A Hedging Strategy That Pays Investors 11.32% Every Year?
The U.S. economy has been doing great. Jobs are growing and profits are rising. But income investors should watch out for the next downturn because as history has shown, our economy always moves in cycles. The last thing you want is a dividend cut during the next recession.
So today, I’m going to show you a way to hedge this risk. There’s no need for complicated financial derivatives. And instead of paying a premium for an insurance policy, you can actually get paid for participating.
Sounds too good to be true? Well, let me explain.
Oaktree Capital Group LLC (NYSE:OAK) is an asset management firm. It specializes in alternative investments. With approximately $99.3 billion in assets under management (AUM), the company uses a value-oriented and risk-controlled approach to invest in corporate debt, distressed debt, control investing, real estate, convertible securities, and listed equities.
Unlike the asset managers who only know how to make money in bull markets, Oaktree is well positioned to capitalize on the next economic downturn. Among the $99.3 billion in AUM, the company has $21.5 billion in uncalled capital commitments, also known as “dry powder.” This is the money that’s standing by for the next great investment opportunity. When the economy enters a downturn and companies are in urgent need of cash, Oaktree can then lend out its “dry powder” at very attractive rates of return.
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OAK Stock Is Paying a Growing High Dividend Yield of 11.09%
Best of all, Oaktree stock investors don’t have to wait till the next recession to make money, as the company pays generous dividends. With a quarterly distribution rate of $1.31 per unit, OAK stock offers an annual yield of 11.32%.
Now, you may be wondering: if the company’s strategy is to make money in the next recession, how can it afford to pay oversized dividends today?
Well, as it turns out, earning an extra return from its “dry powder” is not the only way for Oaktree to generate revenue. As an asset manager, the company earns a management fee and a performance fee. With a diversified mix of pro- and counter-cyclical strategies and a large, blue-chip institutional client base, Oaktree has been generating a steady stream of income.
The chart below shows the outstanding performance of Oaktree’s closed-end funds:
Outstanding Track Record
Source: “Oaktree Capital Group, LLC,” Oaktree Capital Group LLC, last accessed October 12, 2017.
Since the company’s oldest strategy’s inception in October 1988, Oaktree’s closed-end funds have delivered an aggregate internal rate of return (IRR) of 18.9% annually. In comparison, the S&P 500 Index had an average annual return of 10.3% during this period.
By greatly outperforming the benchmark index over the long term, Oaktree has attracted a large client base. Right now, the company’s blue-chip clientele includes pension funds, states, corporations, university endowment funds, and sovereign wealth funds.
Final Thoughts on This High-Yield Stock
In today’s market, high-yield stocks are usually not the safest bets. But Oaktree is a special one. The company not only earns a steady fee revenue but also has strategies in place to generate oversized returns during recessionary periods. Income investors looking for a hedging strategy may want to take a closer look at this 11.32% yielder.