Ep. 138: Crash-Tested Income — Yields That Last vs. Yields That Only Look Like Income

Imagine buying a stock that pays you a massive 40% dividend yield and then you check your brokerage
account a year later and realize you've actually lost money.
Yeah, you see that double digit yield and your brain immediately starts calculating how quickly
you can quit your job. You just dive in and honestly, it happens every single day to well-meaning
investors. So today, we are tearing into the absolute truth about what we're calling crash-tested income.
Because we really have to stop looking at yield as this single uniform concept, the mechanics behind
a payout dictate absolutely everything. Yeah, exactly. When you pull back the curtain on how a fund
or a company is generating that cash, you immediately see whether it's building sustainable wealth for you
or if it's just a highly engineered temporary illusion designed to attract your capital.
So I want to ask you, the listener, a very direct question to keep in the back of your mind as we go
through this deep dive. It's an important one. Right. When you see a massive dividend yield,
how do you know if it represents durable, real cash being generated by a profitable business
or if it's just your own money being handed back to you in disguise? Well, we are going to start by
exposing those manufactured yields that deliberately mask underlying price erosion. The dangerous one.
Exactly. Then we are going to look at the exact opposite, the battle-tested dividends that survived
and even grew through the ultimate financial stress tests of 2008 and 2020, which is wild to think
about. It is. And finally, we are going to run the practical real dollar math of where to actually
hold these assets. Because if you get the tax location wrong, the IRS is just going to eat tens of
thousands of dollars of your profits anyway. Okay. Let's unpack this starting with those manufactured
yields. High yield crypto and covered call ETFs are literally everywhere right now. Oh, they are
inescapable. Right. Take the NIO's Bitcoin high income ETF ticker of BTCI. It boasts a trailing
distribution yield of around 33%, which it claims to generate off Bitcoin, which is fascinating because
because Bitcoin fundamentally pays no interest. Right. It doesn't generate cash flow like a business
or a bond. Right. So isn't this like ordering a massive expensive pizza? But the delivery guy is just
I don't know, slicing up a frozen pizza you already had in your own freezer and charging you a premium
to hand it to you. That is exactly what it's like. You are paying a premium for a delivery guy
to hand you your own pizza. Let's look under the hood at the mechanics to see why that is. Yeah,
how does it actually work? So BTCI doesn't harvest a natural yield because well, there is no natural yield
to harvest. It manufactures one. The fun holds about 19% of its assets in direct Bitcoin exchange
traded products like Ibit or HODL. Okay. And they also hold synthetic long positions. So for you,
the listener, a synthetic long just means they are using options contracts to mimic owning the
asset without actually buying it all a front. But the vast majority of the fund about 56% is simply
heavily collateralized by treasury bills. And they take this complicated structure and sell call
options against it to generate premium. So the yield is coming entirely from the options market,
not from Bitcoin itself. Exactly. And that leads to a terrifying discrepancy in the numbers. BTCI
advertises a distribution rate of roughly 26.7%. But if you look at their 30-day SEC yield,
it sits at just 1.62%. Wait, 1.62. That's a massive gap. It's huge. The SEC yield is the standardized
regulatory measure of actual income generated. So things like real dividends and interest over a 30-day
period. Okay. The reason it's only 1.62% is that most of BTCI's massive payout is just option premium
in return of capital. And when a fund returns your capital, it is literally handing you your own
money back. So you're just paying yourself? Right. Mathematically, that reduces the net asset value or
the share price of your investment. Which perfectly explains the performance numbers we are seeing.
Like the total return for BTCI was negative 6.68% as of July 31st. Yep. It only turned positive,
hitting around a 12% total return. After August is massive 25%, Bitcoin rally bailed it out.
It needed a massive rally just to break even. Exactly. Meanwhile, the actual share price of the ETF
itself is down about 34%. The underlying value is just grinding down to zero. It's a slow drain.
Let me paint a picture of how this math works against you. If you put $10,000 into a fund yielding 40%,
you think, oh great, I'm making $4,000 a year. Right, feels good. But if the share price drops 45%,
your underlying principle is now worth $5,500. So even with that fat dividend payment,
you are poorer than when you started. And to make it worse, you are paying an exorbitant fee for
the privilege of losing money. BTCI charges a 0.99% expense ratio. Almost a full percent.
Yeah. If you just bought a spot bitcoin ETF like BlackRock's Ibit, you'd pay 0.25%. Actually, BlackRock
just entered this specific covered call category, too, with a fund called BTI. Yeah, they charge a
lower 0.65% fee and they structure it to keep at least 70% of the upside. So there's some competition.
There is also a peer ETF, YBTC yielding an incredible 69%. 69%. That's absurd. It is. But because
of how it harvests those options, it has fallen even harder than BTCI. Wow. It's just a brutal trade-off.
I mean, you get a dopamine hit of real monthly cash, but you cap your upside and watch your
principle erode. Exactly. And this is bleeding over into traditional markets, too, specifically with QQQ
rep. Like the QQQ tracks the NASDAQ 100. It had roughly 100% gains over the last five years,
but it pays a tiny 0.4% yield. Right, practically nothing. So because people are just desperate for
income, investors flocked to covered call versions of the same index. You see this everywhere now.
There's QQQI offering a 14% yield. There is TDAQ, which uses zero days to expiration call.
Oh, those are risky. Very. It means they are trading options contracts that expire the exact same day,
which is highly volatile. And that's also yielding around 14%. Wow. You have JEPQ at 11%,
IQQQ at 6%, JPIQ around 10%. Then you step into the absolute danger zone. I want a zero in on a
ticker called QDTE. Oh, yeah. It advertises a staggering 44% headline yield. Right. But again,
you see massive price erosion over time. Right. If an ETF pays you 44% yield, but the share price
collapses, you have lost money. A huge yield needs a huge warning label. Absolutely.
Covered calls inherently cap your upside and bull markets, because you are literally selling
away the right to future gains above a certain price. Yeal simply does not equal total return.
That is the perfect summary of the manufactured yield trap. You are sacrificing long-term wealth
for short-term cash flow. So if those massive yields are just mirages that eat away at your principle,
what does an actual bulletproof yield look like? Where do we find companies paying real cash?
Well, to find bulletproof yields, you have to look for the ultimate financial apocalypse.
Okay. In modern history, those were the 2008 great financial crisis and the 2020 pandemic crash.
In 2008, the sky was falling, banks were collapsing, credit froze overnight, and the financial sector
was absolutely desivated. Remember bankruptcy, slash payouts, government bailouts everywhere.
Exactly. Blood in the streets for any company remotely tied to finance. Right.
Which is why we need to talk about four standout financial companies. Yeah. What's fascinating here
is that while their peers were begging the government for survival money, these four companies looked
at their balance sheets and actually paid a higher regular dividend in 2008 than they did in 2007.
That's incredible. And they did it again in 2020. Let's look at T-RO price, ticker T-R-O-W.
In the middle of the 2008 collapse, they raised their payout from 24 cents to 25 cents. Wow.
And across the 2020 pandemic window, they raised it from 90 cents to a dollar and eight cents.
And how are they doing that when everyone else is failing? Because they operate with zero debt.
They have a pristine balance sheet managing $1.89 trillion in assets.
Zero debt going into a credit crisis is like the ultimate armor. Exactly.
Then you have Cincinnati financial ticker CINF. They offer 2.1 percent yield paying 94 cents quarterly.
And they have maintained unbroken dividend increases since 1999. That's a long time.
Through the dot-com bus, the housing crash, the pandemic, they just kept raising the payout.
Next is area indemnity ticker eerie. They have a 2.2 percent yield and maintained raises
through both crises. Okay. But what stands out for them is a massive 24.8 percent return on equity
or ROE. For you, the listener, ROE just measures how efficiently a company uses the shareholders
money it already has to generate profit. Almost 25 percent is incredibly efficient. Very.
And finally, there is RLI corp ticker RLI. They have a modest 1.03 percent regular yield,
but they are famous for paying massive special dividends. Right. I've seen that.
And this is backed by an 85.6 percent combined ratio in the second quarter of 2026.
Let's explain that combined ratio for a second, because I think it's the secret to their cash flow.
Yeah, the combined ratio is pure insurance math. An 85.6 percent combined ratio
means that for every dollar RLI takes in as insurance premiums, they're only paying out about
86 cents in claims and business expenses. Okay. So they keep the rest. Right. That 14 cent difference
on every single dollar is pure reliable profit. It gives them a massive buffer when the broader
economy tanks. Got it. Now it's one thing for an insurance company or an asset manager to survive a
crash. But what about businesses that rely on people actually paying physical rent? Ah yeah. Because
in 2008 and 2020, the real estate market basically froze. Tenants stopped paying, malls closed,
office buildings just emptied out. Yet there are four real estate investment trusts or REITs that
grew their dividends while their competitors were just slashing them to the bone. Real estate is
the perfect proving ground for this because it requires massive capital and constant cash flow.
Right. Look at real-t income ticker O. They offer a 5.23 percent yield they pay monthly and they
navigated those crashes to currently boast a 98.8 percent occupancy rate. That's almost fully
leased out. Yeah. Or federal real-t ticker FRT. They have a 3.87 percent yield and a 59-year
streak of annual dividend increases. 59 years. Yeah. That is a half century of raising payouts,
which is just unmatched in the entire REIT sector. Wow. Then you have NNREET ticker NNN. They offer a
5.29 percent yield and a very conservative 67 percent payout ratio based on their adjusted
funds from operations. Which is key. Right. Let's translate that. Adjusted funds from operations or
AFFO is like the most important metric for real estate. It measures the actual cash left over after
a company pays to maintain its buildings, fixing roofs, paving parking lots. Right. The real expenses.
Yeah. Gets their all the accounting noise. So paying out only 67 percent of that real cash means
they have a massive safety net. And we have to highlight WP carry ticker WPC. They offer a 5.26
percent yield, but here is the most crucial mechanism for them. Nearly half 47.8 percent actually
of their annualized base rent is tied to CPI escalators. Oh, that's huge. So for you, the listener,
this means if inflation spikes in your groceries get way more expensive, WP carry or as rent revenue
automatically goes up to match it. Exactly. It is a contractual built-in inflation hedge that
protects your purchasing power over time. Growing a dividend through a generational crisis isn't just
a nice perk for shareholders. It is a verified undeniable signal of underlying tenant quality,
conservative debt management and operational strength. It proves it. Yeah. A company simply cannot
fake a cash dividend raised during a liquidity crunch. It proves their cash flow is real. Okay. So
steady razors with moderate yields are great. But I have to ask the greedy question. That's
here. Is it ever possible to get a fat headline yield that isn't secretly destroying your capital?
But can you get a high yield that is actually durable? It is rare, but it does exist.
Altria ticker mo is the prime example of a high yield anomaly backed by true free cash flow.
Altria is a dividend king, meaning they have over 50 consecutive years of dividend increases.
And right now the stock yields around 6.3%. We have to play devil's advocate here.
Isn't smoking a famously dying industry? It is. I mean, smokeable volumes were down about 4.5%
just last quarter. Their five-year revenue compound annual growth rate is basically flat
at 0.68%. Right. They're selling fewer cigarettes every single year. So how on earth are they paying out
a 6.3% yield without going completely bankrupt? Well, if we connect this to the bigger picture,
you have to look under the hood at the mechanism of pricing power. Altria has masterfully expanded
its gross margins over the last decade. How so? In 2015, their gross margin was roughly 59%. Fast
forward to 2025 and that margin has expanded to over 72%. Because nicotine is highly addictive,
their core consumer demand is incredibly inelastic. Oh wow, meaning they just hiked the price
of a packet cigarettes by a few cents every year and the core customer just absorbs that cost.
Exactly. They are selling fewer physical units, yes, but they are making significantly more
pure profit on every single unit they do sell. That makes sense. This pricing power completely
offsets the volume decline and the dividend is fully covered by free cash flow. In fact,
management explicitly targets paying out 80% of their free cash flow to shareholders.
Okay, that's a clear target. Because they reinvest so little capital into maintaining this legacy
business, their return on invested capital has been over 30% for four straight years.
But what about their debt? Because a declining business with heavy debt is usually a ticking time
bomb. You'd think so, but their balance sheet is surprisingly solid. Their net debt to EBITDA ratio
is 1.9 times. Let me just clarify. EBITDA stands for earnings before interest, taxes, depreciation
and amortization, right? Yes. It's a quick way to look at the raw earnings engine of the business
before the accountants get involved. Exactly. And a ratio of 1.9 means they could pay off all
their debt in under two years of raw earnings. It actually beats their own internal safety target
of 2.0 times. Wow. They're even guiding for adjusted earnings per share in fiscal year 2026
to grow to between $5.61 and $5.72. As for valuation, the acceptable buy range is around $67,
which is close to its current price, with a blended fair value around $75. So there's a decent
margin of safety there. Yes, there is. But we have to be clear with the listener, this is absolutely
not a set and forget stock. Elicit vaping is a massive, accelerating risk that is eating into
traditional cigarette volumes way faster than anticipated. It's a huge threat.
Yeah, if Altria's pricing power ever hits a ceiling with a consumer refuses to pay more,
that 72% margin will crack and the dividend will be in danger. You just have to monitor the volume
declines constantly. It requires vigilance for sure, but it proves that a high yield can be
real if the underlying cash mechanics support it. Right. So we have growth engines. We have high
income anomalies like Altria. We have value companies surviving crashes. How do we actually assemble
this puzzle? That's a built challenge. And crucially, where do we hide these assets from the tax man?
Okay. If we look at how to actually build this, there is a fascinating two-fund strategy we need
to talk about that anchors of portfolio by balancing growth and income. First, there is CGDV,
the capital group dividend value ETF. Okay. It only yields about 1.6%. Wait, so it's not a yield
play at all? No, not at all. It is the growth engine that focuses on dividend growth,
averaging about 10% payout growth per year. That's solid. Yeah, it manages $40 billion in assets,
and it's heavily tilted toward AI infrastructure industrials, but with enough defensive stocks to
protect your downside. You pair that growth engine with an income overlay. RSPA, the Invesco S&P 500
equal weight income advantage ETF. And what is that yield? RSPA yields roughly 9 to 9.5%, and has a very
low 0.29% expense ratio. 9%. How does RSPA generate a 9% yield off the S&P 500? It uses an equal weight
S&P 500 strategy combined with an equity linked note or ELN overlay. Okay, and for the listener,
what exactly is an ELN? An ELN is essentially a customized contract, the fun signs with a major
bank to generate yield. It's similar to a covered call, but packaged differently to optimize taxes
in performance. Here is where it gets really interesting, because the math looks incredibly tempting.
A 60-40 combination of CGDV and RSPA claims a compound annual growth rate of over 21% since
inception. Which sounds amazing. Right. It even matched GPI's 10% drawdown during the April 2025
sell-off, which beat the broader S&P's 15% drop. Yes, but we have to call it a massive catch here. RSPA
has a lifespan of less than 14 months. This is a tiny, highly rally-dependent sample size.
You absolutely cannot project a 21% annual growth rate forward based on 14 months of a
roaring bull market. Right. But assuming you construct a sensible, diversified portfolio,
we have to pivot to asset location because it is not just what you hold, it is where you hold it.
Yeah, the US tax code treats different types of dividends very different. Exactly. Let's walk
through the S&H D versus main comparison to illustrate this because the real dollar math here is
jarring. I want to run the real dollar math on this for you, the listener, because it's so important.
Let's do it. Let's take S&H D, the Schwab US dividend equity ETF. It yields about 3%, but it pays
what the IRS calls qualified dividends. Okay. These are taxed at very favorable long-term capital gains
rates, either 0, 15 or 20%, depending on your overall income. Because it is highly tax-efficient,
S&H D belongs in a standard taxable brokerage account. That makes sense. On the other hand, you have a
stock like Maine, Main Street Capital, Maine is a business development company or BDC. By law, BDCs
must distribute roughly 90% of their taxable income to shareholders to maintain their special tax status.
They yield a fat 7% to 8%, but they pay ordinary income. That gets taxed at your highest marginal income
tax rate. So Maine belongs in a Roth IRA, where it can grow and pay out completely tax-free. Let's
run the numbers. Let's say you generate $60,000 in dividend income and you sit in the 22% tax bracket.
Holding Maine in a taxable account costs you roughly $13,200 in federal taxes every year, but holding
S&H D in that same taxable account only costs you about $9,000. And as your career advances and your
income scales, the punishment for ignoring asset location gets significantly worse. If you hit the 32%
tax bracket and generate $100,000 in dividend income, holding Maine in a taxable account
surrenders approximately $32,000 to the IRS. That hurts. Holding S&H D because of that 15% qualified
rate for most earners only costs you $15,000. You are throwing away $17,000 a year just by holding
the exact wrong asset in the exact wrong account. Asset location is quite literally a free lunch,
it takes 10 minutes to set up correctly. And it saves you tens of thousands of dollars over an
investing lifetime. But optimizing the tax math is completely useless. If the market drops 20%,
you panic. You sell everything at the bottom, which leads us perfectly into the final and maybe most
important piece of this deep dive. The patient's layer. We have to bring in the philosophy of Tom
Roberts here. The core belief is that building generational wealth is not about finding some magical
rare 10x 10-bagra stock that moons overnight. Right, it's not a lottery ticket. No, it is about
doing a few sensible boring things consistently for a very long time. We always hear about Warren
Buffett's extreme portfolio concentration. That works for Buffett because he has a structural
informational edge and massive capital. For everyday people with day jobs, commutes and families,
low-cost ETFs, broad diversification and time are the actual path to wealth. Let me translate this
directly to you. You need to ask yourself one question. What strategy can I confidently follow
for the next 20 years? Not. What stock is hot on social media today? Exactly. You have to set
your strategy before crash happens. Decide your asset allocation now and automate your fixed monthly
contributions. Automation is key. Yeah. When you automate the deposit, you remove the emotion.
You don't have to decide whether to buy on a terrifying red day in the market. The system just
automatically buys the dip for you. Roberts points out a fascinating mathematical
reality about patients too. Early on in your investing journey, the sheer size of your portfolio
matters infinitely more than your yield. How so? If you have a 10,000 euro portfolio yielding
3%, that is only 300 euros a year. Is that helpful? Yes. Is it going to change your life or let you
retire? No. Early in your journey, your consistency and your savings rate will fundamentally beat the
size of any single contribution or any risky yield chasing strategy. So what does this all mean?
Tom Roberts defines financial freedom brilliantly. He says it just means money isn't the
thing deciding what you can do with your life. I love that. You don't need a million dollar yield
tomorrow. Start exactly where you are. Invest what you can comfortably afford. Keep learning. And
above all, give yourself the time to let compounding do the heavy lifting. Time in the market,
buying quality assets will always be trying to time the market. To quickly recap our journey today,
we started by dodging those manufactured yields like BTCI and QDTE to just use options to eat your
principle and hand it back you. We did. We found the verified crash tested dividend raisers,
the financials like T-Roll price and reads like WP carry that actually increased payouts
straight through the terrors of 2008 and 2020. We looked at how to optimize your tax locations
to literally save yourself tens of thousands of dollars over a lifetime. And finally, we locked in the
long term patient mindset required to actually execute this map. And I want to leave you with a
final provocative thought to help you evaluate your own holdings. Go for it. Look at your own portfolio
today. If the stock market closed for the next five years and every single dividend yield was suddenly
cut to zero tomorrow, which of those underlying businesses or assets would you still be perfectly
happy holding? That is the ultimate filter. Are you buying a durable crash tested business?
Or are you just buying a mirage of yield? A frozen pizza you already paid for.
Thank you for joining us on this deep dive. Keep asking the hard questions about your money,
stay patient, and we'll see you next time.