Co-produced with Treading Softly
You’ve done it! You’ve made it to December. The year is coming to a close, and like they used to say in childhood games, the new year yells, “ready or not, here I come!”
December is a month filled with nostalgia, childhood memories of decorations, dreams of Santa coming, and spending those precious moments with our loved ones.
It’s also a time of a lot of sadness for some. Doubtlessly someone reading this article today is facing their first holiday season without a loved one they held dear for many years. Know that you are not alone; this too shall pass.
Winter is a period of waiting. The dying leaves have fallen, and trees are left bare. The snow covers the ground and hides the decaying leaves underneath it. Plants are sleeping, waiting for warmer months. Many of the insects and animals we are used to seeing in the summer months have gone to sleep or disappear during the colder weather. On the other side, spring and life will come back with vigor. Green plants, flowers, warm weather, insects and animals will become active again.
In these quiet moments between family gatherings and holiday celebrations, take some time to gather your thoughts. It’s time to plan for the next 12 months that are coming to our door.
2022 has been a year of Winter for many portfolios. The market indexes are down, and many individual stocks are down as the bears ran the market. This is the best time to buy so that you are positioned to benefit when the bull market comes again.
To close out this year with a bang and start the next with an income boost, I have two picks for December that will pay you in January if you buy them soon.
Let’s dive in.
Pick #1: MPW – Yield 8.9%
Medical Properties Trust (MPW) is a unique REIT specializing in owning hospitals. It has been a difficult year for hospital operators. It isn’t a secret – HCA Healthcare (HCA), Tenet Healthcare (THC), Community Health Systems (CYH), and other publicly-traded hospital operators all reported similar issues. The primary ones are:
- Elevated costs of temporary staffing.
- Requirements to pay back COVID-era Medicare Advances.
- Expense inflation rises more quickly than revenue inflation.
This combination of headwinds has significantly reduced margins for hospital operators, putting stress on their business models and pushing some into bankruptcy.
Many of MPW’s tenants are not publicly traded, but they’re certainly experiencing the same headwinds. Fortunately, they’re headwinds that are tapering off in the second half. Labor issues will probably be ongoing for years but will gradually ease as hospitals reduce the usage of travel nurses. As demand for travel nurses declines, the price that they can charge will also normalize.
The Medicare Advances are now paid back. Those funds were paid to providers to help them through COVID but were required to be paid back creating a drain on cash flow in 2022, which will not exist in 2023.
Expenses have gone up with inflation. Labor, equipment and supplies have all seen inflation over the past year. On the revenue side, hospitals are limited in their ability to pass along costs immediately. Much of their pay comes from Medicare. CMS has announced a plan for an increase in 2023. The hike is coming long after hospitals have already seen inflation in their expenses. Similarly, agreements with private insurers are negotiated in advance, and healthcare providers have to wait for those agreements to expire to renegotiate for the future. So it’s an industry where the negatives of inflation are felt immediately, but the benefits on revenue aren’t realized until later.
In the second half of 2022, inflation has slowed down considerably. Something we expect will be sustained into 2023. This will provide time for revenue inflation to catch up.
Through it all, MPW has continued collecting rent. For hospitals, rent is a minor expense next to labor, supplies, and equipment. It’s also an expense that is essential for the hospital to remain in business. Without the building, there is no hospital. This is why the one tenant that filed bankruptcy, Pipeline Health, paid rent in full in Q3, and MPW expects they will continue to pay rent. If a tenant expects to remain in a building during bankruptcy, they are obligated to pay rent.
Throughout the year, MPW’s tenants have continued paying rent, even the one that is in bankruptcy court. Just like in 2020, MPW’s tenants kept paying rent. Yet despite this tangible proof of the durability of MPW’s business model, MPW’s share price has declined to prices below March 2020 levels.
We first added MPW to the Model Portfolio in April 2020. Since then, the dividend has risen 7.4% and we continue to get a payment every quarter. The share price has been a lot more volatile. It was up a lot, and now it’s down.
We’re happy to have an opportunity to buy at these low prices again. MPW has a higher dividend, higher FFO, and higher cash flow, and is benefiting from rising rents thanks to contracts that are very landlord friendly. In April 2020, the market made a huge mistake selling off MPW at such low prices. The market has decided to make the same mistake again. The market’s mistakes are our gain!
Pick #2: RNP – Yield 11.9%
Cohen & Steers REIT and Preferred and Income Fund (RNP) experienced the “problem” of making too much money in 2022 and, as a result, is paying out a special dividend of $1.0714 this year.
RNP invests in a roughly 50/50 mix of REIT common shares and preferred shares in other sectors like banks, insurance, and utilities. We really like this structure, and it actually mirrors the HDO strategy, where we hold a mix of common equities and preferred equities. It’s a strategy that provides excellent stability in income.
It’s also two sectors that we are very bullish about going forward. REITs benefit greatly from inflation and had extremely strong Q3 earnings. The market remains skeptical, with many on Wall Street following the mantra of selling REITs when interest rates rise. However, the reality is that on a fundamental level, rising interest rates have little impact on REITs.
Quality REITs were refinancing their debt at historically low-interest rates in 2020 and 2021. As a result, they have a few maturities in 2023-2024 that need to be refinanced. Many REITs have no maturities until 2025. As a result, interest rates over the next few years are not particularly meaningful to REITs. The question that matters for them is what will interest rates be in 2026-2030? Because that’s when the bulk of their debt will be maturing and need to be refinanced.
In the meantime, rents are rising at the fastest rate we’ve seen in decades, thanks to inflation. In short, REITs are seeing the benefits of inflation immediately, while the negative impact of higher interest rates won’t have a material impact on earnings for another four-plus years. Even then, it is a “maybe” impact, as it’s very likely that sometime in the next few years, the Fed might cut rates again.
Preferred shares have also seen headwinds from rising interest rates. As “fixed-income” style investments, their prices have fallen with interest rates. Though they still produce the same amount of income.
Put them together, and you have a great place to earn a solid income while having the potential for significant capital gains when the Fed pivots back to being dovish. We don’t need to predict when that will happen. We can just kick back, relax and collect our dividends, knowing that sooner or later, it will happen.
Like the inevitability of Spring, the Fed will turn dovish, and the market will turn bullish. While we wait, we can enjoy substantial dividends from RNP!
MPW goes ex-div on Dec. 7 and pays in early January. RNP goes ex-div Dec. 12 and pays out Dec. 30. RNP’s special distribution is ex-div Dec. 7 with a Dec. 15 pay date. So by buying today, you can lock in excellent income for the days ahead.
When I used to work daily at the office, I’d tell my co-workers on Thursday that the weekend is just a trip and fall away, so whether you make it there gracefully or fall flat on your face – you’ll still make it to the weekend!
We all likely have a few things on our list to check off before we can glide in autopilot to the end of the year. Growing my income is at the top of my list. These are our top income picks to buy in December and close out your income investing year on a high note!
Your retirement investing method should allow you to have a silent night, not a scrooge experience. The ghosts of your past, present, and future should be leaving you alone if you’re not living in financial fear. Let income investing make it a reality and provide you the financial security you need to sleep well at night.
(Except for the headline, this story has not been edited by PostX News and is published from a syndicated feed.)