Volatility Went Crazy...Who Cares!

RQI: Sold (Exited 2.85% Allocation) 

This closed end fund appreciated 22% (not including distributions; total return is higher) since purchasing it in April 2024. RQI’s price appreciation caused its yield to fall down to 7.21%. I have nothing against the fund, and real estate is positioned to benefit from interest rate cuts. I’m optimizing for income, not appreciation…but I’m happy to take appreciation and spend it on higher income opportunities elsewhere.

AGNCN: Reduced from 4.20% to 2.94% 

This preferred stock offers a high yield (more than 10%) because its payout is calculated on a variable rate. If, and when rates fall, so will the distributions from this preferred stock. Also, it is “Callable”, meaning that the issuer can buy it back at $25. Given that it's trading at a price slightly above $25, there’s a risk of losing the difference between the market price and $25 (an $0.83 loss as I type this). The lower that rates fall, the greater the motivation for the issuer to call this preferred share, and issue new preferred shares at a lower rate.

The risks described above are small eg. A call resulting in a loss of $0.83 on the current price of $25.83 is a 3.2% loss. A rate cut of 0.25% that reduces the distribution by approx 0.25% isn’t a big deal either. However, the lower that rates fall, the less attractive these preferred shares become. Lastly, all other things being equal, I prefer funds to individual stocks to avoid concentration risk. 

If you’d like to review the details of the call date, interest rate calculation etc, they’re available at this link via Quantum Online (also repeated below under “Resources”). 

NLY.PF: Reduced from 3.92 to 2.91%

Another preferred stock. Same scenario as explained above for AGNCN, and the numbers are similar. Also, if you want to check the details for this preferred stock, use the ticker NLY-F on the Quantum Online website.

UTG Increased from 2.93% to 5.01%

This closed end fund is focused on utilities and uses approx 19% leverage. Generally, utilities are capital intensive and carry a lot of debt. Therefore they are more profitable in a low interest rate environment. Also, the fund’s leverage will be cheaper if rates fall. 

My expectation is that if rates fall, the price of UTG will increase, which will cause the yield to revert back to a lower rate, approaching 6%. If that happens, I’ll sell and take profits. If it doesn’t happen, I’ll happily continue to collect the current yield of 7.69%. The current yield is at the lower end of the range I’m looking for but that’s balanced out by this fund’s low risk (relative to the rest of the portfolio). 

This fund has a 20 year history of zero dividend cuts, as explained in this recent video. I consider this allocation increase to be a slight de-risking of the portfolio.

RLTY: Bought (2.99% Allocation)

Despite selling RQI, I want to retain some exposure to real estate…enter RLTY. This closed end fund is a close cousin of RQI. They share the same fund management company, Cohen and Steers, 3 fund managers are common to both funds,  and the largest holdings are similar. 

Why the switch? 

1/ Higher yield. RQI is currently yielding 7.21% and RLTY is yielding 8.38%. 

2/ Bigger discount to Net Asset Value (NAV). RQI is trading at a discount to NAV of -5.34%, while RLTY is trading at a discount to NAV of -9.28%. In other words it's “cheaper”. Or to put it another way, if RLTY were to generate the same level of investment income as RQI, the greater discount would result in a higher payout to investors.

Downsides? 

There’s no free lunch. RLTY is slightly more risky than RQI because:

1/ RLTY has slightly higher leverage:  RQI’s leverage is 27.86% and RLTY’s leverage is 32.92%. 

2/ RLTY has a much shorter track record. RQI has been around since 2002. RLTY was born in February 2022.