Make Money While You Sleep, 2 Big Dividends For A Retirement Dream

Co-authored by Treading Softly.

When you were young, do you remember what you used to dream about your occupation? Many of us had unrealistic dreams, like wanting to be some sort of superhero or a career that we ended up not following, but thought would be fun and exciting, like a police officer, a firefighter, or a doctor.

I have one daughter who is convinced that she will be a princess when she’s older. She has already figured out which one of the young princes of England she wants to marry to hopefully join the ranks of the royal family. It thrills her heart to think that in the future, I will have to call her “your majesty.”

When it comes to the market, many of us have goals to achieve for our retirement. Sadly, many of our goals fall short of a real, effective goal to help us achieve an end. If your goal is to save $1,000,000 for your retirement, you’re hit with a “then what question?” You have $1,000,000; what are you going to do with it? Unfortunately, many people run towards the concept of having $1,000,000 and have no clue what to do with it, other than to be afraid that they’re going to run out of money before they run out of breath. I’m a big believer in having a retirement dream that uses the market as a tool to fund your retirement and not as the be-all-end-all goal itself.

My retirement dream is to visit my family, enjoy my hobbies, and, at the end of the day, sit back and relax by the fireplace, drinking a glass of tea. I will reminisce with my wife about the wonderful things we were able to achieve that day.

Today, I want to look at two funds to help you fund your retirement.

Let’s dive in!

Pick #1: OXLC – Yield 19.3%

Shareholders of Oxford Lane Capital Corporation (OXLC) will enjoy a distribution hike starting with the payments from this month. The monthly distribution of $0.09/share is a 12.5% increase over the prior month. What might surprise investors the most is that OXLC’s yield was already over 17%. How is it possible that an investment with such high yields can increase its distribution?

The answer is that CLO equity (Collateralized Loan Obligations) is currently in the “sweet spot” where asset values are recovering, and default rates remain very low.

What is a CLO?

A CLO is an actively managed investment portfolio that invests in bank loans. A CLO manager creates a CLO by acquiring loans and then raises debt capital by selling “tranches” in the CLO. The word “tranche” confuses many people, but at the end of the day, a “tranche” is just a level of the capital structure. Among companies, we would break the capital structure into senior secured debt, senior debt, junior debt, preferred equity, and common equity. The corporate structure has various levels of capital with different seniority.

In a CLO, you also have levels ranked by seniority, and they are called tranches and are labeled with letters that clearly indicate their respective seniority. You know that the AA tranche is senior to the A tranche, which is senior to the BBB tranche. Corporations should use the same system, as it would save investors the trouble of trying to figure out if the senior loan is senior or on the same level as a senior bond. When you read the details, all too often a “senior” bond is junior to some loans.

CLOs provide two major benefits:

1. The ability to choose your own risk/reward. The higher your tranche, the lower your yield and the lower your risk. The lower your tranche is, the higher your yield and the greater your risk. Within a CLO, there is a level for everyone.
2. A very stable structure. CLOs are super structured in everything they do. Everything is determined at inception. For every payment that is collected by the CLO, there is no question where that money goes. Even when a CLO has a high level of defaults and is unable to pay in full, there is no reason to go to bankruptcy court. It is already predetermined how the tranches will be paid, and in what conditions the senior tranches will be prepaid.

Institutions love the predictability and defensiveness of the senior tranches. That is why they are willing to accept a low yield of SOFR + 150 bps when the underlying loans held by the CLO have coupons over SOFR + 500 bps. They are willing to sacrifice the high return, for the certainty of return.

OXLC targets the equity tranche. It is the “common equity,” a level that doesn’t come with any guarantees. As borrowers repay their loans, the interest owed to the debt tranches gets paid first, and then the equity gets to keep the profit.

Thanks to low default rates, the return of CLO equity positions has been enormous. OXLC provides us with two yields — the “effective yield” which is a GAAP calculation that includes assumptions of…