Yes, You Can Retire On Dividends, 2 Fat Yields Up To 10%
Co-authored by Treading Softly.
Have you ever spoken with somebody who has completely made up their mind and just ignored what you have to say outright? They’re not really that concerned with the facts. They’re more concerned with their pre-conceived opinion. I think author Frank Peretti put it well when he said it this way:
“When people get their mind made up about something, then it’s: ‘Don’t bother me with facts.’ They’ve got their minds made up and dismiss you out of hand. Some people don’t even give you a fair hearing.”
The biggest resistance that I run into regularly is when I explain to people that they can retire strictly on dividends. Many of these people have concluded that doing so is impossible and dismissed it right out of hand. Sadly, many of these people base this dismissal on the idea that they think that you can only have a “safe” dividend if it’s 3% or less.
For decades, we lived in a low-interest rate environment, very different from the environment we’re currently living in, where you can get a Treasury note that yields 5%. I have been developing my Income Method for decades, honing and fine-tuning it through various rate cycles, various market conditions, and various political administrations, all the while still being able to see my portfolio produce massive levels of income. I can tell you from my experience, as well as the countless experiences of others who invest for income, that yes, you can retire on dividends.
Today, I want to highlight two picks that you can use to help yourself retire on dividends and live off the income that your portfolio produces.
Let’s dive in!
Pick #1: SCE Preferreds – Up To 6% Yields
Southern California Edison (will be referred to as SCE in this article) is one of the largest electric utilities in the United States, serving ~15 million people across 50,000 sq. miles of Central, Coastal, and Southern California. SCE is a wholly-owned subsidiary of Edison International (EIX), a 136-year-old company providing electric utility services in the region.
EIX has been an excellent dividend steward, with 20 years of annual payment raises. The company’s recent dividend raise (by 5.8% YoY) provides a quarterly payment of $0.78/share.
The utility company reported its FY 2023 core EPS $4.76, placing its annualized dividend at a modest 66% payout ratio. For FY 2024, the company projects $4.75-5.05 in core EPS, providing adequate room for another healthy dividend raise.
EIX has had a busy fiscal year, with the issue of new debt notes to refinance its maturities. The company also took steps to issue a tender offer for its Series A and Series B preferred securities in cash of up to $750 million. Source.
- 5.375% Series A, Fixed-Rate Reset Cumulative Perpetual Preferred Stock
- 5.00% Series B, Fixed-Rate Reset Cumulative Perpetual Preferred Stock
During Q4, the company reported that they purchased $308 million of preferred equity through the tender offer.
EIX has been actively improving the defensiveness and safety of its grid, having replaced more than 5,200 miles of distribution lines with covered conductors, effectively hardening 76% of its distribution miles in high-fire-risk areas.
EIX projects a 5–7% core EPS CAGR through 2028, and expects its 2025 EPS to be between $5.5-$5.9. The company targets a long-term dividend payout of 45–55% of SCE core earnings, indicating strong prospects of continued payment growth.
EIX ended FY 2023 with $304 million in cash, and both EIX and SCE maintain investment-grade balance sheets with well-staggered maturities in the coming years.
During FY 2023, SCE spent $1.6 billion on interest expense, $87 million on EIX preferred dividends, and $123 million on SCE preferred dividends. The preferred expenses enjoyed adequate coverage from the $1.4 billion net income for the period.
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SCE Trust II, 5.10% Cumulative Redeemable Perpetual Trust Preference (SCE.PR.G) – Yield 6.1%
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SCE Trust III, 5.75% Cumulative Redeemable Fixed-to-Floating Rate Perpetual Trust Preference (SCE.PR.H) – Yield 5.7%
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SCE Trust IV, 5.375% Cumulative Redeemable Fixed-to-Floating Rate Perpetual Trust Preference (SCE.PR.J) – Yield 5.8%
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SCE Trust V, 5.45% Cumulative Redeemable Fixed-to-Floating Rate Perpetual Trust Preference (SCE.PR.K) – Yield 5.6%
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SCE Trust VI, 5.00% Cumulative Redeemable Perpetual Trust Preference (SCE.PR.L) – Yield 6.2%.
Both fixed-rate SCE-G and SCE-L present an excellent opportunity, offering +6% current yields and ~20% upside to par.
Pick #2: THQ – Yield 10.8%
The healthcare sector carries unique benefits for investors and also unique risks. On the benefit side, medical care is something that has become an essential need in the modern world. It is something that we generally believe should be accessible to people. As people live longer, the demand for medical care has grown exponentially. The healthcare sector is not significantly impacted by recessions and has historically been a sector that has been relatively attractive through downturns.
On the other hand, because medical care is so important to people, it is politically very contentious. The government is intrinsically involved with paying for medical care, with Medicare and Medicaid easily being the two largest payors. Even when paid for “privately,” insurance companies are usually involved. For companies in the medical business, this means that adaptability is essential. The government has changed the rules in the past, and it will probably change them again in the future.
In the long run, the pros have outweighed the cons. There is a ton of money to be made in the healthcare sector, and that is something that isn’t likely to change.
The most recent issue for the healthcare sector has been inflation. It is a sector where the costs go up immediately, but since payments come from insurers, inflation takes longer to be reflected in revenues. This has created a buying opportunity, as the sector has generally underperformed the S&P 500 in recent years.
abrdn Healthcare Opportunities Fund (THQ) is a CEF (Closed-End Fund) that was previously owned by Tekla. Aberdeen acquired Tekla, including all of its funds and the staff that ran them. THQ is under a new banner but is still being managed by the same team. I’ve received a lot of questions about news stories that Aberdeen is cutting staff; these stories are referring to staff that was operating 100+ funds operated from the U.K. that Aberdeen elected to close down. There have not been any announcements of any staffing changes at the Tekla funds, which are based in the U.S.
This is important because Tekla has built a reputation of excelling in the healthcare industry. Some of its oldest funds like abrdn Healthcare Investors (HQH) have outperformed since the 1980s.
THQ is invested in a broad array of healthcare sub-sectors, including pharmaceuticals, providers, biotechnology, and equipment. Source.
This provides exposure to every angle of healthcare.
As a CEF that invests in common equities, it isn’t unusual for THQ to trade at a discount to NAV. However, over the past year, we have seen a significant increase in the discount that THQ trades at – currently a discount of over 10%, the steepest it has seen since March 2020.
Typically, THQ’s discount has been in the 8-10% range. This provides some additional upside for investors, in addition to NAV growth.
Healthcare has faced struggles in recent years, but the long-term fundamentals remain strong. Demand will continue to rise, and reimbursements will catch up with inflation. THQ is a great vehicle to take advantage of the long-term investment while collecting a good yield.
Sister fund abrdn World Healthcare Fund (THW) has a similar portfolio but had a more aggressive distribution policy, which caused it to trade at a slight premium to NAV.
Recently, Aberdeen announced a 60% hike in THQ’s distribution to $0.18/month. As a percentage of NAV, THQ’s distribution will still be lower than THW’s, but not by much. THQ will be distributing approximately 10.8% on NAV vs THW’s 11.0%. We expect this change will cause THQ’s discount to NAV to close sooner rather than later. Certainly, between the two, THQ has become the much better option to buy until the valuation gap closes.
Conclusion
I have not met a single retiree who’s made it through their entire retirement without having to rely at some point on pharmaceutical medicines or the power company. You see, most of us turn on a light switch without ever thinking about the fact that that power has to be produced somewhere. We just simply pay our power bill because we need to and because we need the lights.
Likewise, when you take a handful of Motrin because your back is sore or you have to take amoxicillin because you have an infection, you’re buying products developed by pharmaceutical companies. While many people like to vilify different pharmaceutical companies, and sometimes for very valid reasons, the fact remains that we all continue to rely on the products that they produce. Today, you can readily own parts of these companies and parts of your local utility, so you too enjoy the dividends that come from them. Strong income that comes in month after month and quarter after quarter.
When it comes to your retirement, you’re going to need to have the light switch work, and you’re likely going to rely on medicine at some point in time or another. So why not have these companies already paying your way through your retirement instead of simply paying them so that they can pay somebody else? Life is expensive. It’s undeniable. Everything costs money. You’re going to have to come up with that money somehow, whether it’s slowly dismantling and selling your portfolio because all you do is hold an index ETF – or whether it is collecting money from the market that is given to you freely so you can turn around and spend it as needed or reinvest it. To me, the second option sounds better than the first, and that’s why I built my Income Method so you can have an abundant retirement.
That’s the beauty of my Income Method. That’s the beauty of income investing.