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(Bloomberg) — Puerto Rico’s bankrupt power utility has reached a deal with BlackRock Financial Management and Nuveen Asset Management to slash its debt load by about 75%, even as other creditors have said they oppose the accord.
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The island’s federally-appointed financial oversight board, which is managing Puerto Rico Electric Power Authority’s bankruptcy, struck the agreement with a new group of investors holding $2.4 billion of utility debt including BlackRock, Nuveen, Franklin Advisers, Taconic Capital Advisors and Whitebox Advisors. The deal aims to reduce combined claims of $10 billion down to about $2.5 billion of new bonds.
Other creditors including GoldenTree Asset Management, Syncora Guarantee and Assured Guaranty have said they may fight the accord in court. The parties may hash out some of their disagreements before US District Court Judge Laura Taylor Swain, who’s set to hold a hearing on Wednesday.
After Puerto Rico reduced tens of billions of general obligation debt and sales-tax bonds through consensual restructuring agreements, the bankruptcy of Prepa, as the utility is called, is proving to be much more contentious. The deal would give bondholders who sign the agreement 12.5 cents on the dollar on what they were owed when Prepa entered bankruptcy in July 2017, and 3.5 cents for investors who decline to join the restructuring plan.
“We understand that the terms of the plan — which reflect the current realities — may be difficult to accept for some, but we still hope we can get more bondholders to join the agreement and that this will end Prepa’s bankruptcy once and for all,” David Skeel, chair of the oversight board, told reporters Friday.
A Prepa bond with a 5% coupon and maturing in 2032 last traded on Aug. 17 at an average price of 37.4 cents on the dollar, down from around 65 cents at the start of the year, according to data compiled by Bloomberg.
While the deal helps to push forward a six-year bankruptcy that’s been delayed by Puerto Rico’s own debt restructuring, hurricanes and the pandemic, potential appeals from creditors and bond insurers could prolong the workout. Prepa needs to modernize its old and neglected power grid to stabilize electricity rates and end chronic blackouts.
“Prepa will remain a sustainable utility, continue critical investments and complete the transformation of Puerto Rico’s energy system to provide more reliable energy and support Puerto Rico’s economic growth and fiscal stability,” Robert Mujica, the board’s executive director, told reporters on Friday.
The deal is part of a debt-cutting proposal the oversight board filed to the court on Friday and is the last major piece of Puerto Rico debt that needs to be restructured. It includes a new monthly charge of $8.71, on average, for some residents to repay the new bonds. Many Puerto Ricans object to any kind of additional electricity fee as they already pay some of the highest rates in the US. The island’s Energy Bureau, an independent energy regulator, would need to approve any new fee.
Skeel and Mujica are hoping the court will hold a confirmation hearing on the plan sometime in January. They anticipate it will need to go through another solicitation process where all bondholders, including individual investors, vote on the plan.
Creditors Split
Judge Swain in March dealt a blow to bondholders when she ruled that they only had a secured claim to about $16 million that Prepa had already deposited into reserve accounts. In June she capped their right to the utility’s net revenue at $2.38 billion, a small portion of the nearly $9 billion of bonds and loans Prepa had outstanding when it entered bankruptcy.
Those rulings split the original ad hoc bondholder group represented by Kramer Levin Naftalis & Frankel, and which has now disbanded.
BlackRock in May hired Paul, Weiss, Rifkind, Wharton & Garrison to help restructure certain bonds, according to court documents. Nuveen and the other firms joined with BlackRock earlier this month.
GoldenTree Asset Management, which held $835 million of Prepa debt, as of Aug. 14, claims it was excluded from the bondholder negotiations and has said it would seek an appeal of the board’s current proposal.
Invesco Advisers, which held $604 million of Prepa debt as of Aug. 14, and was a former member of the Kramer Levin group, has declined to join the BlackRock pool or GoldenTree’s attempt to lift a stay on putting in a receiver, according to court documents.
Dominic Federico, Assured Guaranty’s chief executive officer, described the board’s current offer in an Aug. 9 earnings call as “insulting” and said the insurer would seek litigation. The company guaranteed $446 million of Prepa’s net par debt, as of March 31.
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If August’s stock-market weakness has you concerned, brace yourself because it’s going to get a lot worse.
That’s the outlook of Eli Salzmann, who manages the Neuberger Berman Large Cap Value Fund NPRTX. While most investors have migrated to the “soft landing” and “no landing” camps, Salzmann holds steadfast to his belief that a recession is on the way.
Why should you care what he thinks? Because where most mutual fund managers have a tough time beating the U.S. market, Salzmann’s $12.6 billion fund outperforms nicely over the past three- and 10 years, according to Morningstar Direct.
Much of that long-term outperformance comes from out-of-consensus forecasts about macro trends — like the one behind his current cautionary stance.
“The economy is heading south in the next six to nine months,” he told me in a recent interview. “Make sure your portfolio is very defensive and protects on the downside, because the downside isn’t going to be pretty.”
If you are looking for defensive names to consider, here’s how Salzmann is positioned for what he expects will play out.
Top holdings include “steady Eddie” consumer staples names including Procter & Gamble
PG,
PepsiCo
PEP,
Philip Morris International
PM
and beverage and snack giant Mondelez International
MDLZ.
The fund also has substantial positions in utilities including Duke Energy
DUK,
Sempra
SRE
and Exelon
EXC,
and mature healthcare giants Johnson & Johnson
JNJ,
Merck
MRK
and Pfizer
PFE.
Salzmann recently had 18.8% of the fund’s portfolio in consumer defensive names, compared to 8.6% for large-cap value funds overall, according to Morningstar Direct.
Likewise, the fund manager is underweighting cyclical sectors like banks, technology, and consumer discretionary companies in the portfolio. For example, he has 2.6% of his fund in tech vs. 12.5% for large cap value overall, Morningstar reports.
This defensive posture has decidedly hurt the fund so far this year — when the crowd moved into cyclical sectors as worries about recession eased. Salzmann’s fund trails both the Morningstar large-cap value category and Morningstar U.S. large-cap value index. But he’s not throwing in the towel.
“Do we think it is time to cave in and go with everyone else? No. We are staying where we are,” Eli Salzmann says. “There are times when you want to bet against consensus, and now is one of those times. We think being defensive is absolutely the right move.”
Salzmann’s cautious economic outlook and defensive posture are based on three core concepts that reformed bears largely abandoned this year.
1. Monetary policy takes around 18 months to impact the economy — and it’s about to hit: Since the Federal Reserve raised rates aggressively in the first part of 2022, that means the U.S. central bank’s policy change is only now going to start hitting the economy. “At some point past September, leading indicators will have tough time,” Salzmann says. Likewise, tighter monetary policy takes about 24 months to hurt company earnings. He adds: “At some point later this year or next year you will see companies miss earnings in a big way.”
The important wrinkle here is that investors consistently forget about this time lag, and shrug off a dramatic monetary policy change. “When the economy did not slow in a substantial way towards the end of last year everybody said it’s time to go back in the water. Guess what. The sharks are still there.”
“ ‘What happened with the banking sector was simply the appetizer.’”
For example, Salzmann expects more trouble in the U.S. banking sector, in part because of exposure to commercial real estate loans. But he expects problems beyond that, as the aggressive Fed rate policy inevitably “breaks” something.
“What happened with the banking sector was simply the appetizer. Other issues will come up,” Salzmann says. He doesn’t offer predictions about what the Fed will “break” next. Fair enough, because past Fed policy moves show the breakage happens in unexpected places — like Orange County, Calif. in the mid-1990s, or Lehman Brothers during the Great Financial Crisis.
2. The inverted yield curve continues to predict a recession: A lot of investors have written this forecast off, because the yield curve has been so wrong for so long. It has been inverted for 11 months. “People on Wall Street are saying the saying yield curve does not matter. I have heard this rhetoric before, but it has a 100% success rate,” he says. “100% of the time when the yield curve has been inverted for this length of time there is a recession.”
3. Inflation will be higher for longer: “We are not going back to 2% or below on a sustained basis. We think inflation will be in the 3% to 4% range,” Salzmann says. He cites the decline in globalization, which removes the downward pressure on U.S. prices exerted by lower production costs in China and India. If he’s right, both the U.S. economy and cyclical stocks will face challenges because the Fed will have to maintain its anti-inflation campaign.
The bottom line: Despite rosy metrics out there like the Atlanta Fed GDPNow expected 5% third quarter growth, Salzmann thinks we are moving into the late stage of the cycle where the economy moves towards a recession — and when defensive names outperform.
Salzmann has benefited from contrarian calls in the past, albeit in the opposite direction — or towards cyclical names and away from defensives. In both 2016 and the first half 2020 he went long cyclicals at a time when other investors moved to defensive names because of worries about global recession.
Stock-picking tactics
Making the right contrarian macro calls is only part of the challenge for portfolio managers. They also have to be in the right stocks to benefit from their calls. Salzmann shares two tactics he says contribute to his fund’s success.
1. Favor sectors where capacity is scarce because they have been deprived of capital: The capacity shortage means surviving companies in the space can enjoy higher profit margins because they have fewer competitors.
Here, Salzmann cites basic materials, where he owns an array of mining companies including Newmont
NEM,
Rio Tinto
RTNTF,
Wheaton Precious Metals
WPM,
Franco-Nevada
FNV,
Freeport-McMoRan
FCX
), Mosaic
MOS
and Barrick Gold
GOLD.
Around 9% of the fund’s portfolio recently was in such basic-materials stocks, compared to 3.6% for large cap value funds overall, Morningstar says.
Energy is the other sector where capacity is scarce because of underinvestment. Global oil investment was 40% lower last year than in 2014, says Goldman Sachs analyst Bruce Callum — part of an underinvestment trend that has gone on for years. In energy, Salzmann’s fund has taken big positions in Exxon Mobil
XOM
and Chevron
CVX.
2. Favor companies that look cheap against normalized earnings: Many stock investors take the easy way out and value stocks against Wall Street consensus earnings forecasts. It’s better to do the legwork and recognize when earnings are temporarily suppressed — and about to bound back to normal. This helps you find the really cheap stocks with better potential. “We look for companies with below-normal returns that have catalysts over the next 12 to 18 months,” Salzmann says.
Consider Procter & Gamble as a mini-case study. Financial databases typical show the stock has a forward price-earnings multiple of about 24. That does not look cheap. But those consensus earnings estimates are too low, Salzmann says. The company has been investing in new product development and automation. “So, earnings are below normal,” he adds.
Investors will see a boost in earnings due to market-share gains and profit margin improvement linked to productivity gains because of these investments, Salzmann says. Incorporating these anticipated earnings gains, Procter & Gamble trades at 19 times Salzmann’s expected normalized earnings, which are considerably higher than consensus earnings expectations. “On the surface, Procter & Gamble does not look that cheap,” he says. “But it is cheaper than it looks because earnings are well below normal.”
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned FCX and XOM. Brush has suggested PM, JNJ, PFE, FCX, MOS, XOM and CVX and in his stock newsletter, Brush Up on Stocks. Follow him on X (formerly Twitter) @mbrushstocks
More: Rising yields put S&P 500 on pace for biggest monthly loss of 2023 as investors brace for Fed Chair Powell’s Jackson Hole speech
Also read: Will August’sstock-market stumble turn into a rout? Here’s what to watch, says Fundstrat’s Tom Lee.
Bonds will do well if U.S. interest rates decline in coming months. What you may not appreciate is that dividend-paying stocks are likely to do even better.
That’s because dividend payers possess a powerful combination of both bond-like characteristics and equity-like growth potential. Like bonds, dividend-paying stocks benefit from declining interest rates. Unlike bonds, those dividend-yielding stocks also benefit from lower interest rates because they cause the discounted value of their future earnings to increase.
“ During declining-rate months, dividend stocks on average did more than twice as well as 10-year Treasurys. ”
To document this double-barreled benefit, I segregated all months since 1927 into two groups: Those in which the 10-year Treasury
BX:TMUBMUSD10Y
rate (or equivalent) declined from the previous month, and those in which the rate rose. On average in the declining-rate months, a portfolio containing the 10% of stocks with the highest yields rose at an annualized rate of 22.7%. During the rising-rate months, in contrast, this portfolio gained just 5.0%. (These returns are courtesy of a database from Dartmouth College professor Ken French.)
The comparable returns for 10-year Treasurys, in contrast, are 9.4% and 0.4%, respectively. (These bond returns are courtesy of a database maintained by Yale University professor Robert Shiller.) So during declining-rate months, dividend stocks on average did more than twice as well as 10-year Treasurys.
To be sure, a portfolio of 10-year Treasurys will have lower volatility than a portfolio of high-yielding stocks, even when interest rates are declining. So the extra return that those stocks produce above and beyond bonds during declining-rate environments is not totally a free lunch. But what is clear is that dividend payers are a better bet when interest rates are falling than when they’re rising.
The key to dividend stocks’ bond-like quality is that their dividends aren’t slashed when interest rates decline. That’s not always the case with lower-quality stocks, whose high yields often indicate an imminent dividend cut. But financially sound blue-chip companies are loathe to cut their dividends, often going to great lengths — including going into debt — to avoid doing so.
For that reason, it’s important to take financial quality into account when choosing dividend-paying stocks. With that thought in mind, I mined the database of stocks that are recommended by at least two of the top-performing newsletters that my performance auditing firm monitors. Below are the 20 stocks in that database with the highest recent dividend yields, listed in descending order of their yields. (Data courtesy of FactSet.)
| Stock | Dividend yield |
| TC Energy Corp (TRP) | 7.9% |
| Keycorp New (KEY) | 7.7% |
| Kohls Corp (KSS) | 7.3% |
| Columbia Bkg Sys Inc (COLB) | 7.3% |
| Truist Finl Corp (TFC) | 7.0% |
| Walgreens Boots Alliance (WBA) | 6.7% |
| Bank N S Halifax (BNS) | 6.7% |
| Leggett & Platt Inc (LEG) | 6.5% |
| Simon Ppty Group Inc New (SPG) | 6.4% |
| Foot Locker Inc (FL) | 6.3% |
| Crown Castle Inc (CCI) | 6.1% |
| Citizens Finl Group Inc (CFG) | 5.9% |
| Comerica Inc (CMA) | 5.9% |
| 3M Co (MMM) | 5.9% |
| International Paper Co (IP) | 5.4% |
| Prudential Finl Inc (PRU) | 5.4% |
| Dow Inc (DOW) | 5.2% |
| Fifth Third Bancorp (FITB) | 5.1% |
| PNC Finl Svcs Group Inc (PNC) | 5.0% |
| Suncor Energy Inc New (SU) | 5.0% |
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: Now’s the time to own dividend-paying stocks. These 5 offer up to a 9% yield.
Plus: These 20 dividend stocks have been the best income growers in the S&P 500
College students around America are beginning the trek back to campus. A precursor to that journey is the back-to-school shopping season, and this year it’s estimated to hit a record-breaking $94 billion for college students.
The National Retail Federation estimates this boom in its back-to-school data and expects family spending on college students to be around $1,367 per student, up slightly from last year.
Inflation is driving the price of school supplies up, but it’s a TikTok trend that may be fueling a part of the high spending for college students. Students are showing off their dorm room designs on the popular social media app, sparking a “silent competition” between students that incentivizes more spending at retailers.
“So far, the U.S. consumer is showing their willingness to still open up their wallet for that discretionary spend as long as the value is compelling,” says Simeon Siegel, senior analyst at BMO.
Back-to-school shopping is also used as a barometer to gauge potential holiday spending. Early back-to-school numbers are appearing strong for retailers in the space, who are also looking to capture sector share from shuttered Bed Bath & Beyond stores.
Watch the video above to find out more about the TikTok trend fueling back-to-college spending.
On Thursday, Autodesk Inc (NASDAQ: ADSK) reported a revenue and profit beat in its fiscal second quarter, while also issuing a better-than-expected guidance as customers look to optimize their construction software in response to increased demand. During after-market trading, the San Francisco-based company who is also among collaborators of NVIDIA Corporation (NASDAQ: NVDA) rose 6% in after-market trading.
Second Quarter Results
For the quarter that ended on July 31st, Autodesk reported revenue rose 9% YoY to $1.35 billion topping estimates of $1.32 billion, but total billings contracted 8% to $1.095 billion.
The Architecture, Engineering and Construction segment rose 11% YoY, generating revenue of $627 million. Design revenue rose 8% YoY or 12% on a constant currency basis, but dropping 6% from the previous quarter. Maker revenue rose 15% YoY to $130 million, which is a 7% increase from the previous quarter. Subscription plans experienced a revenue rise of 9%, or 13% in constant currency, to $1.27 billion, which is a 6% compared to the previous quarter.
On a constant currency basis, net revenue retention rate remained within the range of 100% to 110% on a constant currency basis. Adjusted earnings amounted to $1.91 per share, topping profit estimates of $1.73 per share.
Outlook
The computer-aided design software company, whose software is used by construction, engineering and manufacturing companies, guided third-quarter revenue to be in the range between $1.38 billion and $1.40 billion, topping Refinitiv’s estimates of $1.38 billion, with earnings per share expected in the range between $1.97 to $2.03, also topping the estimated $1.92.
As for full fiscal year 2024, earnings per share are guided in the range between $7.30 and $7.49, above the expected $7.28. Full year revenue is expected to be between $5.41 billion and $5.46 billion, while analysts estimated $5.41 billion.
Autodesk is benefiting from the fact that companies are turning to digital transformation in an effort to overcome limitations in terms of labor, money and materials. Chief Executive Andrew Anagnost remarked that that the strong figures and positioning are owed to the AutoCad maker’s resilience, discipline and action upon new opportunities.
Anagnost also added that Autodesk was always an AI player, and it will use this technology for the purpose of boosting productivity and therefore, optimizing construction design in terms of making it cheaper and more sustainable, as opposed to automating creativity which is a source of endless opportunity.
DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.
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This article Autodesk Surprises By Beating All Key Metrics Due To Healthy Product Demand originally appeared on Benzinga.com
.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Joe Genovese was hired by Ford Motor at the tier-two level, as workers refer to it, 11 years ago. In a year, he’ll finally make top pay, he told a United Auto Workers rally last weekend.
Tier-two workers in the automobile industry can receive less than half as much in hourly wages as top-tier workers, depending on the automaker and the contract. Their benefits are also less generous — and, like in Genovese’s case, it takes them many more years to reach the top hourly wages than those hired before 2007, when the Big Three automakers introduced the current tiering system after their financial troubles.
Because of this, Genovese said, he has seen many friends and family members who were also tier-two employees transfer to other plants during his time at the company, as they sought to increase their pay however they could.
“With tiers, there is no union,” he told the crowd of hundreds of union workers near Detroit during the Sunday rally, which was livestreamed. “With tiers, there’s a division. It’s time to close that division.”
The union has been dissatisfied with its negotiations with the Big Three automakers, and announced Friday that 97% of members had voted to authorize a strike if no agreement is reached. Contracts are set to expire Sept. 14.
One of the union’s priorities is ending the automakers’ tiered workforce. Shawn Fain, the UAW’s president, wore an “End Tiers” T-shirt at the recent rally.
‘A sore point from Day 1’
Tiering, an increasingly common practice that labor experts say started in the U.S. in the 1980s as employers pushed for concessions from their employees, is when companies bring in new employees for lower pay and fewer or worse benefits — sometimes on a supposedly temporary basis that can stretch on for years — than workers hired earlier who are doing the same work.
In the U.S. automobile industry, workers hired in 2007 and onward don’t have pensions or healthcare when they retire. In addition, as automakers make the transition to electric vehicles, so-called new types of work are being performed that may not be covered by UAW contracts, such as by workers at some battery plants that have not been unionized. That worries unions and labor observers alike.
“‘Across the board, the rank-and-file hated [tiering]. … They viewed it as discriminatory that people were doing same job and getting paid substantially less, and that [some workers were] treated as second-class citizens.’”
Nelson Lichtenstein, a professor at the University of California, Santa Barbara who has written books about the history of labor, said that in the ’80s, tiered workforces could be found not just in the automobile industry but in airlines and trucking, too. Now, many “employers are constantly creating new tiers. It fits in with the fissuring of the workplace,” he said in an interview before the results of the strike-authorization vote were released.
U.S. automakers over the years have justified tiering as a way to stay competitive because of globalization, Lichtenstein said. “Whether the automakers are doing well [financially] or not, they’ll say the competition, like Toyota, will eat our cake.”
But “across the board, the rank-and-file hated [tiering],” said Marick Masters, a business professor at Wayne State University in Detroit. “It was a sore point from Day 1. They viewed it as discriminatory that people were doing same job and getting paid substantially less, and that [some workers were] treated as second-class citizens.”
Other auto workers tell stories that are similar to Genovese’s.
Quortez Danforth, a UAW Local 1264 member in Sterling Heights, Mich., who has been a temporary part-time worker at Stellantis for five years, also spoke at the rally. He said he had “missed out on rolling over” to a full-time job in 2020, when he had to have open-heart surgery. Since then, he said, he has lost out on three years of bonuses and profit sharing, to which full-time permanent workers are entitled.
“I’m hoping this [union] fight will help,” Danforth said.
Tony Totty, the president of UAW Local 14 in Toledo, Ohio, and a General Motors employee, told MarketWatch ahead of the vote results that the union and workers have made concessions for years as U.S. automakers went through tough financial times, including bankruptcies and bailouts.
“If we didn’t make those concessions, these [companies], managers and CEOs wouldn’t be making what they make,” Totty said. “Now they’re so profitable, but we still have these provisions from the days of bankruptcy.”
GM
GM,
and Ford
F,
posted $2.6 billion and $1.9 billion in profit in the second quarter, while Stellantis
STLA,
the Dutch multinational automaker that is the parent company of the U.S. automaker formerly known as Chrysler, reported $12.1 billion profit in the first half of 2023.
A GM spokesperson would not comment on tiering but issued the following statement: “We’ve been working hard with the UAW every day to ensure we get this agreement right for all our stakeholders.” A spokesperson for Stellantis referred MarketWatch to the company’s website about the negotiations with the union. Ford did not respond to a request for comment.
Totty, who was hired by GM in 1997, said it took him three years to reach top rate, or the highest wages possible. “Now it’s an eight-year progression. Now there’s other things that will never get them to 100% in the contract,” he said. “I have a pension; they don’t. That pension allows me to get retiree healthcare. They don’t get that.”
As for the issue of automakers striking partnerships with other companies to make batteries for EVs and using nonunion labor, battery-plant workers are starting out at a lower hourly rate of $16 to $20 an hour, Totty said. He expressed concern about what will happen to other workers once the transition to EVs is complete.
“GM has had partnerships before, like with NUMMI [a joint venture between GM and Toyota that had an automobile plant in California], done with all UAW workers,” Totty added.
A game of whack-a-mole
Jody Calemine, a senior fellow and director of labor and employment policy at the Century Foundation, a progressive think tank, likened tiering to a game of whack-a-mole. Tiering exists everywhere, he said, including at grocery stores, in healthcare and in the public sector. It exists in delivery, including at the U.S. Postal Service.
Teamsters at UPS
UPS,
were able to eliminate one tier — a second tier of lower-paid drivers — in the contract the company’s employees approved Tuesday. But a part-time UPS warehouse worker, Noah Jorstad of Fargo, N.D., told MarketWatch that under the new contract, there remains a difference between what current part-timers will make by 2028 ($25 or $26 an hour) and what new hires’ hourly wages will be by that time ($23 an hour).
“It’s going to be an issue for the next contract,” he said. “It’s like kicking the [can] down the road.”
See: It’s ‘crunch time’ for unionized auto workers, but this is not UPS
Saving difficult issues for later has been a recurring theme in labor negotiations since companies introduced tiering in the ’80s, Calemine said. For the companies, it was “a very clever tactic,” he said. “It ended up being the cheapest concession a union could make in the moment. Though unions resisted it, no current member was losing anything.”
“‘We need to be the working class again, instead of the working poor.’”
Perhaps nowhere are the effects of tiering more obvious than within the same family.
Sarah Schambers, a fourth-generation Ford worker in Michigan and single mother of two children, said in a video recently released by the UAW that it took her six years to go from a temp job to a permanent position that paid $16.66 an hour. And it took her a total of 15 years to reach the top wage of $32 an hour at the company, she said — after having to move plants four times, from Michigan to Kentucky and back.
By contrast, it took her mother just three years to get to top pay, she added.
Even when she was working 40 hours a week for Ford, Schambers said, she would make deliveries for the grocery-delivery app Instacart “so I could make sure that my bills were paid and that my kids had everything they need.”
“I don’t think that’s freedom,” she said. “We need to be the working class again, instead of the working poor.”
Related: Actors, writers, hotel housekeepers and grad-student workers are all striking for the same reason
For many Americans, paying the mortgage bill is by far the largest expense they deal with each month. While home prices and other factors (like property taxes) vary widely from state to state, the National Association of Realtors reports that the average monthly mortgage payment for a 30-year fixed mortgage in the United States is now a hefty $2,317. However, what if you could pay for this large, recurring monthly expense with passive, recurring monthly income from your investment portfolio?
One way to do this would be through a high-yield, monthly-dividend ETF like the popular JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI). This ETF pays a dividend each month and its dividend yield is currently 10.2%, making it an investment instrument that is well-suited to pursuing this goal. Let’s walk through the idea of paying this large, recurring bill with recurring dividend income and the steps it would take to get there.
Monthly Dividends
Before diving into the specifics, let’s first touch on what JEPI’s strategy is. This is a $28.5 billion ETF from JPMorgan that launched in 2020 and has quickly gained popularity on its way to becoming the largest actively-managed ETF in the market today.
According to JPMorgan, JEPI “generates income through a combination of selling options and investing in large-cap U.S. stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends.” Additionally, JEPI seeks to “deliver a significant portion of the returns” of the S&P 500 with less volatility.
While most dividend stocks pay out a dividend on a quarterly basis, JEPI pays them monthly, so its payout schedule aligns nicely with our objectives of making a monthly mortgage payment.
Double-Digit Yield
It should be noted that JEPI’s dividend payout can vary from month to month, but it currently yields an attractive 10.2%. Using the last 12 months’ payments, which range from $0.29 to $0.61 cents, we can simplify things by saying that the average dividend payment works out to $0.46 per month.
To reach $2,307 in monthly dividend payments from JEPI to pay off the average mortgage, an investor would need to buy 5,016 shares of the ETF. At a current price of $54.49, this would come out to an investment of $273,321.84.
While this is a large amount for the average individual investor to accumulate, it shows that an investor could theoretically pay their mortgage each month using passive income from a high-yield dividend ETF like JEPI.
Diversification
An advantage of using a dividend ETF JEPI to pay a monthly mortgage payment versus a dividend stock is that while it is a single security, it reduces single-stock risk because this income-oriented ETF owns 120 stocks.
JEPI is further diversified in that its top 10 holdings make up just 17.6% of the fund, so it doesn’t leave investors overexposed to just one or two stocks. In fact, no position has a weighting of more than 2%. Below, you can take a look at JEPI’s top 10 holdings using TipRanks’ holdings tool.
JEPI’s portfolio contains a wide variety of large-cap, blue-chip U.S. stocks, ranging from tech stocks like Amazon, Microsoft, and Adobe to dividend mainstays from the consumer staples sector like Coca-Cola, Pepsi, and Hershey.
Additional Considerations
While the idea of “setting and forgetting” your mortgage payment with a dividend ETF like JEPI is certainly appealing, there are some additional items investors should consider before considering an idea like this.
Though it’s certainly possible to build up a large position of ~$273,000 in one security and use the dividend payments from this ETF to pay your mortgage, you generally want to avoid putting all of your eggs in one basket. Yes, JEPI is diversified, but investing this much in one security could still leave you with a lot of exposure to just one investment vehicle, which could backfire if something goes wrong.
Over the long term, it’s probably preferable to build a diversified portfolio of at least 15-20 stocks to build long-term wealth.
There is also the JEPI-specific consideration that investors could miss out on long-term capital appreciation by investing such a large amount in this type of ETF. By selling covered calls, JEPI runs the risk of leaving upside on the table as the market rises. Selling covered calls caps an investor’s upside at a certain point because if the price of the underlying stock rises beyond the strike price of the option, JEPI investors forgo the additional gains.
It should also be noted that if an investor has accrued this much capital to put into an investment like JEPI, they may also be able to simply pay the mortgage off all in one fell swoop and eliminate the concern of making monthly payments altogether.
Conversely, a mortgage can also give homeowners a tax break, and if they have a low interest rate locked in for their mortgage, they may not want to pay it off. Even if an investor could theoretically pay off their mortgage all at once with the principal that they are allocating to JEPI in this exercise, I still like the idea of remaining liquid and maintaining optionality by keeping the large position in JEPI and paying for the mortgage on a monthly basis.
Is JEPI Stock a Buy, According to Analysts?
Turning to Wall Street, JEPI earns a Moderate Buy consensus rating based on 103 Buys, 17 Holds, and zero Sell ratings assigned in the past three months. The average JEPI stock price target of $62.32 implies ~14% upside potential.
Starting with a Single Step
This strategy might not be right for everyone, but it shows what you can achieve by saving, investing, and building up positions in dividend ETFs. While accruing over $273,000 to achieve this goal might sound daunting at first, the largest journeys begin with a single step.
Allocating over $273,000 to JEPI sounds like a lot, but what if you could allocate $5,000 to start receiving ~$50 in dividend payments each month or put in $10,000 and start receiving $100 in monthly payments? By starting a position, reinvesting the monthly dividends, and adding a bit more to your position each month, you can eventually achieve this goal.
The added bonus is that even if you don’t have enough to receive the $2,307 needed to pay the full monthly mortgage, any passive income coming in from investments to help you pay for it (or pay for other expenses) is an added bonus and gives you a nice helping hand.
What happened
Shares of Credo Technology (CRDO 5.17%) beat the market this week, rising 6% through Thursday trading. That’s as compared to a flat overall market, according to data provided by S&P Global Market Intelligence. The rally added to modest gains for the high-speed data solutions specialist so far in 2023. The stock is up 12%, trailing the S&P 500 index’s rally by just a few percentage points. Yet Credo Technology had been down by as much as 50% earlier in the year.
This week’s rally was sparked by positive news on the earnings front, along with bullish comments from Credo’s management team about demand trends for the rest of its fiscal year.
So what
Management said on Thursday that Q1 sales landed at $35 million for the period that ran through late July. That result translated into a 9% increase year over year and marked a sharp improvement over the prior quarter, when sales were down 15%. Management credited the company’s unique market position, plus increasing demand for high-speed connectivity solutions, for lifting its results.
Results were more mixed around profitability. Credo maintained gross profit margins at 58% of sales, yet its expenses were also elevated. As a result, net losses improved only slightly, shrinking to $12 million in Q1 from $15 million in the prior quarter. Credo’s cash position brightened as well, with cash on the books ticking up to $240 million from $220 million.
Now what
Investors are hopeful that rising demand for generative AI products will lift demand for the types of high-speed, energy-efficient connectivity solutions that Credo provides. The company is also aiming to diversify its business as it grows so that it isn’t too dependent on a small set of customers or product niches.
But the path toward sustainable growth will be a rocky one. Credo projected that sales next quarter will fall to between $42 million and $44 million from $51 million a year ago. Investors can expect continued volatility in this stock while growth rates stabilize. A more sustainable rally in the stock, meanwhile, will also require concrete evidence that Credo is moving toward profitability. Those key ingredients are still missing, and that’s likely a key reason the tech stock is still underperforming the market this year.