Buy The Dip With 2 Great Dividend Stocks

Co-produced with Treading Softly.

When I lived in an apartment, I didn’t have a lot of long-term storage options. So due to this, I only kept what I needed in the present. I didn’t bulk-buy groceries, toilet paper, or other daily needs. I had a “just-in-time” inventory like so many major manufacturers have switched to. Those systems work great when nothing is disrupted, but the moment those disruptions come… We all remember the toilet paper shortage of 2020.

When I purchased a house, I had more storage and space. Bulk buying things when they were on sale or heavily discounted became practical. It opened the door to additional savings by buying items long before I needed to use them.

In 2021, after Christmas was over, I purchased ten rolls of wrapping paper at a heavily discounted sale. No one was looking for fanciful Christmas-themed wrapping paper anymore, and the store was trying to clear its excess inventory as quickly as possible. This wrapping paper was what I used to wrap gifts this year. Unlike fashion, no one knows what last year’s wrapping paper style was. None of my gift recipients asked, “Hey, isn’t this wrapping paper from 2021?”

It was possible to do because I had the means to do so and the room in my home to keep extra wrapping paper for 12 months. My closets are full of extra toilet paper, toothpaste, soap, shampoo, laundry detergent, and all other non-perishable things. When I’m shopping, I buy the items I use when they are on sale and add to my inventory, rather than buying them at any random price because I need them today.

Likewise, when it comes to the stock market, I am quick to buy shares when there are momentary dips in price so long as the fundamentals of a fund or company remain sound. I go out into the market and buy what’s on sale today.

How do I have the means to do so? My portfolio is constantly producing income, and it is rapidly arriving in my account. If my dividends were coins poured down the chimney of my house, my bucket in the fireplace would constantly be clinging and clanging from the sound of their arrival. (Somebody has to create an app for that!)

So, I have the means to buy dips, and unlike a house, my portfolio always has space for more income-generating holdings to be added.

Let’s look at two I’ve been buying with my arriving dividends.

Pick #1: CEQP- Preferred Shares – Yield 9.5%

Crestwood Equity Partners LP, Cumulative Perpetual Preferred Units (CEQP.P).

Very few investments qualify for the actual “buy and hold forever” status. We discuss one such rare nugget in the world of fixed-income securities.

Crestwood Equity Partners (CEQP) is a midstream company that owns and operates midstream assets located primarily in the Williston Basin, Delaware Basin, and Powder River Basin. Source.

This Master Limited Partnership (“MLP”) provides services around gathering, processing, storage, and associated activities for the oil, natural gas, and NGLs. CEQP is well-shielded from commodity price volatility, as 80% of its contracts are fixed-fee or take-or-pay.

As a midstream company, CEQP establishes long-term contracts with a highly diversified customer base. In FY 2022, the partnership has focused on debt reduction, Capex towards asset expansion projects, and returns to shareholders. The company expanded its operating footprint in the Williston and Delaware Basins and raised its common distributions by 5% in Q1. CEQP repurchased 4.6 million common units during the quarter, and the board approved $175 million for common and preferred equity repurchases.

In Q3, CEQP’s distributable cash flow (“DCF”) was $131 million (50% increase YoY) and provided a 1.9x coverage for the common dividend. The partnership ended Q3 with a 4.2x leverage ratio and provided a 2022 DCF guidance of $485-505 million. In October, CEQP closed the previously announced divestiture of its Marcellus Shale gathering and compression assets for $205 million in cash. The company has more than $865 million of available liquidity and has no debt maturity until 2025.

Note: Throughout this report, we use the ticker symbol CEQP– (note the dash at the end) for Crestwood’s preferred units. Most likely your broker will use a different ticker. Crestwood issues a Schedule K-1 for tax purposes, and the entire preferred distribution is reported as UBTI. More details HERE.

With a well-covered and growing distribution, we find safety and income sustainability in Crestwood Equity Partners LP, 9.25% Preferred Partnership Units. CEQP- is a unique preferred “buy and hold forever” for income investors. CEQP- has numerous protections not typically seen in preferred shares available to retail investors. These include:

• A preferred that cannot be called with an “impossible” conversion clause: We have seen perpetual preferred trading post-call date. CEQP- cannot be redeemed but can be converted. However, the company cannot force conversion unless the common shares close above $136.91 for 20 out of 30 consecutive days, a 440% upside from current levels.

• A preferred with voting rights: It is rare for preferred shareholders to have voting rights on corporate matters. CEQP- preferred shareholders get to vote on all matters as common shareholders, a rare benefit. This is important as it helps ensure that if CEQP gets acquired, the terms are favorable for preferred investors. Last year preferred shareholders were able to vote on changes to the partnership agreement that helped to preserve their rights.

• Penalties for missed distributions: Cumulative preferreds offer protection against missed payments. But CEQP- took the protection a step further and implemented a penalty. If a single distribution is missed, the distribution immediately increases 22% to $0.2567/quarter. Additionally, any accrued and unpaid distributions will be increased by 2.8125% each quarter. This structure of penalties incentivizes management not to miss any distribution payments.

CEQP- has sold off in recent weeks despite a strong performance and growing value proposition for common shareholders.

At current prices, CEQP- presents an attractive and well-covered 9.5% yield that you can lock in for the long term.

When common distributions have adequate coverage and growth prospects, the preferred shareholders can sleep well at night with 9.6% yields from this deeply discounted perpetual income machine.

Pick #2: RNP – Yield 7.6%

Cohen & Steers REIT and Preferred and Income Fund (RNP) provided us with the pleasant surprise of a very large special dividend. For long-term investors, special dividends can be a great income boost. For investors who try to chase special dividends, buying for the first time shortly before they are paid, the benefit isn’t so great.

We fall into the category of long-term buyers. We added RNP to our Model Portfolio back in September 2020. We bought it then and added to it periodically over the past several years at attractive prices. We haven’t talked about it recently because the price ran over NAV as investors chased the special.

Now that has changed, the price has come back down, our special dividend is now a realized gain, and it is time to look forward.

RNP holds a combination of high-quality real estate investment trusts (“REITs”) and preferred equity. If RNP’s REIT portfolio were a Hollywood party, it would be something that you would see at the Oscars. Invitation only, all A-listers. Each pick is undeniably at the top of its sector. Source

Really, it isn’t all that creative of a portfolio. To this group of power REITs, RNP adds preferred exposure. Typically, the breakdown is approximately 50/50, but RNP does allow those percentages to fluctuate a bit.

The preferred equity that RNP holds is not in REITs. Instead, it is primarily banks, insurance companies, and utilities.

While many REITs have preferred shares, RNP’s decision to avoid REIT preferred shares provides great diversification. In 2022, it has been a tough year for both REITs and fixed-income in general. As a result, RNP’s price is trading at levels that are very attractive long-term.

What about the leverage?

RNP carries leverage at approximately 30% of assets under management. We’ve seen a lot of investors throwing fits over closed-end funds (“CEFs”) that use leverage in a world of rising rates. While this can be a risk, it is a risk that RNP has managed extraordinarily well. RNP entered into several interest rate swaps totaling $362 million.

These swaps effectively fix over 80% of RNP’s debt at an average interest rate below 0.9%. The earliest maturing swap does not mature until September 2025.

As a result, rising interest rates only have a minor impact on RNP’s interest expense.

RNP has positioned itself to manage the rise of interest rates and should thrive as REITs and preferred shares recover. REITs and preferred shares are both investments we want more exposure to if a recession starts later this year.

With a price now trading right around NAV, now is the time to start adding more of this defensive pick to your portfolio. Don’t chase stocks to catch a special dividend, buy and hold for the special dividends you will collect in the future!

Conclusion

With CEQP- and RNP, I can get a regular income that I look forward to. I also am buying this income on sale from recent dips they’ve experienced. RNP has dipped after the special dividend hunters exited their positions. CEQP- has dipped as interest rates rose while CEQP has remained a solid and stable company.

Both have provided my account with significant dividends in the past and will continue to do so going forward. Now that I’ve added to those positions, the income will be even larger than before!

I love reliability and consistency. When the opportunity arrives to get a discount on income, I do not hesitate. I grab my latest dividends and buy more income. Every month, I own more income-producing shares than I owned last month.

After all, my retirement portfolio is designed to outproduce my expenses and provide me with income to pay for my hobbies, travel, and new experiences. Furthermore, my portfolio is designed to not only outproduce my expenses with income but it is also designed to reward my heirs for generations to come.

That’s the beauty of income investing. That’s the reward of our Income Method.