Hey there, folks! Tim Melvin here, and welcome back to A Better Way to Wealth!
You know, going into 2022, a lot of things can (and will) happen…
But one thing that promises to be with us all year is the maddening search for income-producing investments.
There’s very little doubt in my mind that rates will go higher in 2022, with Fed officials predicting as many as three interest rate hikes in 2022 alone!
That being said, keep in mind that current interest rates are sitting near zero.
This means even if rates doubled in the months ahead, we could still have 30-year bonds and bank CDs yielding around or less than 4% and Treasury bills yielding less than 2%.
This is not going to be enough of a return to provide investors with a meaningful income.
And if rates doubled (which they won’t), the government would be in big trouble because interest expenses would go from 15% to a whopping 30%.
That would be devastating for the U.S. economy, causing stocks and junk bonds to collapse and creating a global recession so bad it would make 2008 look like a picnic!
Blue-chip stocks with sub 5% growth potential over the next several years are trading at 25x earnings.
To get that dividend you are taking a lot of valuation risk. A 3%-4% dividend is not worth much if that stock collapses by 25%-30% in a broad market selloff.
Rates are still up, and opportunities are still available as we’ve discussed over the past several months.
So what are we to do?
If we can find quality real estate investment ideas that are throwing off income, we’ll bring them to you, but what we need to do is think outside the box…
That’s why I’m going to give you a couple unconventional trading ideas today that could produce very high rates of income that you probably won’t hear about too many other places other than right here at A Better Way to Wealth.
Altus Midstream Co.
Altus Midstream Co. (ALTM) is the owner of several midstream assets primarily in Texas.
They’re getting ready to do a deal that will transform the company into a much larger pure play Permian Basin infrastructure company.
They’re buying a company called BCP Raptor HoldCo., which will allow them to own massive processing facilities throughout the Permian Basin for natural gas, including 27% of Kinder Morgan’s pipeline facilities.
This is really interesting because the owners of Raptor are Blackstone and a company called I Squared Capital.
So, the way this breaks down post-deal is that Blackstone, the large private equity fund, will be a 50% owner.
Blackstone thinks long-term, so they are not in this for a short period of time. In fact, they’ve agreed to a one-year lockup, and I predict they’ll own this very valuable collection of assets for much longer than a year.
I Squared Capital, another investment fund, has a 20% ownership interest.
20% will be owned by Apache, an exploration and production company who is a major customer for pipelines and processing facilities.
And just 5% will be owned by public shareholders like us who will jump in and buy this thing at the current markets.
The company has committed to continue paying a $6 dividend through 2023, at which point they predict that dividend will increase from cash flow generation from this priceless collection of assets.
My prediction? They will continue to increase in value year after year because it is so hard to get these types of facilities built in this specific region.
We, obviously, will continue to need ways to get these valuable resources from the fields to the customer for decades to come, so there is a lot of upside.
And that $6 dividend works out to about a 9.3% dividend yield that should only go up as the years continue, allowing us to cash a new check from this company each quarter.
As you can see, there appears to be lots of upside here, and I urge you to take a close look at this pick in the days to come.
PennantPark Investment Corp.
PennantPark Investment Corp. (PNNT) is a business development company that does senior secured loans but usually likes to get 5%-20% equity positions with every loan they make.
Those equity positions over the years have averaged about 13.8% a year, or well above what the S&P 500 and other indexes have done. It just adds to the return and makes higher dividend payments possible.
They like to do senior secured loans to middle-market companies that have earnings before interest, taxes, depreciation and amortization (EBITDA) of between $10-$50 million.
Right now, the portfolio actually appears to be fairly conservative including about 97 companies spread across 29 industries.
The average company in the portfolio has cash interest coverage of about 3.2 times, so it’s very conservative. Most of these folks are going to be able to pay their bills, pay back the loans over time, creating a relatively safe stream of cash flow for us as investors.
Very low leverage levels compared to other business development companies at 0.8, while most are at 1.25. If opportunity presents itself, there is the chance for PennantPark to lever up the balance sheet and get more cash committed into the direct lending markets.
They’ve worked with over 195 private equity sponsors and maintained relationships with most of the private equity players in the business, which is one of the best sources of new loans in the middle market.
They’re very selective. Since their IPO in 2007, the team has looked at over 9,000 deals and funded a mere 600.
They’re cherry-picking the best of the best and creating opportunities for investors like us. And the best part? This pick has currently managed to stay entirely off Wall Street’s radar!
Currently trading at 75% of book value trading and yielding 7.15% yield, I’m predicting strong dividend growth for this pick over the next couple years. That’s something we’re definitely going to want to be a part of.
The Wrap Up
So, there are two unconventional income ideas that not only provide much greater income than you can get anywhere else, but they have substantial upside price potential as well.
Remember, if you want to continue to stay in the game, we need to continue to think in unconventional ways, allowing us to find great picks like those listed above and make our move before prices begin to soar!
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