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Steven Bavaria Takes Investors Inside The Income Factory
Summary
Steven Bavaria discusses his investing strategy, focusing on generating income through high-yield assets like closed-end funds and credit markets.
He emphasizes the importance of sticking with a strategy that aligns with one’s risk tolerance and long-term goals, whether it’s traditional equity investing or an income factory approach.
Bavaria recommends considering credit investments, like BDCs and CLO funds, as a favourable option in the current economic and political climate.
Rena Sherbill: Steven Bavaria, really nice to have you on one of our podcasts. Really nice to have you on Seeking Alpha. It’s been a long time coming. Appreciate you coming on the show.
Steven Bavaria: It’s a pleasure. Thank you.
RS: It’s a pleasure to have you. Like I said, you’ve been writing on Seeking Alpha for a long time. So, good to have you on finally. You now run an investing group called Inside the Income Factory.
I’d love it if we got started with how you’re approaching the markets. You’ve also written a book about it. So if you could synthesize your strategy and how you approach investing, I think, that’s a nice place to start.
SB: Sure. I guess we could start with the name of the book, The Income Factory and the service Inside the Income Factory. I started out investing like most other people, trying to make an equity return of 8%, 9%, 10%, which has been the average for the last 100 years.
And I realized over time, and this was 12, 15 years ago, that that meant you collect a dividend of 1% or 2% per annum. That would be the typical S&P 500 yield, 1% or 2%.
And you’d be counting on capital gains on average of another 7% or 8% every year. Now not always each year, but on average, every year, to get your 8%, 9%, 10% return. And that’s kind of tricky and angst-ridden for many investors because some years you’re not going to be getting it. You might even be losing money on paper. So you’d only be getting your 1% or 2%.
And since I spent my life in the credit markets as a banker and working for Standard & Poor’s and introducing ratings to the whole bank loan business, I realized that you can make interest rates in the high-yield credit market of 7%, 8%, 9%, 10% per annum.
And if you can get an interest rate of 8%, 9%, 10% per annum, even if you don’t have any growth, you’ve still got the same total return, that 8%, 9%, 10% return that equity investors are seeking to get. Many are trying to get more, but Nobel Prizes have been written by people showing that the typical person over a lifetime is lucky to make the average of 8% or 9%, 10%.
So anyway, I began to experiment and realized that I could invest in high-yield closed-end funds, all kinds of different assets that pay a steady 8%, 9%, 10%, sometimes more in markets like we’ve been in recently in interest. And if you then just get your principal back, you’ve still got your equity return, which you can compound and reinvest just like any other equity investor.
So I began to do that, and I began to write about it 10 or 12 years ago. And people called me a heretic. I’d have people say, oh no, you have to have growth stocks. You can’t grow your wealth without growth stocks. And I would show that, well, math is math. And if you can earn 8%, 9%, 10% in cash and 0% in capital gains, that’s the same 8%, 9%, 10% return as somebody who makes 8% in capital gains and 0% in cash or any combination in between.
So after a while I was – I had more and more followers who tried this and realized that, hey, from an emotional standpoint, you’re not going to make any more money or less with either approach, traditional index investing or dividend growth investing, or – and what I came to call an income factory approach, where you’re just focusing on the income and trying to make most of your total return in the form of income.
You’re not going to do better or worse than either – with either one, probably, but some people are going to be emotionally able to stick with it.
If you’re getting 8%, 9%, 10% in cash that you’re reinvesting and creating your own growth, as I would put it in a lot of my writings, then even in a down market, when you’re having paper losses or equity investors are having losses, paper or real, depending on whether they sell out or not, you’re still reinvesting and compounding your income if you’re getting it in cash.
And that can make you feel – and that can help you sleep at night, which thousands of people have told me since they sleep a lot better at night, knowing their money’s compounding and reinvesting and compounding through all kinds of markets.
And as I wrote about it more and more, and my shtick, as a writer, is basically taking complicated stuff and writing about it in plain English. I came up with this name, The Income Factory, thinking that Ford Motor, when they build a factory, a week after it’s built, the only people at Ford who worry about what its market value is as a factory are the green eye shade accountants in the back room.
But everyone else at Ford thinks more about how do you – what’s the output of that factory? How do we – and how do we grow the output of that factory on a regular basis? How do we buy more machines for the factory, make it grow as a factory in terms of its output? And I realized, hey, that’s really what I want my portfolio to do if I’m in it for the long term.
I see it as a factory whose job is to grow its income. And if it does that steadily by investing in high-yield assets, even though there’s no capital gain, I just keep on collecting that output, reinvesting it. And then later on, if you do this for enough years, hopefully, then you’ll, at some point, be able to retire.
And here again, having a portfolio that’s an income factory, as I call it, where you’re creating your output, your 8%, 9%, 10% cash output without having to sell any of your capital each year, that’s a real advantage once you become a retiree and want to live on some or all of that output, some of that income.
Because if you’re a typical equity investor collecting 1% or 2% cash each year in dividends and counting on another 7% or 8% in capital gains each year, you’re dependent on selling off some of the capital whether or not you’ve got the gains.
If you need 5% or 6% to live on, say as a retiree, and you’re only getting 2% in cash, then you’re going to have to sell, even when the market’s down, some of your capital to get what you need to – for your retirement income.
With an income factory where you’re getting 7%, 8%, 9%, 10% recently in cash every year regardless of what the price of the factory is doing, regardless of what your portfolios, paper losses or profits are, you’re not going to have to sell any capital. You’re going to get it all in cash regardless of what the market’s doing. So that, in a nutshell, is my income factory philosophy.
According to the financial firm Hargreaves Lansdown, someone earning £26,000 a year and contributing the standard 8% (5% from their earnings and 3% from their employer) to their pension from age 22 to 68 could build a fund of about £235,000. This could generate an annuity income of about £16,000 a year in retirement on top of the state pension (now £11,973 a year).
If they stopped making contributions and bought an annuity at age 57, their fund might be closer to £143,000 – reducing their annual income to about £8,000 before the state pension.
To retire at 57 with a £16,000 income from a personal pension, they would probably need to contribute about 13% of their salary throughout their working life on top of the 3% employer contribution.
To retire at 57 with a £16,000 income from a personal pension……
Using the 4% rule that would require a fund of £400,000. GL
Meet the 75p dividend stock with a higher yield than Legal & General shares
With a yield of over 10%, this UK dividend stock has the potential to be an absolute cash cow for investors. And it only costs 75p a share.
Posted by Edward Sheldon, CFA
Published 2 August
Image source: Getty Images
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.
Dividend investors have been piling into Legal & General shares recently and it’s easy to see why. Currently, these shares offer a yield of a whopping 8.5%. There are other UK dividend stocks with higher yields than this however. Here’s one that’s currently trading for less than £1.
A 75p dividend stock
The stock in focus today is NextEnergy Solar Fund (LSE: NESF). It’s an investment company that focuses on solar energy and energy storage infrastructure (and is currently invested in over 100 assets).
Its objective is to provide shareholders with attractive returns, predominantly in the form of regular dividends. Listed on the London Stock Exchange‘s main market, it currently trades for just 75p.
A huge yield
Now, analysts’ dividend forecasts are not always accurate. And dividend payments are never guaranteed, of course.
However, for the year ending 31 March 2026, City analysts expect this stock to pay out 8.5p per share in dividends. That translates to a yield of a massive 11.3% at today’s share price of 75p, so this stock could be a cash cow.
Lots to like
Looking beyond the enormous yield here, there are several things to like about NextEnergy Solar Fund from an investment perspective, in my view.
For a start, the company’s operating in growth industries. According to Mordor Intelligence, between now and 2030, the UK solar industry is set to grow by around 19% a year. The UK energy storage market’s projected to grow at an even faster pace, with several research firms forecasting growth of around 35% a year between now and 2030. This market growth should provide a supportive backdrop for the company.
Secondly, the fund benefits from government support. In its most recent trading update, it said the majority of its long-term cash flows are inflation-linked via UK government subsidies.
Third, it’s currently trading at a significant discount to the net asset value (NAV) of its assets (meaning there could be some value on offer). At the end of June, the NAV per share was 95.1p – about 27% higher than the current share price.
Finally, the fund could be set to benefit from lower interest rates. If rates were to come down, it would most likely be looking at less interest on its debt (debt’s used to fund solar farm projects).
Worth a look?
There are plenty of risks here, of course. Dividend risk is one. Recently, dividend coverage (the ratio of earnings to dividends) has been quite low, meaning that in the years ahead, there’s a chance of a lower-than-expected payout.
Share price risk is another. Recently, sentiment towards clean energy investments hasn’t been great and this may persist.
Interest rates are also worth mentioning. If they were to rise from here, it could put pressure on profitability and impact dividend payments. However, I like the story. I think this stock’s worth considering for income as part of a diversified portfolio.
The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro.
We think earning passive income has never been easier
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
Are you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment.
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.Read More
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.
Passive income has always appealed to me. Who wouldn’t want to build up a steady cash flow from solid dividend stocks while doing little more than checking their Stocks and Shares ISA from time to time?
Generating income of £2,000 a month, or £24,000 a year, won’t happen overnight. Under the 4% safe withdrawal rate (which states that your portfolio shouldn’t run dry even if you draw income for decades), it would take a hefty £600,000 to hit that income target.
If an investor upped their withdrawals to 7%, they’d earn more income but might have to dip into their pot from time to time. At that level, they’d need around £342,815 to reach their goal. That’s achievable with long-term discipline.
Digging for dividends
One way I try to reduce the size of the required pot is by focusing on high-yielding shares. Among the FTSE 100, one that stands out for income today is commercial property giant Land Securities Group (LSE: LAND), which has a trailing yield of just over 7%.
Landsec owns prime central London offices and big retail destinations across the UK. Lately, it’s had a tough run. The share price has fallen 10% over 12 months and 20% over three years.
The reasons are clear enough. High interest rates have made property less attractive, inflation has pushed up costs, and the work-from-home trend still squeezes office demand. None of these are easily fixed.
Tempting P/E ratio
In May, Landsec posted full-year EPRA earnings of £374m (after property and derivate revaluations, and profits and losses on disposals), just ahead of last year’s £371m. Occupancy reached a five-year high of 97.2%. The dividend rose just 2% to 40.4p a share. It clearly faces challenges, but now could be a tempting time to consider buying.
The stock trades on a modest price-to-earnings ratio of 11.5, which looks like reasonable value to me. If interest rates start falling and the UK economy picks up, that should help. Landsec is also making a push into residential property, which may provide more stable returns in future, although that’s no guaranteed win.
Landsec wouldn’t be my first income pick, but it could still play a role in a wider ISA income portfolio of 15 or more FTSE 100 stocks offering a mix of growth and dividends.
Dividends and growth
Of course, building up a six-figure portfolio won’t happen overnight. But it’s more achievable than it sounds with early and regular saving.
Someone starting at age 30 and investing £200 a month in a Stocks and Shares ISA could hit £354,992 by 65. That assumes 7% average annual returns, roughly in line with the FTSE 100 average. If they increased their contributions every year, in line with inflation, they should end up with a lot more, although that’s not guaranteed.
Pick the right stocks, reinvest the income and keep at it for decades. That’s my strategy. A reliable second income could be the reward — or even better, full financial independence. Either way, it all starts with a plan and a long-term approach. It’s hard to beat passive income.
Discover how to start building a long-term retirement income in a SIPP by investing intelligently in quality businesses to head towards financial freedom.
Posted by Zaven Boyrazian, CFA
Published 27 July,
Image source: Getty Images
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.
When it comes to investing for retirement, few investment vehicles come close to the power of a Self-Invested Personal Pension (SIPP). Not only does it eliminate the tax burden of capital gains and dividends, but the vehicle also provides tax relief that can supercharge the wealth-building process.
So let’s say someone’s aiming for a £3,000 retirement income to combine with the British State Pension. How much do they need to invest? Let’s explore.
Breaking down the numbers
Since this is a retirement portfolio, we’re going to follow the classic 4% withdrawal rule. That means every year an investor draws down 4% of the value of their investments to live on. And if the goal is £3,000 a month, or £36,000 a year, then a pension pot will need to be worth roughly £900,000.
It goes without saying that’s a pretty large chunk of change. But thanks to the power of a SIPP, in reaching this goal just £750 each month could take slightly over 25 years – perfect timing for someone who’s just turned 40.
Let’s say someone’s paying the Basic income tax rate. That means they’re eligible for 20% tax relief on all deposits made into a SIPP. Suddenly, a £750 monthly deposit is automatically topped up to £937.50, courtesy of the British government. And investing £937.50 at an 8% annualised return for just over 25 years translates into a pension portfolio worth £900,000.
What if 25 years is too long?
Sadly, not everyone has the luxury of a long time horizon. The good news is, stock picking offers a potential solution.
Instead of relying on passive index funds, investors can opt to own individual businesses directly. There’s no denying this strategy comes with increased risk and demands far more discipline. But it’s also how investors can stumble upon big winners like 4imprint Group (LSE:FOUR).
Over the last 15 years, the marketer of promotional merchandise has delivered a massive 1,685% total return, averaging 21.2% a year. And at this rate, the journey to £900k is cut to just 13.5 years.
Still an opportunity?
With its market-cap now just over £1bn, 4imprint’s days of delivering 21% annual returns are likely behind it. But that doesn’t mean it’s not capable of surpassing the market average of 8%.
The firm has established itself as a leader within the small business community, controlling an estimated 5% of the highly fragmented promotional market. And with a highly cash generative business model and practically debt-free balance sheet, the stock continues to garner a lot of favour with institutional investors. Five out of six of them currently rate the stock as a Buy or Outperform.
However there are, of course, risks to consider. Ongoing economic pressures and supply chain disruptions make an unfavourable operating environment. And it’s why the shares have actually fallen by 38% over the last 12 months.
This volatility perfectly highlights the group’s sensitivity to the economic landscape. And should unfavourable conditions persist longer than expected, order intake’s likely to suffer, keeping the stock on its current downward trajectory.
However, with a solid track record of navigating such market conditions, I think 4imprint might still be worth a closer look for long-term SIPP investors.
There’s no question that valuations are starting to look stretched in some parts of the stock market. But I don’t think that should deter investors from looking for shares to buy.
Valuations
Both the FTSE 100 and the S&P 500 are trading at some of their highest price-to-earnings (P/E) multiples in recent years. And that’s because share prices have gone up faster than profits.
That makes the equation less attractive for investors, but this certainly doesn’t mean a crash is imminent. And I don’t think it’s a good reason to stay away from the stock market entirely.
In general, the fact that a stock trades at an unusually low P/E multiple doesn’t mean it has to go up any time soon. It can take weeks, months, or even years.
Equally, there’s no rule that stocks trading at high multiples have to crash in the near future. Even at a P/S multiple of 120, it’s not illegal for Palantir shares to keep going up!
It’s nearly always the case in the stock market that there are shares that trade at relatively low prices but could be very rewarding long term. And I think there’s one name that’s hiding in plain sight at the moment.
Inefficiencies
Shares in Amazon (NASDAQ:AMZN) fell 8% after the firm released its earnings report for the second quarter of 2025. But revenues were up 13% and earnings per share increased by 33%.
The reason the stock fell was because the company’s forecast operating income for Q3 of between $15.5bn and $20.5bn is roughly in line with where it was in 2024.
One potential cause of this is the impact of US tariffs and this is a risk for investors to consider. But at $217, I think the valuation multiple means the stock’s well worth a closer look.
I find it hard to see that as anything other than a stock market inefficiency. And that’s without factoring in Amazon’s advertising business growing at 23% a year and AWS posting 17% growth.
Importantly, I also don’t see tariffs as a genuine threat to Amazon’s long-term competitive position. So I don’t think the stock should be trading at an unusually low P/E multiple.
Opportunities
The truth about the stock market is that there are always shares that are overvalued somewhere. I think that applies to quite a few right now, so it might be fair to say there’s a bubble forming.
Equally though, there are always shares that are undervalued. And the best thing for investors to do is keep looking for these, even when they might seem hard to find.
I have a lot of stocks on my watchlist where I think they’re in bubble territory. But Amazon’s one I’m looking at for my portfolio this month.
AI Is Driving Huge Profits, These Are Best Dividends up to 13%
Michael Foster, Investment Strategist Updated: July 31, 2025
By now you’ve no doubt heard the argument that AI is a bubble, and there’s no way Big Tech will make a significant profit from it, given the massive amounts of cash they’ve already piled in.
That take is just plain wrong—truth is, the tech giants are already booking profits from AI. And we closed-end fund (CEF) investors can grab our share at a discount—and at dividend rates running all the way up to 13%, too.
This next chart tells us straight-up why the “AI-is-unprofitable” theory is off the mark.
Look at the far left of this chart and you see that communication-services stocks led in profit growth in the second quarter of 2025.
Alphabet (GOOGL) and Meta Platforms (META) are both titans of that sector, and both have invested billions in AI. They’ve largely done it by buying chips and other hardware, as well as software, from IT firms like NVIDIA (NVDA).
That pop in communication-services earnings proves that these companies are profiting from AI. Similarly, the second-highest earnings gains in the chart above, in IT, confirms that AI actually does make money for Big Tech.
Tech-Focused CEFs Go on a Tear
When it comes to high-yielding, tech-focused CEFs, there are basically four tickers that income investors look to. Let’s check in on those now.
As you can see in the chart below, all four of these funds’ net asset values have been roaring higher, with the 12.3%-yielding BlackRock Science and Technology Term Trust (BSTZ), in green, leading by a small amount over the last three months. It’s followed closely by its sister fund, the 7.7%-yielding BlackRock Science and Technology Trust (BST), in purple.
The BlackRock Technology and Private Equity Term Trust (BTX), with its huge 13% yield (in blue), and the Columbia Seligman Premium Technology Growth Fund (STK), (in orange and paying 6%) bring up the rear.
Tech CEFs Rise Across the Board
The Best Tech CEFs Are Still Great Bargains
The interesting thing, however, is the fact that these funds still trade at discounts to net asset value (NAV). The best values are the three BlackRock funds (again in green, blue and purple):
Tech CEFs Get Cheaper, Led By BlackRock Funds
We’ve seen BSTZ’s discount remain basically where it was three months ago, despite its strong NAV return in that time, while BST’s discount has widened slightly, despite its strong performance.
The third BlackRock tech CEF, the BlackRock Technology and Private Equity Term Trust (BTX), has seen its discount narrow slightly (April was a great time to buy BTX). The Columbia Seligman Premium Technology Growth Fund (STK) is the priciest of our quartet, but context matters here, as its premium to NAV, which it has held for much of the last decade, suddenly disappeared.
Let’s stick with STK for a bit. Despite that fund’s smaller discount, is it still worth our time? I’d say yes, given the next chart. But there is a caveat that we’ll get into shortly.
STK Tracks the NASDAQ Higher, Pays a Bigger Dividend
Before we get to that, we see that STK, whose NAV (in purple above) has closely matched the NASDAQ 100 (whose benchmark index fund is shown in orange) over the last decade. That makes STK a good way to get tech exposure, plus the index’s diversification.
I mention that diversification because STK is tech-heavy, with core names like Microsoft (MSFT), NVIDIA and Apple (AAPL). But like the NASDAQ, it also branches out a bit, with holdings in companies like Visa (V) and Bloom Energy (BE), which focuses on products that help customers generate power on-site.
On the dividend side, STK’s 6% yield far outruns the NASDAQ’s 0.5%, and the CEF has also never cut its payouts. However, STK is contending with funds yielding a lot more—up to 13% in the case of the highest-paying BlackRock fund, BTX.
That’s the real reason for STK’s growing discount: Even though it was swept up in the tech rally, its lower payouts aren’t enough for many income investors, now that there’s more competition, plus dividends that nearly double STK’s 6% yield, among tech CEFs.
This is why the bigger discounts offered by the BlackRock funds are the better deals here, and why STK’s discount isn’t yet big enough to warrant our attention.
These Tech CEFs Are Just the Start. Here Are the Real AI “Dividend Winners”
We’re still in the early stages of AI’s stunning growth. As this breakthrough tech embeds itself across the economy, it’ll drive massive productivity gains—fattening the profits of AI providers and AI users alike.
Return to the Office? Try Revenge of the Office. This Surging Divvie Loves It.
Brett Owens, Chief Investment Strategist Updated: July 29, 2025
I have to laugh when I hear the phrase “return to the office.”
I mean, COVID started more than five years ago. With the turnover in Corporate America since then, we can hardly call what’s happening now a “return.”
Most of those “returning” aren’t even the same people!
Nonetheless, the, shall we say, revenge, of the office is real. My wife and I saw it firsthand when we went to an open house here in Sacramento a few months ago. Staring into the front room, labeled “home office,” my wife said, “Programmer.”
“They’re hoping for a rentback,” said the realtor. “The couple has to move out of town for work.” Back to the Bay Area for these two!
They’re far from alone. Major cities—Boston, New York, San Francisco—are shaking off five years of downtown rust, preparing for commuters back four or more days a week.
Funny thing is, many companies issuing back-to-office mandates these days don’t have space for these workers, after shedding leases in 2021. Pinterest (PINS), you may recall, canceled a lease for nearly 490,000 square feet of future office space back then. Meta Platforms (META) walked away from 200,000 square feet in New York.
Nowadays, freshly “returned” workers are elbowing each other out of lousy temporary desks! That means we’re going to be looking at a “reverse 2021” shortly, as companies hunt for more space. And I’ve got a complete strategy for us to play it—and grab some high, and growing payouts, as we do.
“Revenge” of the Office Will Long Outlast Work-From-Home
According to Placer.ai’s Office Index, June was the fourth-best month for in-office visits since COVID. (Placer specializes in foot-traffic data for offices, stores and the like.)
That might make it sound like we’re too late here. But the gap between now and the “old times” is still wide, with office visits down about 27% compared to June 2019.
A shifting trend with at least a 27% runway still ahead? That has our attention.
So how do we tap into it? Here’s my take on two popular office landlords. One is the wrong way to play the shift; another could work as a speculative pickup. Finally, we’ll dive into our very best play on this trend, which isn’t an office REIT at all.
Sell This “Revenge of the Office” Stock Yesterday
Let’s start with one REIT we’re not going to buy: Easterly Government Properties REIT (DEA).
Back in the “old days,” having a portfolio of mainly government tenants was a plus—Uncle Sam, of course, always paid the rent! But now, a government focused REIT is the opposite of conservative. Uncle Sam has been on a spending bender and has a $2-trillion deficit to tame. That adds risk.
Don’t be pulled in by its 7.7% dividend. DEA’s $1.6-billion of long-term debt eclipses its market cap (or value as a public company) by a lot—about $600 million. And it’s been rising.
DEA Groans Under Heavy Debt Load
DEA also executed a 1 for 2.5 reverse stock split on April 28. This is usually done to reduce its share count and give the impression of a higher share price—not a good look. Neither is the 32% dividend cut the REIT announced earlier in the month. Management still has a lot of work ahead to turn things around, and we don’t need to be here for it.
This NYC Office Landlord Has Appeal—and Risk, Too
Next up is SL Green Realty (SLG), with interests in 53 buildings, or around 31 million square feet, in New York City. SLG yields 5.1% dividend, and that payout is well-covered, at 53% of the midpoint of management’s forecast funds from operations (FFO—the best metric of REIT profitability) for 2025.
In fact, with that low of a ratio (for a REIT—ratios of 80%+ are common in the sector, and safe, thanks to steady rent checks), I’d expect SLG to do more on the payout front. But it’s been holding off for a good reason: Management has been cutting long-term debt, from about $5.5 billion five years ago to around $3.7 billion today.
That’s smart, as interest rates remain elevated. But I’m concerned about the company’s focus on New York, where office visits are only 5.3% below 2019, according to Placer’s June numbers. Moreover, SLG’s occupancy rate is a bit lower than I’d like to see, at around 91%, as of June 2025.
All of this suggests SL’s growth potential may be close to a top. But that’s not the case with the REIT I favor most as a play on “revenge of the office.”
Our Top “Revenge of the Office” Play Isn’t an Office Owner at All
There’s a chance the couple whose open house I attended are headed back to the Bay Area—and renting an apartment there from Equity Residential (EQR).
The REIT yields 4.1% and has interests in nearly 85,000 units in major markets like Boston, New York, Washington, DC, and, on the West Coast, Seattle, San Francisco and Southern California.
Regarding those last three markets, I know there’s been a lot of talk about AI replacing humans in Big Tech, and that trend will continue. But it’ll still take years to play out.
Meantime, Big Tech still employs more people than it did five years ago. Consider Meta, which had 58,604 workers back in 2020. As of March 31, that number stood at 76,834. And even if headcounts just held steady, demands for more in-office time alone will bring more workers back to these areas. Meta, for the record, requires three days a week, while Salesforce (CRM) now requires three days at minimum, with some teams back in their cubicles four and five days.
Continued jobs growth supports EQR’s cash flow—and dividend, which has returned to growth after staying flat during the pandemic years. That’s notable, as management has been raising the payout straight through the current higher-rate period, which has been tough on REITs.
EQR’s Dividend Springs Back to Life
To be sure, EQR’s dividend yield is a bit low for us. But it has room to keep growing, with the current yearly amount at 70% of the midpoint of management’s forecast 2025 FFO—again, low for a REIT.
What’s more, EQR is seeing rental rates rise, with the expectation of what it calls “blended rates” rising around 2% to 3% this year. Occupancy is also high: 96.2% as of the end of Q2.
What’s more, the REIT stands to gain as interest rates move lower over time, cutting its borrowing costs. That’s a big plus—and management is already doing a solid job on the debt front, reducing long-term borrowings sharply in the last decade. The current level of $7.85 billion is just 31% of EQR’s market cap, or its value as a public company. That’s a very light debt load for a REIT.
Management Tackles Debt, Leaving More Room for Divs, Expansion
Finally, we love the fact that EQR is smartly culling older buildings from its portfolio and using the proceeds to snap up newer ones. That, of course, boosts its portfolio value and attractiveness to tenants while going easy on its balance sheet.
In the second quarter, the REIT sold off some of its older properties on the coasts and used the cash to pick up 2,064 units in fast-growing Atlanta. Management sees these new additions contributing to FFO in about two years.
Tech workers, after all, love their modern conveniences. EQR’s newer units give them just that—a small consolation, perhaps, for being herded back to the 9-to-5 grind.
