Is It Becoming A Great Time For Income Investors? | Steven Bavaria

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Steven Bavaria (1:00)

There's been so much, I'd call it investor almost panic about credit in some of these areas, that they've driven discounts very high. So it is a good time to do it.

Adam Taggart (1:20)

Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. Very excited to sit down to have a conversation today all about income investing. And we're going to have it with Steven Bavaria, who returns to the program. Steven is the founder of the Income Factory, which is basically a framework in an investing platform to help investors get equity-like returns but using the safety of credit and credit-like instruments.

Steven builds a lower-risk portfolio of income-generating assets that include high-dividend stocks, senior bonds, high-yield bonds, covered call funds, master-limited partnerships, closed-end funds, BDCs, and more. I look forward to talking all about it with you today. Steven, thanks so much for joining us.

Steven Bavaria (2:04)

Thank you, Adam. It's a pleasure to be here again.

Adam Taggart (2:07)

Thank you. And it's nice to talk to you from your base there in Florida this time of year without having a hurricane barrel down on you. I think the past couple of falls we've had you on, you've been under Hurricane Watch.

Steven Bavaria (2:18)

Yeah, cross your fingers. We're still early in the season, but anything can happen. We're lucky. I'm up near Jacksonville, which is, we're kind of sheltered a bit from most of the hurricanes. They either have to cross Florida, which slows them down from the west, or they're out further out in the Atlantic here. So cross your fingers.

Adam Taggart (2:36)

Fingers crossed. And I think I read an article last week that said it was like the, one of the first weeks and forever of this time of year, where there were no storms forming in the Atlantic. So hopefully this remains a low incident hurricane season for you. But all right, Steven, I've been really looking forward to talk to you because you're all about income investing. And income investing generally depends upon the yields that the underlying instruments are paying investors to own them. And as anybody watching the bond market this year has seen is that yields have kept going up. So my question for you is how has rising yields impacted the income factory strategy? Has it been a boon or is there a cost as well? As rates go up, bond prices come down. Has it been more or less net favorable or net negative for your income factory strategy?

Steven Bavaria (3:31)

For the long term, for those of us that are in it for the long term, using an income factory strategy to build our own pensions over time or if we're closer to retirement, but we're still building them and we're thinking about using them or in part.

It probably is an advantage for us to have interest rates rise over time. But in the short term, if you were a short term trader, let's say in the assets that I tend to own, which you mentioned earlier, short term, the prices will go down. But longer term, the base on which your income is determined is rising. I'll get into the little details of why that is. But when interest rates go up, your reinvestment rate, when whatever you're holding, pays off. Because when interest rates go up, whether you're holding a three month bill or a 30 year bond, the immediate market price of that decreases. Because the same bond or bill, if it were being reissued that moment after interest rates went up, would have a higher yield. So since yours has a slightly lower yield, then yours will be worth less until its maturity. However, when it matures, which might be three months, when its interest rate changes is what I should say, then the rate on your instrument will reprice to the new yield and the value of it priced in the current market will then jump up to whatever a new asset would be worth. What this means is for our kind of stuff, which would be loans, senior loans and BDCs, which are just companies that make senior floating rate loans, that those all reprice immediately when you've got changes in interest rates because they reprice every month or every three months. So you don't have any interest rate risk, any real duration risk with loans and BDCs, anything that does floating rate debt. So it will reprice constantly. So you won't see the immediate price of it go down and you won't see your income from it go down or be lower than the market price going forward. Now, longer term stuff like we do high-yield bonds, which typically high-yield bonds are maybe five to eight years in term.