If you’re an income investor, well, the market roads just keep getting bumpier. After the Great Financial Crisis, the Federal Reserve acted to save the economy by keeping interest rates very low and continually buying billions of dollars of Treasury bonds and mortgage-backed securities.
They’ve been doing that so long that it feels like forever pretty much, and the last time they tried to taper their asset purchases and raise rates in 2018, the market just did not respond well. It sold off very sharply, and while I don’t know if that’s going to happen again, the Fed is once again talking about tapering.
In fact, the Fed hopes to conclude its taper and get totally out of the bond market by sometime in late 2022. The Fed may even begin to start raising interest rates in the fourth quarter of 2022, although they can’t raise them too high because the economy is just not that great.
But I don’t know if they’re going to be moving them higher too fast, which means that you can’t just invest in traditional bank or government bond investment programs because the interest rates are still going to be too low.
Furthermore, increasing inflation has the potential to push interest rates higher, which makes the value of existing fixed income investments lower, and it also makes each and every dollar you spend buy a little bit, or sometimes even a lot, less than it did previously.
So, inflation continues to be a challenge, and traditional products are not going to solve your income problems. Blue-chip stocks would have worked if you bought them back in 2008 or 2020, but today those stock have been bid way up and are trading at 20, 25 and 30 times earnings.
That means to get a 3% or 4% dividend, you have to risk the possibility of a 15%-25% decline if this market does roll over due to inflationary pressures. And junk bonds? Good luck! They’re yielding less than 5%, so I would not buy junk bonds here, and I don’t think they’re going to be a good answer.
Therefore, we’ve got to look for some ideas and investments that can produce high rates of income and meet our current income needs and that will also be protected from the ravages of inflation. Even better would be an investment that goes up in price because of inflation and which gives us growing dividends and capital gains.
With that in mind, here are a couple of ideas for building an inflation-proof income portfolio.
Enterprise Products Partners L.P.
The first is one that I’ve talked about several times, and that is Enterprise Products Partners L.P. (EPD). This company has pipelines, gathering facilities and storage facilities for natural gas, natural gas liquids including propane, and crude oil as well.
They’ve got marine terminals and trucking fleets, so if it’s involved with getting oil and gas from point A to point B, EPD is involved as well. They’re one of the largest mid-stream infrastructure companies in the United States.
The stock currently pays a dividend of over 7%, there is active insider buying and the company has also been buying back stock. There is the opportunity for dividend increases, and with oil and gas demand surging, more supply should be getting pushed through all of the facilities and pipelines owned by EPD, thereby dramatically increasing their cash flow.
If we continue to have inflation, and it increasingly looks like we will, there’s a good chance that EPD is going to go up in price. It’s also a very rare thing to own pipelines in the US, and they’re not building any more of them because of political and regulatory pressure. So, the ones that are already in place are going to be worth more.
Oil and gas are a part of our future for at least the next 40 to 50 years, and I think it will be the dominant fuel source in the US for a variety of uses for a long time to come. And as long as it’s around, we’re going to need oil and gas infrastructure, and that’s going to throw off a lot of cash flow.
And with EPD, we can put that cash flow into our pockets to help protect ourselves against inflation and higher interest rates.
CTO Realty Growth, Inc.
Next up is CTO Realty Growth, Inc. (CTO), which is a real estate investment trust (REIT) that owns office and retail income properties all over the US. They prefer multi-tenant properties, and while they have a portfolio of single-tenant operations, but they’ve been slowly selling them off to Alpine Income Property Trust, Inc. (PINE), another REIT.
They’re still benefitting on those assets due to their partial ownership of PINE, but the sales allow them to focus on higher-yielding multi-tenant operations. They also have a ton of land and mineral rights and other non-cash-producing assets that they intent to slowly sell as the opportunity presents itself and redeploy that cash into income-producing properties.
They just sold a big block of land in Daytona Beach, for example, and they’ve been recycling the cash from these properties and putting it into multi-family properties in places like Las Vegas, Salt Lake City and Dallas that are going to produce higher cash flows.
Now, remember that real estate tends to go up when there’s inflation as it is. But now that there’s all these non-core assets — the single-tenant facilities and the non-income-producing properties like raw land — that they’re going to be selling and putting into multi-tenant properties that kick off quite a bit of income. That gives us the potential for dividend increases to help offset the pressures of inflation and higher interest rates.
Income investing is changing and changing rapidly. Inflation is going to be here with us to drive rates even higher, and it’s going to be harder than ever to put together a portfolio of income ideas that can provide you with both the income you want and protect you from the impact of higher interest rates on your income portfolio.
These two ideas — EPD and CTO — can give you a great start to putting exactly that type of portfolio together.
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