Co-written by Treading Softly.

There’s an old saying that I hear often:

“Health is wealth.”

For many, being hugely successful and wealthy means little if you don’t have the health to enjoy it. As I got older, I remember one of my first bosses saying that many traded their health to gain wealth and then spent all their wealth in old age to gain the remaining health back. Instead of this constant back and forth, I recommend preserving your health through your pursuit of monetary wealth. Once you give your health away, the chances of you ever getting much of it back are slim.

There is a lot of money moving through the financial markets and I like to use it to achieve my income goals. By strategically investing in dividend-paying sectors, I direct a flow of money away from the markets directly into my account. That’s why I’m investing to own a piece of utilities, fuel distribution, and natural gas pipelines.

Today I want to look at how you can make a great income for those who trade in their assets to get some of their health back. We’ll look at how to tap into another income stream that’s as old as time itself: real estate.

Let’s get started!

Choice #1: THQ – Efficiency 10.1%

Since the sale of Tekla Capital Management to Abrdn Inc. was completed, the CEFs (Closed-End Funds) have shown great results. abrdn Fund for opportunities in healthcare (THQ) was notably the strongest performer in the group, with a total return of +45% and a +20% increase in net asset value (NAV) since the transaction closed.

For years, THQ is trading at a deep discount to NAV, while its international cousin, the higher-yielding abrdn World Healthcare Fund (THAT), had healthy premiums.

While Tekla’s management team consists of highly qualified medical professionals who are able to assess the markets and companies to make wise investments in promising drugs and treatments, Abrdn brings his influence and reputation as a world-class fund manager. The combination of these has resulted in the shrinkage of THQ’s discounted valuation and market-beating performance, which we expect to continue for years to come.

THQ’s largest holdings are leading US biopharmaceutical companies, with Eli Lilly (LLY) representing the largest position. Source.

THQ’s top holdings represent ~45% of CEF assets and continue to deliver robust gains. Here are a few notable ones:

• Eli Lilly (LLY) recently reported a monster second quarter, fueled by robust sales of its new weight-loss drug, Zepbound. The company raised its revenue forecast, showing the commercial promise of GLP-1 drugs.

• As sales of its blockbuster drug Humira continue to slow, Abbvie (ABBV) is easing investor concerns by showing it’s catching another golden goose. The pharma giant reported a strong quarter with sales driven by immunology drugs Skyrizi and Rinvoq, a combination used to treat forms of arthritis and inflammatory bowel disease, among other conditions.

• Intuitive Surgical (ISRG) reported double-digit revenue growth, driven by strong demand for its da Vinci surgical robotic device.

THQ operates with ~20% leverage (at a cost of 1.48% of net assets) to increase the returns of its holdings. Earlier this year, the CEF delivered a 60% increase in distributions, and its current monthly payment of $0.18/share equates to an annual yield of 10.1%. THQ has a 9/30 fiscal year end. In its fiscal year to date, the CEF estimates that 54% of distributions came from capital gains and 46% from Return of Capital.

Health care prices and overall health care spending have historically outpaced the rest of the economy. As the U.S. population ages, health care costs represent a growing share of gross domestic product, and families are seeing the cost of services, medications, and insurance premiums rise much faster than household income.

Healthcare is a critical sector with huge demand potential given America’s aging population. Despite solid price and NAV performance since the new management takeover, THQ continues to trade at a ~7% discount to NAV, making its 10.1% yield an excellent buying opportunity.

Choice #2: RNP – Yield 7.2%

During 1H 2024, REITs’ operating performance was solid with high occupancy rates in the face of supply-demand imbalances due to high interest rate-driven weakness in construction activity. Well-managed REITs also maintain disciplined balance sheets with sufficient liquidity to be real estate acquirers.

Second quarter data shows that REITs continue to have well-structured debt: 79% of total REIT debt was unsecured, while 91% of total public REIT debt was fixed-rate.

Active fund managers are increasingly allocating to new and emerging real estate sectors with more creditworthy tenants, better demand dynamics and promising growth prospects. Cohen & Steers began in 1986 as the first manager of a REIT-focused investment fund and currently manages more than $80 billion in Assets Under Management.

Cohen & Steers REIT & Preferred Income Fund (RNP) is a CEF with a highly diversified portfolio, 310 holdings and a unique asset composition. The fund maintains a 51% allocation to REITs and a 49% allocation to non-REIT preferred securities, primarily from the banking, insurance, utilities and pipeline sectors. High-quality REITs across various real estate classes are the fund’s primary holdings, representing 32% of invested assets. We note an increased allocation to data center names such as Digital Realty Trust (DLR), Equinix (EQIX) and Iron Mountain (IRM) that are well positioned to see rising demand fueled by heavy innovation from chipmakers and billions in investment from Big Tech. RNPKey investments also include leading names in telecommunications towers, healthcare and single-family homes. Source.

RNP maintains a largely investment-grade portfolio, with +68% of its holdings rated BBB or higher. Furthermore, RNP is actively managed, so we can expect the fund managers to make regular portfolio changes based on the financial position and performance of the companies.

Launched in 2003, RNP has been impacted by the global financial crisis and the COVID-19 pandemic, both of which have had devastating effects on the real estate market. Despite this, the fund has outperformed its passively managed index ETFs while achieving its current income target. There are two reasons for this: active management and judicious use of leverage.

RNP has maintained growing distributions since inception, with its $0.136/share distribution representing an annualized yield of 7.2%. Internal estimates suggest that 100% of RNP’s distributions for the seven months of FY 2024 will come from NII (Net Investment Income). The CEF’s portfolio is leveraged at 31%, with a weighted average interest rate of 2.4%, with 81% of loans committed for a weighted average term of ~2 years. With interest rate cuts on the horizon, we expect RNP’s NAV to rise significantly, providing the fund with the opportunity to naturally delever and refinance on more favorable terms.

RNP’s unique mix of REITs and preferred stocks offers a packaged opportunity to take advantage of interest rate declines right away. We like both asset classes for their predictable income and lower correlation to broader markets. RNP is priced at par with NAV and its high-quality portfolio offers a defensive investment in this euphoric market.

Conclusion

With THQ and RNP, we can benefit from an aging population and impending rate cuts. Thanks to Medicare, healthcare spending is very likely to rise or at least remain stable even in a recession. This means that THQ’s investment pool will be financially strong and have income flowing in, allowing the CEF to continue paying us. RNP’s holding pool will benefit when rates fall and REITs flourish. Both investments provide us with strong, recurring income flowing directly from various companies into our accounts.

When it comes to retirement, it’s important to have the cash flow you need to directly cover your expenses. I don’t want you to have to delay paying bills, miss opportunities, or cut back on your dreams because your finances are holding you back. I also don’t want you to sink into a debt trap and have your life ruled by your creditors. Instead, with our unique Income Method, you can tap into the trillions flowing through the market and enjoy a strong income so the economy can pay your bills during your retirement. That’s the beauty of my Income Method. That’s the beauty of income investing.