Most investors that need to earn income from their investments are screwed.
No matter which way you look at it, interest rates will trade at fairly low levels for several more years at least.
Yes, I have heard several forecasts for long term interest rates to begin moving slightly higher. The short end without a doubt will stay low for the foreseeable future, but there is hope that more stimulus from the Biden Administration will kick growth rates up a bit. KKR’s McVey thinks we could see 1.25 on the ten year by the end of 2021 and 1.50 by the end of 2022.
The ten-year bond rate has already gone from a low of .4% to a little over 1% today, so an increase to those levels strikes me as reasonable.
But, you can go ahead and call me skeptical that we will see a massive boost from the stimulus package. We have 18.4 million people collecting unemployment benefits and added more than 1.1 million (all programs, including the pandemic assistance program) to the rolls yesterday.
However, it all plays out, it adds up to the fact that even if rates rise along the path KKR expects, fixed income is still going to provide meager returns from traditional bond portfolios. Even junk bonds are trading at near-historic low yields and do not offer a path to adequate income levels.
I am talking a lot about the need for income in this space because the lack of income-producing opportunities has a negative impact on people’s lives. Earning 2% on your retirement fund will not provide the cash you need for all the things you want to do unless that’s one massive stack of cash.
Wall Street is going to tell you they can help.
They can help turn a huge portion of useless cash into meaningful commission dollars.
I see more scams, cons, and ridiculously bad advice surrounding income investing than any other investment area, with the possible exception of options trading.
Two Ideas to Create Income in Today’s Market
Today I am going to turn back to two of my favorite areas of the market: Closed-end funds and Private Equity
No matter what strategy investors are trying to implement, I can usually find a way to use discounted closed-end funds to execute it. Closed-end funds and income go together like peanut butter and jelly, so it’s a great place to look for a way to increase the cash rolling in the door every month.
Using discounted closed-end funds allows me to buy income-producing assets for less than 100 cents on the dollar.
I am a big fan of that.
I am also a big fan of private equity firms as proven by the fact that I have a whole research service dedicated to this idea. They have proven themselves to be the best investors on the planet over the last 50 years. They are also one of the most significant users of credit and know more about leverage than pretty much anyone else.
Income Idea #1: Ares
Ares Management Corporation (ARES) is a leading global alternative investment manager that specializes in private equity and leveraged finance. They also oversee a closed-end fund, Ares Dynamic Credit Allocation Fund (ARDC) which is what I am going to focus on.
The fund invests in loans and high yield bonds with allocation determined by the Ares credit team. The credit team brings their deep evaluation experience to the fund, helping them get the right mix of the right companies in the portfolio.
They are not lending or buying bonds from a bunch of obscure companies. I looked at the most recent list of portfolios holding and knew most of the companies off the top of my head.
They have bonds from Ford Motor (F) and Brookfield Property (BPY).
They have securities from Dell (DELL) and MGM Properties (MGP).
They hold loans to JetBlue (JBLU) and Bass Pro Shops.
It is a well put together collection of income-producing securities managed by best-in-class managers.
The fund is trading at a discount of 10.5% right now, so we are buying the portfolio for less than $.90 on the dollar.
The shares yield 8.06%, and the dividend is paid monthly, so you have a steady stream of cash hitting your account.
Income Idea #2: KKR
KKR is one of the oldest and most successful private equity firms in the world. The company started doing leverage investing back in 1976 and has borrowed and repaid hundreds of billions of dollars over the 44 years of existence. It’s safe to say the company knows a little something about credit.
In 2004 they used their knowledge and experience to open KKR Credit. The division now has about $79 billion under management.
They also have a closed-end fund that specializes in bonds and loans: KKR Income Opportunities Fund (KIO). KIO currently trades at a discount of almost 10%, so you are getting the expertise of a top-performing private equity and credit investing firm at a bargain price.
The yield on the KKR fund is 8.68%, and it also pays monthly.
Both funds are down over the last year but have rallied off their lows. I prefer to buy everything on pullbacks, so I might wait for a little disruption in the markets to put money to work in these discounted closed end fund opportunities.
Private equity firms are experts on both sides of the leverage lending game. We can put their expertise to work, providing us monthly income streams at less than full price using a discounted closed-end fund strategy.