Co-produced with Treading Softly
When polls and research are done, economics often reigns supreme in people’s minds. Inflation has become a major problem for all of us, and as such, Americans want their government to sit up and pay attention.
According to a Pew Research Center poll in January, 80% of Americans think the economy should be the government’s priority. While they are busy fighting to change the filibuster rules and trying to enact voting legislation, they actively ignore what Americans see as the biggest problem. This is only compounded by the Federal Reserve’s constant denial about the persistence of inflation as it hits decade highs.
I have learned in my life that it is better to be as independent as possible. Investing means recognizing global trends, the political environment and the economic situation when making adjustments and additions to my portfolio or positions.
Today I want to look at the possibilities of benefiting from inflation now and further strengthening of the economy later.
Choice #1: AWP – Yield 7.8%
Aberdeen Global Premier Properties Fund (AWP) is a CEF that invests in REITs. An investment category that will thrive in 2022 as the stars align to create one of the best investment environments for real estate ever seen.
When we consider the macroeconomic outlook for the economy, two features jump out at us for 2022 as very safe bets.
- Inflation will be well above average.
- The 10-year Treasury rate will remain well below average.
Even the Federal Reserve predicts that inflation in 2022 will be 2.7% using its “Core PCE” measure. We think that’s a lot less than realistic, but even if we’re driving at 2.7%, inflation is still running at a much higher rate than it has been in almost 30 years.
Similarly, the 10-year rate is “rising” but it is only high relative to recent history. It is still lower than it has been for most of the past decade.
Why is this important? Above-average inflation is good for REITs. It has become very common for landlords to negotiate leases that have “indexations” linked to measures of inflation – usually the CPI.
The reason is simple, neither the landlord nor the tenant enjoys the time and expense of negotiating the rent every year, but the future is uncertain. A lease with escalators creates a dynamic lease that will adjust to economic conditions and the parties can agree to commitments of more than 10 years.
In addition to existing leases, new leases are based on prevailing rents which generally increase with inflation and often at a faster rate than inflation. So, with above-average inflation, REITs will see rents rise faster with existing leases that are inflation-linked and are likely to see higher rents for new leases as well.
Another common aspect of REITs is that they borrow a lot of money. In fact, interest charges are usually the biggest cash expense for them. Being able to borrow at low interest rates is the fuel that drives REITs, allowing them to buy more properties, collect more rents and reduce their most important expenses. In short, the combination of above-average inflation and below-average interest rates directly leads to above-average incomes and below-average expenses. You don’t have to be a professional analyst to achieve higher income + lower expenses, it’s a great combination! For REITs, this combination will be a reality in 2022.
AWP holds many high-quality REITs that will be able to take advantage of this momentum.
AWPis a great example of these impacts that are already happening. Prologis (PLD) owns industrial buildings and, on its latest results, cash rents have increased by 12.9% on buildings that have signed new leases or renewed their leases. Meanwhile, their interest expense has fallen by 20% year over year thanks to the refinancing of $2 billion of debt with new bonds at rates ranging from 0.5% to 1.625%!
In 2022, rents can be expected to continue to rise, and those who renewed their leases last year will likely begin to view their rent as “low”. Over the next few years, escalators in the PLD portfolio will trip, causing rents to rise and new tenants paying even higher rents.
The main thing for investors? Profits are booming and dividend increases are going to be huge. PLD does not earn enough to fit into the HDO portfolio, but we can buy it, along with other premium REITs, at a discount by buying shares of AWP.
AWP trades at a 5% discount to NAV, which means it is cheaper buy these quality REITs through AWP rather than buying them directly! On top of that, we’re getting a 7.8% return and will see more NAV growth as REITs have a phenomenal year. Buy AWP before the market realizes how great it will be for REITs!
Choice #2: BKEPP – Yield 8.4%
Blueknight Energy Partners Series A Preferred Units (BKEPP) is a preferred security issued by Blueknight Energy Partners (BKEP). Currently, BKEPP and BKEP are overshadowing a possible buyout offer by its general partner.
BKEPP is proposed to be redeemed for $8.46 per preferred share. This has created a very stable price situation where BKEPP remains close to its tender offer price.
So what does BKEP do? They own and operate an asphalt terminal.
These terminals are essentially the intermediate station between where asphalt is produced in a refinery and where it is used by construction companies. BKEP has 95% take-or-pay contracts, which gives it clear revenue for the future.
As the government has focused on improving infrastructure by spending to repair and replace it, the BKEP is well established to benefit in the long term.
These stable revenues more than covered BKEPP’s dividend. The preferential dividend is covered up to 1.73x by BKEP’s distributable cash flow.
So why is BKEPP worth buying? BKEP’s GP takeover bid keeps the price largely stable while paying a strong dividend. If the deal is done you will get your money back, if it fails BKEPP will continue to pay you a great dividend and will likely climb higher from here.
Note: BKEPP issues a K-1 at tax time. High Dividend Opportunities strongly advises to use limit orders and not to buy stocks above $8.46
Today we looked at two solid dividends you can buy today that you can take advantage of as inflation rises and the government eventually takes action to help the economy strengthen further.
AWP will see income from its position increase because its rents are linked to inflation. Also, the value of his real estate will increase as inflation pushes the values up.
BKEPP provides us with a unique arbitrage opportunity to see a stable share price and eventual buyback occur while paying excellent returns to its holders. If the takeover fails, revenue will continue to flow due to BKEP’s contract revenue. An additional boost from government infrastructure spending to repair and update roads in the United States will ensure dividend security.
It all boils down to providing a stable and reliable stream of income for your retirement, allowing you financial flexibility and financial independence.