Buffett Says ‘Never Bet Against America’: 2 Great Dividends, Yields +10%

Co-produced with PendragonY

Why Bet on the U.S.A?

At High Dividend Opportunities, we are investing and betting on the U.S. economy. Why? For starters, it is one of the largest economies in the world, as well as one of the most resilient and flexible economies.

The GDP for the U.S. economy is currently $26.14 trillion, while the entire E.U., for example, comes in at only $17.18 trillion. The entire world is approximately $96 trillion. The U.S. produces just over 27% of the goods and services produced by the entire world despite having only a small fraction of the world’s population.

Additionally, the U.S. economy has a great track record of growth. Since 2010, the U.S. economy has grown by more than 78%, while the global economy only grew by around 59%. The E.U. lagged even further behind, seeing only 16% growth. Also, notice how much steadier the growth is over that period, particularly between 2010 and 2020. The U.S. grew at a pretty constant rate, while everywhere else, growth surged and ebbed. Even COVID only had a temporary impact on the U.S.

The U.S. also offers consistent and transparent reporting for publicly listed companies. While no amount of regulation can be perfect, investors in publicly traded U.S. companies can have a high degree of confidence in the accuracy of public reports. Meanwhile, though plenty of other countries offer similar levels of law and transparency, many of the faster-growing areas have less history of such openness.

Even though there has recently been a lot of discussion revolving around the U.S. Dollar gradually losing its dominance on the world stage, that doesn’t change the absolute powerhouse that the U.S. economy is.

Just look at the sheer volume of trade that the U.S. engages in. Last year, the U.S. imported $3.957 trillion in goods and services and exported $3.011 trillion. As a result, U.S. trade accounts for 7.2% of the world’s GDP. (Source: US Department of Commerce)

So, let’s take a look at two great ways that income investors can make a bet on the U.S. economy with their investments.

Bet #1 USA – yield 10.1%

Liberty All-Star Equity Fund (USA) is a Closed-End Fund (‘CEF’) that is very diversified and provides us exposure to many stocks that don’t fit with the Income Method strategy. The fund is also relatively conservative in using no leverage. (Source)

Looking at its top 10 holdings, we can see many popular names. Companies like Microsoft, Amazon, and Alphabet dominate the tech field, but other companies held also are important to the U.S. economy as well.

In an unusual arrangement, the fund uses five portfolio managers to manage sub-portfolios. Two utilize Growth strategies, while the other 3 follow Value strategies. (Source)

According to portfolio visualizer, the correlation from 1994 to today between USA‘s net asset value and the S&P 500 is 0.97. The HDO portfolio overall has a weak correlation with the market, so it is good to have a drummer that is marching to a different beat than many other CEFs.

USA produces a good income. It pays distributions on its common shares totaling approximately 10% of its NAV per year, payable in four quarterly installments of 2.5% of the Fund’s NAV at the beginning of each quarter. While generous, this policy limits any erosion in the NAV from too high a distribution payment. This policy means that the distribution self-corrects. When the market is up, the distribution will be up; but if the market is down, the distribution will pull back to a level the fund can fully support.

Between the portfolio being fairly well correlated to the S&P 500 and the generous distribution, over time, USA has beaten both the S&P 500 and the Russell 3000 on a total return basis. So with USA, you can have the best of both worlds, great income and market-beating total return.

USA has been trading above NAV a lot in recent months. Currently, it is trading very close to NAV, about a 1% discount. Distribution reinvestment is done at NAV (with a cap of a 5% discount to market price). Trading near NAV provides us with a good opportunity to buy.

This is a great time to invest in USA, with the markets offering a great entry point!

Bet #2 ARCC – Yield 10.6%

Ares Capital Corporation (ARCC) is a publicly traded BDC that predates the Great Financial Crisis, arguably one of the hardest times in history for small to medium U.S. businesses. This means that ARCC offers pure U.S. exposure.

Not only did ARCC survive the challenging period of the 2008 financial crisis, but it also required only a small reduction in the dividend, which was soon restored as the company thrived.

ARCC currently provides a gigantic dividend of nearly 11%. Importantly, has beaten both the S&P 500 and the Russell 3000 in total return since 2005, its first full year as a public company.

Also important to note that ARCC has not only outperformed the S&P 500, but it also outperformed its BDC peers, high-yield bonds, and leveraged loans. ARCC outperforms by maintaining a portfolio whose NAV has above-average returns with below-average volatility. ARCC is a big winner! (Source)

Small businesses are the backbone of the American economy. They are great representatives of the spirit of the American dream. According to the U.S. Small Business Administration, there are more than 33.2 million small businesses in the U.S., representing 99.9% of all businesses and employing 61.7 million or 46.4% of the private workforce. A net of over 180,000 new small businesses were added between March 2020 and March 2021.

Jobs report data from the National Federation of Independent Business (‘NFIB’) found in February 2023 that a near record 47% of small business owners had unfilled job openings and that 17% of owners plan to create new jobs in the coming months. Seasonally adjusted, a net 46% of owners reported raising compensation, unchanged from last month. A net 23% plan to raise compensation in the next three months, up one point from January. 23% of owners report plans to raise compensation in the next 3 months, while 46% report having already done so. While the top-line GDP growth numbers seem weak, small businesses are showing all the classic signs of the U.S. economy rebounding strongly. This makes the BDC sector, where ARC operates, a great place to bet on the strength of the U.S. economy.

The portfolio companies that BDCs invest in are mostly privately owned U.S. businesses and are typically inaccessible to individual investors. These businesses offer great rewards to investors due to their fast growth. By buying shares of ARCC, you can tap into their growth while collecting its big yield!

Conclusion

We have highlighted two great income picks that are part of the “High Dividend Opportunities” model portfolio, which currently yields +9%:

• USA invests in a diverse set of U.S. companies, many of which are large and key to the U.S. economy. It offers a great choice to bet on the U.S. Economy with a big yield. USA currently yields 10.1%.
• ARCC is referred to as the “Blue Chip” of the BDCs. BDCs sold off in response to the failure of Silicon Valley Bank and other banks. The pullback is not warranted because BDCs are not banks. BDCs don’t have depositors and don’t run this risk. In fact, BDCs are set to be big winners from the bank failure situation: Banks are set to reduce their lending, and this will increase demand for loans from BDC companies. ARCC is a solid BDC with an excellent track record. ARCC currently yields +10.6%. We are buying the dip for a reliable income stream!

The great billionaire investor Warrant Buffett said, ‘Never bet against America.’ We believe in this view too, and the vast majority of our ‘model portfolio’ of +45 dividend stocks provide pure exposure to the great U.S. economy. And we believe that, over the long run, U.S. stocks are set to always win!