I would urge investors to focus on establishing a legacy of solid financial health and decision making for future generations, suggests Rida Morwa, editor of High Dividend Opportunities.
Studies show that families that come from a solid financial footing often see higher levels of sustained success — using that footing to spring off from.
This means as the year comes to a close, we would want to consider adjustments to our investing timeframe and outlook for the betterment of those to follow behind us. For your children, grandchildren, and even great-grandchildren.
What would you need to focus on to build a multi-generational portfolio? For income investors, we would want investments that produce strong income in the present, but also have a clear line of sight on doing so for decades to come.
Such investments need to have a strong foundation and terms that allow us to have confidence in the income they generate indefinitely through a wide variety of economic conditions. Here are two such examples I would include in such a portfolio and would add to at any opportunistic moments.
RLJ Lodging Trust, $1.95 Series A Cumulative Convertible Preferred Shares (RLJ-A) pay $1.95 per share per year, making it an easy to calculate income generator. Currently, it yields 7%.
RLJ-A is what we like to call a "busted" convertible preferred security. RLJ-A can be converted to common shares if RLJ Lodging Trust (RLJ) moves above $115 for 20 out of 30 days. This is unlikely as RLJ shares trade in the mid-teens, and like most REITs, common shares will see more dividends than price increases.
RLJ did not originally issue RLJ-A but bought out the issuing company, causing RLJ-A to become a busted convertible. This means you can hold onto these preferred shares for decades or even generations to come and keep getting solid reliable income.
Crestwood Equity Partners LP, 9.25% Preferred Partnership Units (CEQP.PR) pay $0.84 annually and currently yield 8.9% is another example of a "busted" convertible preferred. CEQP.PR was originally issued privately to insider institutions and offers strong protection for preferred holders.
How did it become busted? At one point Crestwood Equity Partners (CEQP) conducted a 10 for 1 reverse split, this also altered the conversion ratio for CEQP.PR from being $13.69 to $136.90. While CEQP is performing considerably stronger than it did when this past event occurred, it effectively busted the chances of forcing such a conversion.
This again means you can buy this K-1 issuing preferred security and lock in decades of high income. (Note that from a tax perspective, CEQP.PR is most beneficial if held in a taxable account, and holding in a retirement account adds the risk of potential UBTI consequences).
Both of these preferreds do not weigh heavily on the issuing company's income as they are not large balances - a positive for holders and a positive for the company themselves.
RLJ and CEQP would both love to reduce the outstanding shares of these preferreds and have at times mentioned buying them on the open market to reduce their float. I plan to hold these shares forever and my heirs will have the option to hold indefinitely as well.