Co-authored by Treading Softly.
The movie “Up in the Air” (2009) follows a man whose job is to travel around the country and fire people. He is employed to end other people’s employment. At one point in the film, he asks somebody who he’s actively firing, a very poignant question.
He asked them, “How much did they pay you to give up on your dreams?”
The answer was “$27,000 a year.”
For many of us, we took our first job, or what may have turned into our career, simply to make ends meet, not because it was our dream job or dream career. We were paid by a company to sacrifice our dreams for the forced reality of having to survive day to day.
I remember when I was in high school, there were these two motivational speakers they brought in who proclaimed the idea of doing what you loved for your career, so that way you felt that you were just being “paid to breathe.” Because if you love what you do, you would do it even if it was for free, they argued. You would be paid to breathe because you’re doing what you love, and you would be doing that anyway.
When it comes to the market, so many investors hate interacting with their brokerage accounts or their markets, they find it frustrating, tiring, and exhausting, constantly feeling like they’re having to battle against faceless institutions or other investors to find the best opportunity to simply afford their retirement. It’s the reason why I so strongly advocate investing for income, because once you own the shares of a company that’s a quality company, and they’re paying you, you don’t have to do anything else – you get paid to breathe. You get paid to wait through potentially tough market situations.
Today, I’m going to look at an opportunity and show an example of how we were literally paid to do nothing and continue to be paid. This is one company that I think is well worth having in your portfolio.
Let’s dive in!
Earning While Waiting
We often talk about the benefits of being paid while we wait. An important part of income investing is recognizing that share prices are volatile and not something we need to worry about as they swing month-to-month. BrightSpire Capital, Inc. (NYSE:BRSP), yielding 10.6%, is a commercial mortgage REIT that is an excellent example of why we don’t sweat over price swings.
Here is BRSP‘s performance over the past year, both on price alone and with dividends included.
To say it has been a volatile year is an understatement. BRSP’s 52-week high price is 50% higher than its 52-week low. Draw its chart in a game of Pictionary, and someone will shout out, “Rocky Mountains!”
By price, BRSP was down 15% just a few months ago and now is up 20%. The price has been all over the place. However, for income investors, the total return is 40% over the past year – a rather good return for a year where the demise of commercial real estate and how horrible it is to invest in has been a common theme on the financial news. Note how early in the year, the total return (with dividends included) and price are roughly the same. Yet as the year goes by, the total return declines less than the price and has higher highs.
Last year, we suggested that investors “put income under the tree this year” buying BRSP, noting that BRSP had adopted a conservative positioning in anticipation of a difficult market.
Here is what CEO Mike Mazzei said at the Q3 2022 earnings call:
“BrightSpire expects the first half of 2023 to remain challenging. More presently, over the course of 2022, BrightSpire has been preparing for the impact of rising rates and the current risk-off investment environment. To this end, we have been throttling back our loan originations and maintaining higher cash balances.”
Then wrapping up with the comment:
“Finally, that will undoubtedly be great lending opportunities that will arise from this market dislocation. But to be clear, over these past few quarters and in the very immediate future, all things equal, our bias is that liquidity will generally take precedence over new loan originations and stock buybacks.”
Fast forward to today, and BRSP has been doing exactly what management guided it would do. Source.
Liquidity remains high, leverage has declined from 2.3x to 1.9x yet adjusted distributable earnings have increased from $0.25 to $0.28. Despite that increase, BRSP opted to maintain the dividend at $0.20, consistent with the conservative strategy that management guided for.
A year later, management is still following a conservative plan. When asked about the dividend in the Q3 2023 earnings call, Mazzei said:
“But overall, right now, I don’t anticipate moving the dividend but we kept it at a conservative level over these past quarters. As I said early on, we were talking about the Fed in Q1 and what they were going to do with rate rises. And knowing that we kept the dividend where it was to make sure that we wouldn’t have to move it backwards.”
It isn’t very often that we can describe a 10%+ dividend as “conservative” but in this high-interest world, we can. With rates likely peaking, we are probably closer to a point where BRSP can get more aggressive, but in the near term, management made it clear its priority is managing risk within its current portfolio and maintaining a high level of liquidity to ensure it can deal with any unexpected challenges.
What does this mean for shareholders? We are going to keep seeing end-of-the-world news stories in the commercial sector. We could see the rollercoaster that is BRSP’s share price following those news stories. Yet we can be confident that our dividend is well-covered, and when the opportunity comes for BRSP to deploy its capital, there is room for both price upside and dividend growth.
With BRSP, we’ve seen mountaintops and valleys in what many would easily claim is a wild ride. Traders would be proactively trying to bob and weave in and out of BRSP as it rolls along, but for professional income investors, we will continue to collect outstanding income and enjoy the ride. Knowing that our realized returns are growing each quarter. In just one year, dividends have accounted for 50% of our total return. In the long run, they will account for a much larger portion. Whatever the price does, the total amount of dividends we have collected will continue to grow.
When it comes to retirement, I hope that you have maintained hobbies throughout your entire life that you’re able to enjoy even in your golden years. I also hope that during these twilight years, you’re able to find new hobbies that you can enjoy and discover and grow your life experience. For some of you, now is the time to tackle trying to do what you dreamed you would love to do and see if it’s something you would enjoy or not. If your portfolio doesn’t provide you with the income to do that, I strongly recommend you consider adjusting your portfolio to match our unique Income Method so that your portfolio can provide you with financial security, so you can pursue your dreams. I don’t want you to have to ask the question at the end of your life of how much you had to give up on your dreams because your portfolio held you back.
That’s the beauty of my Income Method. That’s the beauty of income investing.