Ways To Maximize Your Retirement With BDCs And REITs

Introduction

With the latest CPI report showing inflation remaining sticky, a June rate cut like many were predicting is likely out the window. But this creates a great opportunity for us income investors, as now is a perfect time to buy stocks at discount prices. At least in the REIT sector (XLRE).

However, for those who invest in the BDC sector like myself, many of their share prices will likely trend higher from here over the next few months as a result of the report. In this article, I discuss some things to look for when investing in both sectors to not only preserve your income, but ways to maximize your retirement income as well.

Opportunity

Interest rates are probably going to be higher for longer. At least that’s what it looks like right now. According to CME FED Watch Tool, there’s a 79.1% chance that rates remain at their current levels. I honestly think they need to hike rates further from here if they really want to get inflation down to their targeted 2%. And while this is a possibility, I think they will leave rates here for the time being.

But what does that mean for dividend investors? For me, I’m continuing to buy the same stocks I’ve been buying for the last several months. REITs. I’ve even had readers comment on my articles saying REIT share prices can fall further from here. I agree with that statement 100%.

And if the FED decides to conduct another hike, I think many will see new 52-week lows. So just know that REIT investors, you’ve been warned. That’s just the nature of the game. Moreover, if your goal is not to buy and hold quality stocks at discount prices while seeing some volatility, then you may want to consider safer investments like CDs or treasuries. Can’t stand the heat? Stay out of the kitchen!

#1 Dollar-Cost Average

I’ve been buying stocks almost on a daily basis over the past several months, mainly focusing on where I see the best opportunities, which so happens to be in REITs. Now, some may say: But their share prices have continued to fall. I say good, buy more! I spend a lot of time watching the stock market looking for opportunities to not only buy, but average down on my positions.

So, if you have a large sum of cash, keep it in your brokerage account and buy in installments. 5 shares here, 20 shares there. Before you know it, you will have built up a sizable position, especially if you buy frequently like I have the past several months.

#2 Perfect Time To DRIP

With many share prices down in dividend stocks specifically, now may be the perfect time to utilize the DRIP, or dividend reinvestment plan. If you’re like me, I hate buying fractional shares and only use DRIP if my reinvested dividends can buy me at least one share. For quarterly stocks, that’s four additional shares a year, and for monthly payers that’s twelve.

For instance, say you have 2,000 shares of Agree Realty (ADC), this gives you a monthly payout of $500. At the current price of $56.75, that means you can purchase an additional 8 shares monthly, or 96 annually. This increases your annualized income by $24. This may not seem like much, but over time this adds up. And not to mention you don’t have to give up your time for a 40-hour work week to get a 3.5% raise, the 2024 projected increase for employees.

This is expected to increase slightly to 4% in 2025, but with the way costs have continued rising for consumers, this is not nearly enough. For instance, the cost of homes has risen significantly, causing consumers to have to earn 80% more in the past four years, while incomes haven’t been able to keep up, rising 23% over the same period.

#3 Buy Quality Over Quantity

Like anything you spend your hard-earned money on, focus on buying quality over quantity. With share prices much lower, this has caused yields to go up, enticing investors in the process. And while a high yield is good for income, what good is a higher yield if it’s at a high risk of being cut?

For those investing in the REIT sector, look not only for companies with strong balance sheets with well-laddered debt maturities, but solid fundamentals as well. An investment-grade credit rating is always a plus. Two smaller-cap REITs that are some of my favorites within the sector with strong balance sheets are Agree Realty and CareTrust REIT (CTRE).

Agree Realty not only has an BBB credit rating, but a strong balance sheet with very little debt maturing until 2028. This gives them financial flexibility to make acquisitions, but also if their financials come under pressure in the foreseeable future, it gives them a better chance of continuing paying a dividend.

Regarding CTRE, they don’t have an investment-grade credit rating like ADC, but their balance sheet is also strong with no debt maturing until 2026. And at only $200 million, the company has more than enough liquidity to satisfy this, with $300 million in cash on hand. Tenant quality also plays a part when looking to invest.

Hold Fast

For business development companies, they’ve done quite the opposite of REITs as many have enjoyed share price appreciation over the past year, with the VanEck BDC Income ETF (BIZD) up double-digits at nearly 16%. As a BDC holder myself, I have elected not to add to any of my BDCs during this period. Instead, I’ve taken the opportunity to enjoy their share price appreciation while balancing out my portfolio.

#1 Turn Off DRIP

In my opinion, now is not a good time to utilize the dividend reinvestment plan if you invest in BDCs. Why? Because, although interest rates will likely remain higher for longer, they will eventually fall. And when they do, I suspect BDC share prices will fall as well. Maybe not back to the share prices we’ve seen before, but I do think they will see a pullback. But the good news is that some could see their share prices trend a bit higher with sentiment dwindling surrounding interest cuts.

At the time of writing, one of my holdings and favorites within the sector, Blackstone Secured Lending (BXSL), is sitting near its 52-week high at a price of $30.82. Another BDC, Capital Southwest (CSWC) is also not too far from its 52-week high of roughly $26 a share. And if we get another rate hike in the future, BDC prices could move higher.

So, while investors in the sector have enjoyed some nice share price appreciation, buying large positions now may cost you to lose out on money as I suspect their share prices will retract when rates do fall in the future.

#2 Balance Sheets & Non-Accruals

For income-focused investors that hold REITs and BDCs, these are probably the two most important metrics to pay close attention to. With higher for longer interest rates, BDCs have seen a rise in non-accruals, or non-performing loans. And this has not only impacted some BDC financials, but their share prices as well.

Those with strong balance sheets and lower non-accruals have been and will likely continue to be rewarded by Mr. Market. In fact, BDCs with lower non-accruals like Blackstone Secured Lending and Ares Capital (ARCC) have enjoyed some nice appreciation in share price because of their low non-accrual percentages. For FSK KKR Capital (FSK), they continue to trade at a significant discount to NAV because of their higher percentage of loan defaults.

During Q4, FSK’s non-accrual % stood at 5.1% at cost and 2.6% at fair value. And while they still are out-earning their dividend currently, this could become a bigger problem if rates remain high, or we get another hike. This has also caused FSK to lag behind its peers, who are all up double-digits in the past year.

So, if we do get another rate hike, REITs with stronger balance sheets will experience less volatility than those with significant debt maturing. Don’t believe me? Although healthcare REITs have enjoyed a better year than their retail peers, CTRE has outperformed several of its larger, more known peers in the healthcare sector. Why? One reason is their stronger balance sheet.

This is also important because when rates do fall and the economy stabilizes, the market may go on a bull run, in which I think REITs will play a big part. And those with strong balance sheets and higher quality tenants will likely also enjoy higher share prices.

In regards to BDCs, those with higher percentages of non-accruals may see a larger pullback in share price than those with lower defaults. So, while their yields may be higher now and investors may be enjoying their higher dividend payouts, the more conservative ones will likely see less volatility in their share price.

#3 Take Profits

And last thing, don’t be afraid to take profits. This is something I struggled with early in my investing days. As previously mentioned, BDCs have enjoyed some nice share price appreciation, while REITs have not. So, now may be a good time to take profits and place elsewhere, whether that be REITs, or other quality stocks trading at discounts.

And when interest rates do fall, I think investors will get another chance to add to their favorite BDCs at cheaper valuations. And when REIT prices appreciate after interest rates are cut, investors should be taking profits to place back into BDCs to continue building their income streams.

Conclusion

Due to market volatility and uncertainty surrounding interest rates, investors should not look for safer alternatives like fixed-rate investments, but look to take advantage of opportunities within both sectors. And one way to do this is by dollar-cost averaging, and utilizing their brokerage DRIP properly.

With REIT prices facing downward pressures and BDC prices in the green, now is the opportune time to use the dividends from BDCs to place into discount REIT prices. But investors should remember to not chase yields, and instead look for those with higher tenant qualities, and more importantly strong balance sheets and well-laddered debt. And remember, there’s always an opportunity somewhere, you just have to look for and at it with the right mindset.