Thinking about retirement today is not for the faint of heart. With interest rates at ridiculously low levels, it’s very hard to put your nest egg to work and have it provide a nice return.
Twenty years ago, you had far more options for getting paid to take risk than you do today. So, investors that are thinking about retiring today are being forced to get much more aggressive with their portfolios.
Wall Street knows that retirees need the extra income, and they’ve come up with all kinds of ridiculous products that promise to meet your income needs. But what they really do is meet Wall Street’s commission needs.
Sure, some stocks pay over 4%, and some of them are okay. For example, I think that Philip Morris International Inc. (PM) and Altria Group, Inc. (MO) are pretty good income stocks.
Most of them tend to be riskier, however. And of course, as we talked about last week, the stock market is vulnerable to some drastic underperformance over the next seven to 10 years.
But I’m here to tell you that there’s a better way to a wealthy retirement that involves undervalued assets that are producing reliable, ongoing streams of cash that we can use to supplement our pensions and social security payments.
Business Development Companies
Now, I love business development companies, or BDCs. These are companies that make loans to small to medium-sized businesses, and they really started to get more attention following the 2008 financial crisis when a lot of banks stepped back from riskier forms of corporate lending.
However, if you know what you’re doing, it’s not all that risky. And my favorite BDC right now that’s in this market is called FS KKR Capital Corp. (FSK). It has over $15 billion in assets, and its portfolio is almost entirely in senior secured loans of one form or another.
We’re not too concerned about interest rate movements here, as 88% of their portfolio is in floating rate loans. So, if rates go up, so do the interest payments they collect, and that flows right back into our pockets as dividends.
Right now, FSK is trading at just 85% of its book value. But I believe it will eventually trade at a premium because this is one of the best BDCs in the country. Insider running the company have been steadily buying the shares in the open market with their own cash.
The best part is that they’re earning about a 9.5% return on the loans in the portfolio based on net asset value (NAV). But because it’s trading below NAV, our dividends are a little bit higher. In fact, the dividend was raised earlier this year and now yields 10.8% paid quarterly.
I love BDCs, and this is my single best idea in the space right now. I’ll have more going forward, so continue to check back with A Better Way to Wealth.
But for now, we can use these as a core portion of an alternative income portfolio that can help all retirees put together a mix of assets that will produce the income that can make your retirement dreams come true.
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