
SLRC is trading at a discount of around 18% to its net asset value. This steep discount prompted management to announce a new buyback program for up to $50 million of BDC’s outstanding shares. This is an overall win, as more net investment income becomes available for a smaller group of stocks, improving the prospects for healthy distribution coverage. SLRC is a BDC focused on recession-resistant sectors and is structurally well positioned for a rising rate environment. Today you have the opportunity to lock in the 10.9% returns of this undervalued BDC.
Pick #2: ATH-C, 6.1% yield
Insurance is a great, long-lasting business; Bill Gates and his pal Warren Buffett know this all too well. Berkshire Hathaway (BRK.A) (BRK.B) is an important component of Mr. Gates’ portfolio, and the company notably derives 27% of its revenue and around 20% of its pre-tax (“EBT”) profit of its insurance companies. No wonder BRK.B looms large in Mr. Gates’ portfolio.
Let me state the obvious – Warren Buffett doesn’t like paying dividends, and he doesn’t need to pay dividends to make BRK.A and BRK.B attractive to shareholders. So I will look elsewhere for my income needs while respecting Buffett and Gates’ eye on the lucrativeness of the insurance business.
Athene Holdings is an insurance company specializing in retirement products. It offers annuities, reinsures annuities and offers other retirement service products. It is a wholly owned subsidiary of Apollo Global Management (APO), one of the largest asset management companies in the world. APO and its subsidiary Athene maintain healthy ‘A’ rated balance sheets. (Source: July 2022 Investor Presentation)
Today we are going to discuss one of Athene’s favored titles, Athens Holding Ltd. 6.375% Series C, Non-Cumulative Rate Reset Perpetual Preferred Shares (ATH.PC). ATH-C is a rate reset preferred share. This means that if the stock is not redeemed on its redemption date (30/09/2025), the initial fixed rate will change to 5.97% plus the yield of the 5-year Treasury note at that time. . As Peter Lynch says, no one can predict where interest rates (5-year treasury yields) will be in 2025. However, looking at the current situation, the preferred stock yield will drop from its current coupon of 6.375 % to 8.93%. And if the 5-year note continues to rise, the rate may rise even more as it resets every 5 years (unless Athene exercises its option to call ATH-C on any subsequent reset date of 5 years). Thus, this security is the epitome of preferred stock with strong inflation protection features.
ATH-C is rated BBB by S&P. It is important to note that only a small percentage of corporate preferred stocks are rated as investment grade, indicating that ATH-C is a safe income investment. The good news doesn’t end there. ATH-C’s dividend is qualified, making it eligible for federal income tax reduction depending on your circumstances. This high-quality preference traded at a deserved premium, reaching $29.20 in November 2021.
Whether inflation roars like a lion or purrs like a cat, it destroys your hard-earned savings in the long run. An adjustable-rate preference like ATH-C provides reliable income and much-needed inflation protection for your portfolio.
If your portfolio is flying too close to the sun in search of growth, adding stability to the equation is essential. Dividend stocks provide that much-needed stability by providing income during both bull and bear markets. Billionaires like Bill Gates may not be income investors. Yet, looking at their portfolio, we see sizable dividends coming from cash-flow-rich companies and industry sectors that retain a significant competitive advantage and prioritize shareholder returns.
Unlike Mr. Gates, we focus on current income to fuel a healthy retirement. However, I like Cascade’s portfolio design and stock mix which provides resilience in the face of economic conditions. I follow a similar strategy, but my goals are different, so I pursue it with a slightly different choice of stocks in my portfolio. At HDO, we maintain a diversified portfolio of securities targeting an overall return of +8% to ensure peace of mind for retirees. Two choices with returns of up to 10.9% to enable a happy and healthy retirement.
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