Had enough market drama? If so, it’s time to trade in your overly-sensitive stocks for some domestic cash cows paying 5% or more.
I’ll show you how to find these secure yet somewhat-obscure payers in a minute. They are ideal income investments (especially today) because…
- Their monthly payments are comfortably powered by secure cash flows,
- They pay us more than Treasuries (5%+), and
- Their coupons reset higher as rates rise.
Facebook’s folly, the Fed’s latest murmurs and even trade tariffs are mere noise in this corner of the income universe. Cash is king in these parts, and these firms have plenty to cover your yield no matter what Zuck mumbles to Congress or how much China taxes pork.
Let me show you a specific example.
Collecting 5% in Cash (Without an Official Dividend)
Transdigm Group Incorporated (NYSE:TDG) is plenty profitable, but doesn’t like to be on the hook for regular dividends. The aerospace manufacturer doesn’t formally issue a payout. When it has extra cash, it will dish a special dividend to shareholders. But it’s not our style to buy a stock and hope for a payout!
Fortunately, we can force the issue. Other than its lack of dividend commitment, Transdigm is everything we like to see in a stock. It generated $791 million in free cash flow (FCF) over the past 12 months. Year-after-year, the firm rakes in more and more greenbacks:
Plenty of Cash for a Reliable Payout
And TransDigm does allow itself one payment commitment – to its bondholders. A favorite money manager of mine has monthly payments locked in from TDG (for 4.2% yearly). Thanks to the firm’s massive FCF, it should have no problem making these payments between now and their June 2023 maturity.
But wait – won’t these bonds decline in value as rates rise?
No! They are floating rates loans. Which means, if rates continue to rise, you’ll enjoy higher yields as a result.
And we can do even better than 4.2% if we purchase these bonds by choosing a closed-end fund (CEF) as our vehicle. CEFs get access to cheap money. They can borrow at Libor, which is money for (almost) nothing today. My aforementioned manager pays just 2%, and can safely turn that 4% into a 5%+ yield with a bit of leverage.
The Best Bonds to Buy Right Now
Vanilla bonds are under pressure today as we transition from a no-yield world to a some-yield world.
Ten-year Treasury bonds, in particular, have some troubling risk vs. reward measures today. For example, let’s say you buy a 10-Year today for its 2.7% yield.
Your interest payments are secure, but your principal is at risk as rates continue to rise.
The problem you’ll have is that nobody will want your 2.7% bond if they can buy a newer, better issue yielding 3.5 or 4%. The fixed rate no longer looks as good as it used to, and your T-Bill will drop more in price than it’ll pay you.
Floating-rate bonds don’t have this problem. They have variable coupons (interest payments) that are calculated quarterly, or even monthly. Their rates take some reference rate (such as the federal funds rate) and add a defined payout percentage to it. As the reference rate ticks higher, so does the coupon’s payout.
Corporate Bonds: Beneficiaries and Hedges
When the economy is rolling, corporations benefit. So do their bondholders, who get paid a premium over lower paying Treasuries.
But I’m a conservative guy, so I prefer fixed income that’ll do well no matter what the economy does. So I look for investments – and specifically, bond managers – who know how to put together portfolios that easily make their monthly payments and simply “grind higher” no matter what the stock market, rate curve or latest tariff zing from Beijing looks like.
The best deals in the corporate bond market are actually just below the somewhat arbitrary investment grade cutoff. It’s where contrarian fund managers and investors like us capitalize on the fact that any pension funds, banks, and insurance companies are not allowed to invest in these “low quality” issues per their by-laws.
The result is a sweet spot of value, thanks to the lack of big money chasing these types of bonds.
Agencies’ ratings shortchange a lot of very good debt. You just have to pick and choose the quality companies with plenty of cash flow to service their debt obligations. Or those with enough assets to make their creditors whole no matter what happens.
My preferred way to invest in this market is with my favorite floating-rate bond fund that today pays 5.6% yearly (and has double-digit price upside potential, too.)
With a single-click of our mouse (or tap of our phone), we can hire the best (and most well connected) bond managers on the planet to build a portfolio for us. And we can even get them to work for us for free if we buy the fund today!
This ultimate rate-proof bond fund also pays a monthly dividend, good for 5.6% annually. And it delivers total returns between 10% and 15% yearly when the Fed is raising interest rates (as it is right now).
It’s one of 12 monthly payers in my “8% Monthly Payer Portfolio”. With just $500,000 invested, it’ll hand you a rock-solid $40,000-a-year income stream. That’s an 8% dividend yield … and it’s easily enough for most folks to retire on.
The best part is you won’t have to go back to “lumpy” quarterly payouts to do it! Of the 19 income studs in this unique portfolio, 12 pay dividends monthly, so you can look forward to the steady drip of $3,333 in income, month in and month out—give or take a couple hundred bucks – on every $500K in capital you’re able to invest.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."