Buy These 2 Magnificent Yields, Even If You Buy Nothing Else In October

Co-authored by Treading Softly

With nine-twelfths of the year over, we’re marching quickly into the final period of the year. This often comes with lots of holidays and fun adventures for children – Halloween, Thanksgiving, Veterans Day, and Christmas are all right around the corner.

Typically, the weather turns colder, and sometimes snow even starts to fall, depending on where you live. The other thing that comes to mind is that we often see a rapid uptick in illness. The flu, RSV, and supposedly COVID are all expected to make some pretty strong inroads this year, being part of the new seasonal norm for illnesses.

Gasoline sales typically spike as well, as we all start to travel just a little bit more to go see friends and family. Coincidentally, we’ve seen across the global scale that oil production is expected to be reduced, helping oil prices to remain high.

Healthcare prices have also not really changed in that they’re some of the vaguest and hardest-to-discover things in the universe. Unfortunately, unlike a McDonald’s, you can’t walk into the hospital and get a menu with all of the prices of different services that they offer so that you may comparison shop.

I can definitively say that from both of these situations and in the seasonality of our lives, you can generate strong income without having to gamble with different companies in the market.

Today, I want to look at two different funds that offer you the ability to benefit from the strong prices of commodities, and also benefit from the long-term payouts that the healthcare sector is able to provide.

Let’s dive in!

Pick #1: BCX – Yield 7%

As I’ve discussed in my Market Outlooks, while inflation is slowing down, it does not mean that anything you buy will be cheaper. The inflation rate measures the pace of price increases, not the absolute increase in prices. If you have a product that is selling for $90 one year and $100 the next, that is $10 of inflation and an 11.1% inflation rate. If that same product sells for $102 the following year, the inflation rate has fallen to 2%. We would say that inflation has slowed to the Fed’s targeted 2% rate. Note that at $90, 2% inflation would only be $1.80, but at $100, 2% inflation would be a $2.00 increase.

This is what is happening throughout the economy. Inflation is “slowing down”, but prices are still rising on most items. Prices are rising at a slower rate, but it is a slower rate starting from a higher price established from the high inflation of 2021 and 2022. The impact of inflation happened, and the higher base of prices is something we will live with forever.

Why am I bringing this up? During inflation, investors were piling into commodity companies, excited at the prospect of high commodity prices driving prices higher. Now that the narrative has shifted, many investors have piled out.

True, prices of most commodities have come down from their COVID-era highs as supply chain disruptions are becoming a thing of the past. However, the prices of most commodities are still higher than they were from 2010-2019. Commodities were pressured by low prices for a decade, and now the tide has turned. Companies that managed to survive when prices were low are now thriving.

BlackRock Resources & Commodities Strategy Trust (BCX) is one way we can invest in various commodity-driven companies. BCX invests in three major segments: Energy, Mining, and Agriculture. Currently, it is heaviest in energy and is benefiting from oil rising back above $90/barrel. Source

BCX primarily invests in large, well-established commodity companies. Over 90% of its portfolio is invested in companies with a market capitalization exceeding $10 billion. It then generates excess income by writing covered calls on approximately 1/3rd of its portfolio.

BCX reduced its dividend during COVID, but has since raised it. The current dividend is now slightly higher at $0.0518/month compared to $0.0516 pre-COVID. As the environment continues to be positive for commodity companies, we believe that there will be room for BCX to increase its dividend even more.

Today, BCX is trading at a great discount to NAV. As noted above, BCX primarily invests in companies that have $10 billion+ market caps. These are companies we could invest in directly if we wished. However, with BCX, we are getting a 14% discount!

Plus, our income keeps coming in every month without any additional effort from us. So, as I sit back listening to folks complain about the price of oil, lumber, or food, I have to sip my coffee and cover up my smile as I think about the dividends pouring into my account!

Pick #2: HQH – Yield 10.6%

Tekla Healthcare Investors (HQH) is a CEF that focuses on the healthcare sector, with a special focus on biotechnology and pharmaceuticals which make up over 77% of the current portfolio. Source

Something interesting has happened this year. HQH is trading at the steepest discount to NAV in over a decade, excluding a very brief dip in March 2020.

Note that NAV is not too far from where it was a year ago. It has been relatively stable over the past year. The share price for HQH has been on a steady downtrend.

Anytime a CEF trades at a larger discount than usual, it is worth a look. Especially a CEF like HQH, which primarily holds publicly traded common equities.

HQH’s top 10 are all widely recognizable, easily buyable stocks in the healthcare sector:

You could buy these stocks yourself. Then again, you can pay 18% less buying with HQH. I like to pay less, plus HQH will convert the capital gains from these holdings into dividends.

HQH has a variable dividend policy, and it pays out 2% of NAV each quarter. Note that the dividend payment is calculated based on NAV, not the market price. So when we can buy at a steep discount like we can today, our yield on investment is much higher.

HQH’s price is heading down, but the prices of the stocks that it owns have kept NAV in the $19-$21 range for over a year. As a result, we can get a much higher yield today and benefit from capital gains when the share price gets closer to NAV.

HQH has a very long history, going back to 1987, providing investors with great dividends and total returns. The manager Tekla is being acquired by Aberdeen, but this will not change the personnel managing the fund on a daily basis. I have voted in favor of the merger and encourage others to do the same.

Healthcare has always been a sector that has to deal with politics, large capital expenditures, and regulations. However, it is also a very profitable sector that serves vital social needs and desires. With an aging population, demand for new medications is going to continue to increase. A lot of the big companies in this sector don’t pay an attractive dividend, so to gain exposure to it while following the Income Method, CEFs like HQH are an excellent option.

Conclusion

With HQH yielding 10.6% and BCX yielding 7%, we’re able to enjoy strong exposure from two sectors that are going to thrive going forward. Commodity prices remain elevated over historical norms because a reduction in commodity inflation means that its prices are not climbing as rapidly. It does not mean that prices have declined. Furthermore, healthcare has been a sector that has historically outperformed the S&P 500 (SPY).

As an incremental investor, I’m not necessarily worried about always beating the market itself, but I am always worried about beating the market on the level of income that I get versus what the income of the market provides.

When it comes to your retirement, you’re not going to be able to pay your grocery bill by telling them how much your portfolio has risen in paper value that you’ve never unlocked and do not have available in your wallet. This is something I often think people use to impress one another but does not actually help their lifestyle. People like to tell you, “my portfolio is up 10% year to date,” but the cash in their wallet is just as sparse as it’s always been. When it comes to the real world, real-world cash is important, and that is something that a quarterly or monthly dividend from a holding can provide you with. Just like when you live in your home, you don’t have to worry about what its value is every day because you’re enjoying the tangible benefits it provides. Likewise, you don’t have to worry about the price movements of a security you’re holding if its dividends are still providing you with those tangible benefits. One of those benefits is financial security, and you can have that.

That’s the beauty of my Income Method. That’s the beauty of income investing.