Ep. 72: Senior Housing REITs, Hidden Value Stocks & NASDAQ Income ETF Showdown

What do end-of-life hospice care and emergency plumbing have in common?
On the surface. Absolutely nothing.
Right. Literally nothing. But in the world of dividend investing,
they actually combine to form like one of the most recession-proof
cash printing machines on the entire market.
It is incredibly fascinating.
It really is. So welcome to another deep dive.
Today we are tearing down how people build their income portfolios.
Yeah, we're really unpacking the wild, incredibly varied landscape
of dividend investing today.
Exactly. Our mission for this deep dive is to basically build a hypothetical portfolio
for you, the listener. We're starting from a solid, boring foundation,
then we're going to move into these massive demographic macro trends.
With those stuff.
Yeah, exactly. Exploring some truly Darwinian stockpicking,
and then finishing at the absolute bleeding edge of high yield financial engineering.
But before we pour that first foundational layer,
I do need to establish that everything we discuss in this deep dive is strictly educational.
Right. Good point.
We are just analyzing strategies, exploring the mechanics of how these
financial instruments actually work. This is not financial advice.
Disclaimer noted. So let's start with the foundation.
We are looking at what is basically the heavyweight
championship of U.S. dividend ETF.
Oh yeah, the big two.
Right. On one side, you've got Vanguard's high dividend yield ETF ticker VYM.
And on the other side, Schwab's U.S. dividend equity ETF ticker SCHD.
SCHD? Yeah.
The sheer scale of VYM is just staggering.
I mean, it holds 608 stocks generating a dividend yield of, I think it's 2.24%
with an expense ratio of just 0.04%.
Which is practically free.
Exactly. But then SCHD takes this completely different approach.
It concentrates way down to just 103 stocks, giving you a significantly higher yield
at 3.29%.
Right. And with a similarly tiny expense ratio, I think it's 0.06%.
Yeah, 0.06.
Okay, let's unpack this.
I kind of look at it like, oh, VYM is this massive.
All you can eat buffet.
It's safe. You get a little bit of everything.
Right. Whereas SCHD is more like a specialty steakhouse.
It's a richer yield, but way more concentrated.
That's a great way to put it.
What's fascinating here is that the mechanical difference between those two
approaches is really what drives their performance.
How so?
Well, VYM is casting this massive net across the entire market, right?
It captures almost any company that pays a reasonably high dividend.
Okay.
And because it's market cap weighted as these massive tech and financial companies grow,
they just completely dominate the fund.
Oh, right. Because their market cap just balloons.
Exactly. It's largest holding right now is Broadcom,
which is sitting at over 8% of the entire portfolio.
Wow.
Yeah. SCHD, conversely, it acts more like a bouncer at a club.
A bouncer.
Yeah. It uses these super strict fundamental screening methodologies.
Like it requires 10 consecutive years of dividend payments.
Wow. 10 years.
Right.
And it screens for free cash flow to total debt.
And it demands a really high return on equity.
So that screening process fundamentally changes the DNA of the ETF?
Entirely. By demanding all those historic value metrics,
SCHD naturally just kicks out a lot of those high-flying tech stocks.
Makes sense.
And it leans heavily into defensive sectors, you know,
consumer staples, healthcare, energy.
Its top holding is actually Qualcomm.
But here is the friction point.
I was looking at the charts.
And over the last year, VYM has absolutely crushed
SCHD on total return.
It really has.
Like, VYM is up roughly 29.5% while SCHD is trailing around 17.8%.
So if I'm an investor looking at those numbers,
why should I even care about SCHD's extra 1% in yield
when VYM is delivering almost 30% in total growth?
Well, you really have to look at the market environment
that generated that 30% return.
VYM caught the tailwind of this enormous tech and financials rally.
Because of Broadcom and stuff?
Exactly. Broadcom has been on an absolute tear.
Essentially pulling the rest of VYM's massive 608 stock portfolio
right up the mountain with it.
OK, I see.
SCHD's defensive posture in consumer staples and healthcare means
it inherently lags during those aggressive bull markets.
Trish but.
Yes.
But those defensive sectors are the shock absorbers
when the market panics.
Oh, right.
Because people might stop buying like new iPhones during a recession
but they definitely don't stop buying toothpaste.
Exactly.
Toothpaste, electricity, blood pressure medication.
They serve completely different roles for you.
So the choice between them really comes down to the time line
of when you actually need the cash?
Yes, exactly.
If you're building a portfolio for 10 years from now,
VYM gives you that broader market participation
and stronger capital appreciation.
But if I'm a say stepping away from my job tomorrow?
Right.
If you need cash load to pay your mortgage next month,
SCHD's concentration in those defensive cash cows
provides a much thicker layer of psychological armor.
Psychological armor, I like that.
Okay, so speaking of armor and safety,
let's pivot to real estate.
Yeah, because while ETF spreads your risk
across hundreds of companies,
there are times when broad diversification
actually dilutes a massive macroeconomic tailwind.
Right.
Like sometimes you see a tidal wave forming
and you want to paddle directly into it.
Exactly.
And the most undeniable demographic wave
in the world right now is the baby boomer generation
aging into assisted living in senior care.
The silver tsunami.
I mean, it's not a forecast, right?
It's literally a biological certainty.
Exactly.
And looking at the data on this,
there are two giant real estate investment trusts
or REITs positioned to capture this demand.
Well-tower, ticker, well, and Ventus, ticker VTR.
And if you just glance at their top line operating metrics,
they seem almost identical.
They really do.
Both are boasting portfolio occupancy near,
I think, 88.8%.
Yeah, 88.8, which is a massive year over your jump.
Huge.
And both are seeing incredible net operating income
or NOI growth.
Well-tower sitting at 22% growth,
Ventus is over 15%.
So the demand is just flooding in for both of them?
Top line demand is identical.
But the way their balance sheets are engineered
to actually handle that demand,
it reveals a staggering divergence.
Okay, let's get into the plumbing here.
What's the difference?
The critical metric here is net debt to EBITDA.
Well-tower maintains an incredibly healthy 2.73X ratio.
And that's paired with an A-credit rating.
So in plain English, their debt burden is light enough
that the cash they generate from their properties
completely covers their expansion.
Oh, wow.
I read they recently paid off like $700 million in debt.
They did.
And they simultaneously raised their dividend
by 10.4% bringing it to $2.96 annualized.
That's incredible.
So they are essentially self-funding their own empire.
Exactly.
But then you look at Ventus
and they're operating in a completely different reality.
Right. They're like that homeowner
who took out a massive adjustable rate mortgage
just to build an addition on their house.
That is the perfect analogy.
The addition is bringing in a rent, sure.
But their net debt to EBITDA is 5.0X.
Whoa.
So almost double the leverage of well-tower.
Double.
And their credit rating is a notch lower at BBB+.
Now interest rates have spiked
and they have an $862 million note coming
due in June, 2026.
Ouch.
And I'm guessing they don't have
the internal cash flow to comfortably cover
that kind of refinancing in a high rate environment.
Not at all.
To continue growing and to manage that debt profile,
Ventus is basically forced into equity delude of maneuvers.
Meaning they're issuing new shares.
Exactly.
They're pursuing $2.5 billion in equity-funded acquisitions.
So they issue new shares to pay for their growth,
which inherently slices the ownership pie
into thinner pieces for you,
the existing shareholder.
It delutes the value of the stock you already hold.
Yes.
And furthermore, they're weighed down by struggling assets
like their revel independent living portfolio.
So you basically have these two companies
surfing the exact same demographic wave.
Right.
But well-tower built this custom lightweight board
and is just gliding ahead,
raising dividends organically.
Well, Ventus is paddling out there
at the backpack full of adjustable rate debt,
just hoping the wave carries them
before those 2026 debt maturities pull them under.
Exactly.
It highlights perfectly
why looking solely at the macro trend isn't enough.
The underlying financial plumbing dictates
whether you actually profit from it.
So true.
OK, well, speaking of financial plumbing,
let's pivot away from companies carrying heavy leverage
and look at businesses that practically print money
with zero debt.
Yes, this brings us to a really fascinating framework
from Poulac Prasad, which he outlines in his book,
what I learned about investing from Darwin.
Right, the Darwinian approach to stockpicking.
Yeah, he argues that the financial industry's obsession
with future forecasting-like,
trying to predict next quarter's earnings
or a five-year growth trajectory,
it's just a complete fool's errand.
So he takes this evolutionary biology approach instead.
Exactly.
Instead of guessing which species might mutate
and survive a future ice age,
he says, just look at the apex predators
that have already survived the last three ice ages.
OK, I love that.
So his screen is entirely backward looking.
Entirely.
He searches for companies with a 10-year average return
on invested capital or ROIC above 20%.
20% over a decade.
That is huge.
That metric is absolutely crucial.
It means, for every dollar,
the business reinvests into itself.
It generates a guaranteed 20 cents of profit consistently
across an entire decade of varying economic conditions.
Wow.
And then to make sure you aren't overpaying for that quality,
I think he looks for a current price to earnings ratio
that's sitting below its own 10-year median rate.
You got it.
And when you run that screen,
it spits out some incredibly unglamorous, hidden value stocks.
Which brings us back to the start of the show,
the hospice and plumbing connection.
Yes, GMED, ticker, CHE.
They own Vitus Healthcare,
which is a massive hospice provider.
And they also own RotoRooter.
It is such a bizarre corporate marriage,
but honestly, the mechanics are flawless.
Right, because both are hyperessential,
localized, basically recession-proof services.
Like, a homeowner cannot defer a catastrophic plumbing failure.
Yeah.
And families obviously cannot defer end-of-life care.
Exactly.
And the cash generation from that combination is phenomenal.
They produce a massive $26.60 per share in free cash.
Wow.
And their ROIC.
Their 10-year average ROIC sits at 27%.
That's wild, but the stock has been down a bit recently, right?
Yeah, it's currently trading at a discount
because they took a temporary hit
from a fading Medicare billing cap.
The market basically punished them
for a short-term regulatory headwind.
Which creates a great entry point
into a proven survivor.
Exactly.
Okay, another prime example
from this Darwinian screen is a Legion,
ticker A-L-L-E.
They manufacture slag locks
and Von Duprin exit devices.
Right, door hardware.
Yeah, but their competitive mode
isn't just, like, brand recognition.
It is literally baked into the architectural
blueprints of commercial building.
Oh, this is fascinating.
Right. When an architect
designs a hospital or a school,
they write the exact specifications
for a Legion's door hardware
right into the building plans.
And the switching costs
created by that specification are massive.
Huge.
Like, if a contractor wants to use
a cheaper competitor's lock,
they have to halt construction,
get the architect to redraw
and improve the new specs
and make sure the new hardware
meets all the fire and safety codes.
Yeah, the cost of that delay
just far exceeds any savings on the lock itself.
Right, so Legion operates
with a captive audience.
And that's allowed them
to aggressively pay down their debt,
going from 93% debt to capital
down to just 46% over the last decade.
Incredible. And the screen pulls up
a few others too.
Like, global industrial company
ticker GIC.
The shelving guys.
Yeah, selling shelving
and safety gear for 75 years,
they maintain a 31% average
ROIC with practically zero debt.
Their debt to capital is just 10%.
Incredible.
And we also see market access,
ticker MKTX,
which is an electronic bond trading platform,
zero debt,
41% operating margin.
And currently trading at a 69%
discount to its historical valuation, I think,
just because of some passing
competitive fears from trade web.
Yep.
And finally commercial metals company,
CMC,
a steel manufacturer
with a 60-year streak of
uninterrupted dividends.
60 years.
Yeah, and they recently raised their
payout 11%
after acquiring some strategic
precast platforms.
The core philosophy here is really
embracing what we call lazy investing.
Tell me more about lazy investing.
Well, you identify these deeply
entrenched companies with high returns
on capital and low debt.
You buy them when temporary headwinds
push their valuation below historical
averages,
and then you just let them compound.
So you are trading in and out?
No, exactly.
You let the biological reality
of their competitive modes
do all the heavy lifting for you
over a 10-year horizon.
It is an incredibly robust way
to build wealth,
but let's be honest,
you know,
steel manufacturing
and commercial door locks
require immense patience.
Well, they do. They are very boring.
Right. So what if a listener
wants massive,
immediate income
from high-flying,
volatile tech stocks?
Ah,
then we have to enter the world
of financial engineering.
Yes, the explosion of NASDAQ
100 income ETFs.
These funds fundamentally
alter the typical dividend arrangement.
Instead of just holding stocks
and, you know,
passing along whatever small
dividends those companies
naturally pay.
Because tech companies barely
pay dividends.
Exactly. So instead of relying on that,
these ETFs actively trade options
against their underlying holdings
to synthesize a massive yield.
And we have this really
fascinating three-way battle going on
in this space.
There is the new contender,
QQA,
the Invesco QQQ
income advantage ETF,
yielding around 9.54%.
Right.
Then you have QQQI,
which is optimized purely
for maximizing income,
yielding a massive 13.5%.
And finally,
GPIQ,
which sacrifices some of that yield
to capture more of the underlying tech growth.
Yeah, and GPIQ posted a 36.66%
total return over the last year.
That's massive.
So how on earth are these yields even possible?
To understand that,
we have to look under the hood
at QQA.
They utilize a mechanism
called Equity Link to Notes
or ELNs.
ELNs, okay.
Instead of the ETF managers
sitting at a terminal
manually selling options
on Microsoft and Apple all day,
they just buy a note directly
from a major global investment bank.
Okay. So they're outsourcing it.
Exactly.
The bank does all the complex,
heavy lifting of the options trading
and simply pays the ETF
and agreed upon yield.
Wait, hold on a second.
If the ETF is buying a note
from a bank to generate the yield,
they are outsourcing the strategy,
sure, but they are also
introducing counterparty risk,
aren't they?
You spotted it.
Yes.
Like, if that investment bank
faces a liquidity crisis,
the ETF's income stream
is suddenly vulnerable,
regardless of what the actual
underlying tech stocks are doing.
Right. That counterparty risk
is the hidden cost of outsourcing
the options strategy.
But the other crucial mechanism
QQA uses
is a 50% covered call overlay.
Okay.
Assuming listeners understand
the basics of a covered call,
you cap your upside potential
in exchange for premium income today.
Exactly.
Now if an ETF
writes covered calls
on 100% of its portfolio,
and the NASDAQ
goes on a historic 40% bull run.
The ETF captures almost none of that growth.
Right. But QQA only applies the
option strategy to half the portfolio.
Oh, nice.
Yeah, the other 50% is left
completely unencumbered to run with the market.
What makes QQA stand out even more to me
is that it's actively managed
by humans, not some static algorithm.
Yes. That is a huge differentiator.
During massive tech rallies,
human managers can roll the options up
or just step aside entirely,
preventing the fund from having
its best performing assets called away.
And they execute all of this
with a remarkably low expense ratio
of 0.29% compared to QQA's
hefty 0.68%.
Which eats into your yield.
And we also see this engineering
applied to the S&P 500
with funds like SPYI.
Oh, right.
SPYI.
The math behind these high yield vehicles
can be incredibly seductive
for someone trying to build a passive
income stream.
SPYI pays roughly a 12%
distribution rate.
So if you want to generate 1,000 bucks a month
in pure passive income.
You need roughly 2,000 shares,
which requires about a $100,000 capital investment.
If an investor can aggressively funnel
$3,000 a month into the fund,
they can build that $1,000 a month income engine
in roughly three years.
Okay, here's where it gets really interesting.
We cannot talk about generating
1,000 dollars a month from options premiums
without bringing the IRS into the room.
Ah, taxes, yes.
Right. If QQA and SPYI are using
ELNs and covered calls to manufacture this yield,
those distributions are not qualified dividends.
They are taxed as ordinary income.
So for a higher earning professional
in a high tax bracket,
you're losing a massive percentage
of that 9.5 or 12% yield straight to taxes.
Aren't we just moving money from our left pocket,
which is capital appreciation,
enjoying lower-long-term capital gains rates?
Into our right pocket.
Right. Into our right pocket,
triggering a massive tax bill every single month.
You're entirely right.
The tax drag is the Achilles heel of engineered income.
If you hold these option overlay ETFs
in a standard taxable brokerage account,
the after-tax yield drops precipitously.
Right.
The structural brilliance of the strategy
really only survives if you place these assets
inside a tax-advanced shelter,
like a Roth IRA.
Because inside a Roth,
the distribution's compound tax-free.
Exactly.
And the math works perfectly.
But in a taxable account,
you are effectively converting tax-efficient tech growth
into highly-taxed ordinary income.
That tax trap is actually a perfect transition
into the absolute darkest corner of the dividend landscape.
The danger zone.
The danger zone.
This is where the hunt for yield
abandons strategy entirely
and becomes pure,
unadulterated speculation.
Oh, boy.
We are talking about single-stock option ETFs.
And the poster child for this risk is MSTY,
the Yieldmax Microstrategy ETF.
Yeah, MSTY is a masterclass in the illusion of yield.
Illusion of yield.
I mean, since its inception,
the fund is down 79%.
Wait, 79% down?
Yes.
The yield looks astronomical on paper,
but the principal investment is literally vaporizing.
The failure point lies in the mechanics of NAV erosion,
net asset value erosion.
Okay, let's break down exactly how that erosion happens.
Because I know a lot of investors think,
hey, if the yield is 50%,
I'll just reinvest the dividends
and eventually break even
no matter what the stock does.
Reinvesting cannot outrun mathematical decay.
Wow.
MSTY doesn't hold actual shares of microstrategy.
It uses synthetic options to replicate the price movements.
And microstrategy's corporate valuation
is violently tethered to the price of Bitcoin.
Right, because they just hold massive amounts of Bitcoin.
Exactly.
So when Bitcoin crashes 20%
microstrategy crashes
and MSTY synthetic options bleed their intrinsic value.
Oh, I see.
To maintain the illusion of that massive yield payout,
the fund often distributes its own shrinking capital
back to the investors.
Oh, so they're paying you with your own money?
Basically.
And when Bitcoin eventually recovers,
MSTY is a significantly smaller capital base left
to capture any upward momentum.
Because the principal shrinks so fast
during the downturns that the math permanently breaks.
Yes.
A 50% yield on a principal that has been gutted
by 79% pays you absolutely pennies.
And if you are relying on that income for retirement,
meaning you actually have to spend the dividend
rather than reinvest it,
you are completely exposed to the total collapse
of the underlying asset.
Which is why, if an investor insists
on utilizing these hyper aggressive option strategies,
the only rational approach is to use a portfolio buffer.
Like what?
Consider an alternative like CHPY.
It utilizes the same high yield options mechanics
but it applies them across a portfolio
of semiconductor companies, the Asian Video Broadcom Intel.
Ah, so there's diversification.
Exactly.
If Intel suffers a catastrophic earnings misimplumments,
well, Nvidia or Broadcom might post record revenues.
The portfolio survives the volatility.
A single stock options ETF is just a leveraged synthetic bet
on a single point of failure.
And you'd think if the core flaw of single stock options
is tying your entire income stream
to one highly volatile asset,
the market would learn its lesson.
It would think.
Instead, they have doubled down.
They've moved away from options entirely
and built an income machine directly on top
of the most volatile asset on Earth, Bitcoin.
Oh, say that.
Enter say that.
They have literally trademarked the phrase
the daily dividend company.
It's crazy.
It is.
Say that is a Bitcoin Treasury company,
very similar to MicroStrategy,
holding over 15,000 Bitcoin on its balance sheet.
But their structural hook is that starting in June,
2026, they are transitioning to paying a dividend
every single day.
Yes, every single day.
They're targeting roughly 250 micro-payments a year,
generating annualized yield of around 13%.
250 payments.
If we connect this to the bigger picture,
when you analyze the underlying psychology of this structure,
it is no longer about efficient capital allocation.
It is pure gamification.
Oh, 100%.
They have engineered a financial product specifically
to deliver a daily dopamine hit to income investors.
It is the financial equivalent of checking your phone
for social media notifications.
You wake up, open your brokerage app,
and boom, you got paid today, you will get paid tomorrow.
It completely changes the behavioral relationship
an investor has with their portfolio.
And I imagine that behavioral gamification
introduces an absolute labyrinth of tax
and accounting complexities.
It is a nightmare.
Say that achieves this daily payout
by utilizing a tax treatment known as return of capital.
Oh no.
Yeah, they are not distributing business profits
generated from operations.
They are systematically handing your own
initial investment back to you.
Now, the immediate reaction to return of capital
is usually positive because it defers taxes.
Right, would you?
Yes, but the mechanical reality is a ticking time bomb
for your cost basis.
Precisely.
It is the opposite of a free lunch.
If you buy a share of SATA for $100,
and they pay you $10 over the year,
categorized as a return of capital,
you don't pay taxes on that $10 today.
Okay, sounds good so far.
However, your official cost basis
in the eyes of the IRS drops to $90.
And if you hold the stock long enough,
your cost basis decays all the way to zero.
Once you hit zero,
every single daily microdividend you receive
moving forward is taxed as a capital gain.
That is brutal.
And beyond the tax decay,
just imagine the accounting nightmare of
logging 250 micro transactions a year
if your brokerage software doesn't perfectly sink
with your tax prep platform.
It would be awful.
And beneath all of this complex gamification and tax deferral,
the entire engine stalls
if the price of Bitcoin enters a sustained crypto winter.
It is just a highly speculative cash parking spot
for thrill seekers,
not a foundational asset for a retirement portfolio.
Which really brings into sharp contrast
the massive 608 stock safety net
of the Vanguard VYM foundation we started with.
Absolutely.
Well, we have covered incredible ground today.
We laid the concrete with
the broad market participation of VYM
and the defensive concentration of SHD.
We analyzed how Ventus' adjustable rate debt
forces them to dilute shareholders
while Welltower's pristine balance sheet
lets them organically surf
that demographic wave of senior housing.
Right.
And we unpacked the Darwinian brilliance of companies
like Chimid and Elegion,
whose competitive modes allow them to compound cash
with zero reliance on forecasting.
And of course we navigated the dangerous mechanics
of NAV erosion in single stock options
and the gamified dopamine hits of daily crypto dividends.
It's been quite the journey.
The spectrum of strategies is fascinating
but it really leaves us with a critical underlying question
about the psychology of the modern investor.
What's that?
If you spend years successfully constructing
this ultimate income machine,
a portfolio heavily engineered
to pay your living expenses
through daily and monthly cash distributions,
does that psychological addiction
to immediate tangible yield actually blind you
to the massive compounding wealth building power
of traditional non-dividend growth stocks?
Oh wow.
Are we trading the opportunity to build long-term
empires just to secure short-term dopamine hits?
It's a real risk.
That is a very heavy thought to chew on
while you check your portfolio balances tomorrow morning.
Thank you for joining us on this deep dive.
Remember, poor solid concrete slab
before you start worrying about the shiny,
high-yield fixtures.
We'll catch you next time.