BlackRock Income: Capital Preservation and a High Yield

10/14/2019 5:00 am EST

Focus: BONDS

Todd Shaver

Founder and Editor-in-Chief,

BlackRock Income Trust (BKT) was created with two goals: 1) capital preservation and 2) income generation. The portfolio is at least 65% invested in mortgage-backed securities (MBS), notes Todd Shaver, editor of Bull Market Report.

Some 80% of its assets are agency MBS, which means they are backed with the full faith and credit of the federal government, through insurers Fannie Mae, Freddie Mac and Ginnie Mae. The trust — created by Blackrock (BLK), the world's largest asset manager — has been publicly-traded since 1988.

With the broader market currently experiencing a host of headwinds, real estate mortgages are increasingly being viewed as a safe haven and defensive investment.

Agency-backed MBS are some of the safest real estate investments one can make, so BlackRock is in a unique position to capitalize on investor rotation out of riskier sectors which are more exposed to the broader economy, and into real estate.

By BlackRock standards, this is an extremely small fund — valued at under $400 million. The company is very comfortable playing in the shallow waters of the MBS industry. This company is not a boom-or-bust investment. It’s a stable, dependable long-term dividend play.

By the end of 2Q19, BlackRock produced a one-year return of 8.3% on its MBS investments. Its average annual three and five-year returns were closer to 3%. This is not the stock’s return, but rather the company’s internal return on its investments.

The company has about $600 million in managed assets, and only 32% of that is leveraged. The company produced $26 million in operating cash flow over the trailing 12-months, which is around 6% of its market cap. The company also boasts a high operating margin at 83%, so its dividend should remain stable for some time.

Over the past five years, the stock hasn’t budged from its trading range of $5.50-$6.50. That’s a very tight range to trade in for such a small-cap company. That said, the company’s agency MBS portfolio is pretty airtight in terms of risk. There just isn’t much here — which means investors aren’t on board for price appreciation, they are on board for the dividend, which yields 6.8% annually.

An investment in BlackRock won’t make you rich, since the stock isn’t likely to double or triple (or even gain 50%). But it presents a stable opportunity to secure a high fixed income interest rate for many years to come. The name of the game here is defense.

This is a company that has been through both the Tech bubble burst of 2000 and The Great Recession of 2008, and yet still has never traded below $5.50. So even if the Chicken Littles of the world are correct, and a recession is indeed imminent, the downside risk here is extremely low.

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