Bitcoin, Marijuana And Other Unusual Ways To Get A 6%-7% Yield And Diversify Your Risk (2024)

Introduction

I am a big fan of America. Among my white collared European friends, it is quite trendy to bash America.

Source: Open Domain

But not me. As a youth, growing up in France, all my idols were American. I’d look up to basketball players like Allen Iverson, Shaquille O’Neal and Kobe Bryant, and dream of one day playing in the NBA.

While I played basketball nationally in France & Belgium, the reality that I just wasn’t good enough for the NBA hit me in high school. But my fascination with America, never disappeared. I would binge watch American TV shows, read the biographies and memoirs of American industry tycoons, and my American designed iPod would blast American music: hip hop, jazz, soul.

This is without even mentioning my curious passion for Nike (NKE) sneakers. The photo below shows me a few years ago, with a collector pair of Nike sneakers, now worth over $4,000.

Source: author’s photo (Note: the big beard has mostly disappeared now)

My business counts nearly 100% American members. My retirement investment accounts are 90% American stocks. And I’m privileged to share investment articles with a mostly American audience, here on Seeking Alpha.

Has my love affair with America become a problem?

My income is in US dollars. My assets are in US dollars. But my liabilities and expenses aren’t. When I’m in my country of residence, they are in Luxembourg, and when I am abroad, as I’ve been this year in Indonesia, they are in the relevant local currency.

This has never been a problem for me, as I’ve always seen America’s growth potential, and contribution to tech and culture to be unwavering.

But when the Fed increases the M2 money supply as dramatically as it did this year, I like many around me, started asking what the true value of a dollar is. The recent article by Lyn Alder Schwartzer titled “Money-Printing: 2020 vs 2008” is phenomenal in addressing these concerns.

In simple terms, she explains why 2008 QE was not inflationary, but why 2020 QE is inflationary. It all comes down to where the money is going. If the newly minted money is being used to run a fiscal deficit, thereby increasing deposits and money in circulation, it is inflationary.

My fears are best summed up by her words:

Therefore, the big question for investors in multiple asset classes, is whether the fiscal authorities will keep repeating that on a notable scale, or whether they will cool off. Without the massive fiscal+QE “MMT” combo, the economy remains in the grip of structural disinflation, and a renewed cyclical disinflationary trend. However, with another round of massive fiscal+QE “MMT” combo, the outcome would likely be more of what we saw in spring/summer of 2020: rebounding inflation and asset prices, and likely eventually pushing too far.

While I’m bullish enough on America to bet my livelihood and retirement on it, part of me can’t help but think that I need an out.

This has led me to slightly change the allocation of my assets and monthly contributions over the past two quarters.

While I previously held 12 months of cash in Euros and USD, I’ve mixed the bag of currencies I hold, to create exposure to other currencies, including some crypto and some gold.

While previously 100% of my monthly investments went towards American dividend stocks, I now only attribute 80%. The remaining 20% goes into creating natural hedges: investing in different asset classes, holding different currencies, and so on.

Naturally, the dividend investor in me asked whether I could get some form of yield in doing so. This has unearthed some interesting investment opportunities, and others that I chose to pass on. This article will present a few of these, contrasting them with the classical approach to dividend investing, which remains my bread and butter.

Introducing such assets on a Seeking Alpha, forces me towards extreme caution. I will present the article in the following way:

• American dividend investing is well and alive. I will demonstrate this with a few examples.
• Other opportunities if you have to put some of your assets elsewhere.

They don’t make dividends like in the US.

Dividend investing is beautiful. A dividends first approach, when done right provides a fantastic framework.

It forces you to focus on the fundamentals. To be successful, you need to identify high quality companies which will remain relevant and profitable for years to come.

You then need to find shareholder friendly management, which will reward investors by returning part of profits to shareholders, through the form of dividends and buybacks.

Doing these things will allow you to qualify investment opportunities as All Weather, Fair Weather or No Weather dividend stocks.

Finally, it forces you to focus on valuation, as you measure the combination of dividend yield and dividend growth potential (Looking at either of these in isolation is a bad idea).

Then there is a bag of tricks you can do to improve your prospects.

You can exclude low momentum stocks which will stay in the doldrums for a while. We do this for fair weather stocks, but not for all weather stocks where we enjoy buying at great prices, regardless of short term performance.

You can perform various option strategies, selling cash covered puts to enter a position, or covered calls to exit a position, and squeeze out more yield. This extra yield does come at the cost of foregoing some capital returns and some loss of flexibility.

You can sell when valuations are high, and deploy the capital to instantly boost your income.

But that’s about it. The core ideas are simple, and it is a proven method to grow your wealth and retire financially independent.

The thing is they don’t make dividends anywhere in the world quite like they do in the US.

America embodies the concept of shareholder friendliness like nobody else.

There is a list of European “Dividend Aristocrats” going around the web, but it only includes 39 stocks. And the definition of aristocrats is not the same as in the US, it suggests 10 years of dividend increases versus 25 for America.

For that reason, seeking yield outside of US dividend stocks, should only be done if it supports another goal.

For me the goal is to diversify my USD risk. In many ways this article is beyond the scope of my normal contributions to SA. However, if my thinking is good enough for me to put part of my assets into ideas, maybe others are interested in these ideas.

It should be noted, that my reliance on these ideas is exactly zero. At best, they will work as diversifiers, and will prove mostly useless. If owning USD backed assets becomes a problem, they might act as insurance. At worst, they will have been an expensive hobby. To be clear, even if 100% of the cash I have tied up in the assets below went to $0, it would have no impact whatsoever on my retirement plans, or my dividend investing strategy. If anything, I’d be happy for the US dollar to not loose its value, and for my business and investments to remain strong relative to my foreign currency expenditures.

American dividend investing is strong and alive.

Before we dive into the different opportunities which exist outside of American dividend stocks, I must emphasize this once again: American dividend investing is well and alive.

High quality American corporations with staying power, a proven track record, and shareholder friendly management will continue to do great for decades. I am sure of it.

Most of my wealth is tied up in dividend stocks, and most of my monthly contributions (which in absolute terms have grown every quarter) go towards dividend stocks.

There are two types of stocks which I invest in: fair weather and all weather. All weather dividend stocks are the bread and butter of my portfolio. Fair weather dividend stocks are the less proven, maybe cyclical, but high potential dividend stocks which even out the portfolio.

More risk averse investors can buy more all weather stocks, and more risk loving investors can buy more fair weather stocks.

And within these categories, you get your pick of stocks among yield and growth profiles.

If you’re looking for a lower yield high dividend growth stock, you’d find Texas Instruments (TXN) in the all weather segment.

Source: mad-dividends.com

It’s 2.77% yield with a history of double digit dividend growth makes it a great buying opportunity. The MAD Chart above fails to show the latest increase, which places TXN back into historically undervalued territory.

In the fair weather category, you get Insperity (NSP), which we suggested to buy at $65.

Source: mad-dividends.com

The current yield of 1.88% now doesn’t look like much, yet given the stocks explosive dividend growth in the past few years (33% increase just last year), combined with low FCF payout levels, it still looks good.

At the other end of the spectrum, among high yielding stocks, you can access names like Altria (MO) which yield 9% despite good dividend coverage.

Source: mad-dividends.com

If you don’t like cigarettes maybe you like oil? Then Enbridge (ENB) is a great high yielding option, offering just shy of 8.8%.

Source: mad-dividends.com

If you don’t like oil, maybe you like natural gas? In this case, fair weather dividend stock Oneok (OKE) might be worth a look at.

Source: mad-dividends.com

We recently talked about our renewed confidence in the name following better than expected Q3 results, showing that the company will likely pull through in maintaining its dividend.

Don’t like cigarettes, oil, or gas? While you might be a little too “woke” for my taste, you could still get a well covered sky high yield in other stocks which we recently covered. Prudential Financial (PRU) comes to mind, with its 6.5% yield.

Source: mad-dividends.com

Arbor Realty (ABR) is also an option, providing a strong 9.8% yield, still making it significantly undervalued.

Source: mad-dividends.com

Either way you look, American dividend investing is strong and alive.

This is well covered each month in our model “All Weather dividend portfolio”.

How do you get yield outside of American dividend stocks?

As I’ve already established, other countries don’t quite do shareholder capitalism as well as America. Dividend growth investments, or high yield investments in international equities are few and far between.

If you’ve been following Robert & my work for a while, you know that we always consider dividend yield and dividend growth in conjunction.

We consider that to reach a certain dividend objective by a certain year, you can get that investing in a low yielding stock with a certain rate of growth, or a higher yielding stock with a lower rate of growth.

There is a trade-off. This is well documented on one of our classic articles “How you can retire on dividends forever and ever” .

When you can’t rely on dividend growth, you need to find a reliable yield. When this can’t be done in the form of equities, it must be done in the form of interest.

You get interest when you take an asset (be it stock, cash, crypto, gold) and lend it to somebody who is willing to pay you interest to borrow that asset.

At the most elementary level, this takes the form of a bond, or of a loan. You give cash to somebody who needs it. They give you back more cash, through interest.

It turns out, you can get yield by lending a variety of assets.

Getting a 7% yield from Weed.

This example doesn’t actually remove your US exposure, but it is a good starting point for the rest of these opportunities.

Take the ETFMG Alternative Harvest ETF (MJ). It is a cannabis ETF with a trailing dividend yield of 7.55%.

Source: Seeking Alpha

Yet when you look at its top 10 holdings, it will not come as a surprise that for the most part they don’t pay a dividend.

Source: Seeking Alpha

Cronos (CRON), doesn’t pay a dividend. Neither does GW Pharmaceuticals (GWPH). Ditto for Tilray (TLRY), Hexo (HEXO), Aphria (APHA), Aurora (ACB)… you get the idea.

If 50% of the funds assets don’t pay a dividend…. How on earth does the company yield 7.5%?

Well, I have to thank fellow SA author Dave Dierking, CFA for this one. I must admit, I looked at this fund once, scratched my head, didn’t understand where the yield came from and moved on.

In his article “Yes, this Marijuana ETF has provided a steady 6-7% yield”, he explains the wizardry that is going on.

You see, many people want to short pot stocks. Like Dave explains:

While the marijuana sector has some of the highest growth potential in the economy, it's also incredibly overvalued. Buyers bid up the prices of the industry's biggest players, including Tilray (TLRY), Aurora Cannabis (ACB), Cronos (CRON) and Canopy Growth (CGC), to ridiculous levels. Even optimistic growth projections haven't been able to justify current prices, despite severe pullbacks.

To short pot stocks, you need to borrow them from somebody. With just over half a billion dollars in AUM, MJ is in a prime position to lend these funds.

In exchange it gets interest, which it distributes to fund holders as a dividend.

So is it a good idea to loan your weed stocks (indirectly) to get yield?

Well that depends. When you loan your assets out, you always need to ask why it is that the counterparty wants to borrow funds.

In the case of MJ, it is to short the stocks which you’d own.

So the only reason which would justify owning MJ as a yield producing investment, is if you actually want to own a basket of cannabis stocks at current prices.

I’m no weed expert. What I can tell, is that I don’t like the idea that I can get such a high yield by being the limited supply to a large demand which wants to bet against my asset.

Here’s why: if the counterparty is right, your capital is at risk, and you’re getting yield on a dying asset. If you are right, the more you are right, the more the demand for shorting will evaporate. Your yield will disappear along with it.

I won’t suggest whether or not you should own weed stocks now, I will state that I do not.

Peer to peer lending

There are many peer to peer lending programs. Here the idea is that you lend funds to a corporation or individual which couldn’t get funds through traditional funding. As always you’ll want to ask what the lender is going to do with the money and why he wants it.

This has often lead to me turning down these opportunities. One exception was EstateGuru, which offers development or bridge loans to real estate developers in Europe. Borrowers can get interest rates in the 8% to 10% range, on property backed loans. The average LTV of such loans is 60%, meaning that the loans are all over-collateralized.

To believe there is no risk would be foolish.

Source: Estateguru

Of the outstanding loans, 7% of the value is in default, and another 7% is late on payments. Yet Estateguru still claims a 0% loss of capital on all loans, outstanding and historical.

My allocation to them is tiny, yet it serves the purpose of getting yield while holding Euros. The only catch for most US investors, is that they need access to a EU bank to access the platform.

Peer to peer platforms are plentiful, and not mentioning them would have excluded a growing trend in alternative high yield investments.

Why I own bitcoin

Finally, we get to the section of this article where I have significant skin in the game.

As you recall, my pursuit for yield outside of the US dividend stocks came from a need to diversify away from the US dollar.

Loaning US denominated weed stocks did not achieve that for me, but the example of loaning an asset set the stage on what is yet to come in this article. European P2P loans somewhat achieved the goal, giving some use to my Euros. However given the risk profile of the investments, it is a non-sizeable portion of my Euros.

But then we get to crypto. I was typically adverse to cryptocurrencies. In 2017, I published an article on Linkedin, days before the crash, where I called the mania and insanity of the ICO craze.

At the time, I disliked bitcoin (BTC-USD) because it was neither a store of value because of its volatility, or a means of payment, because of high associated costs.

It is still quite a useless asset to buy stuff with, but my view of it as a store of value has changed. With China pushing for the development of its crypto-yuan, and other countries following suit, I’ve now come to believe that for better or for worse, crypto fiat currencies will be adopted by most nations within the next 50 years.

And within this framework, bitcoin stands as potential crypto-gold, because of its known, limited supply, and the security and independence of its infrastructure.

In his book “Financial Services Revolution”, Alex Tapscott says:

Eight and half years and 120 million transactions into its life, this system has continued to hold up. The Bitcoin ledger has never been seriously compromised. No one – not a hacker, not a bank, not a government– has been able to take it over and alter, or censor, transactions.

He argues that Bitcoins rise in value “reflects the accumulative popular recognition that this apparently unbreakable system of value exchange constitutes a public good, a unique new, digital system of value management that, like gold, defies control by any centralized party, be it a government, a bank, or any other institution”.

Now many will point out to the fact that other cryptocurrencies can do everything that bitcoin can do, better and cheaper.

This might be the case. It might also be irrelevant. Bitcoin’s first mover advantage might very well be long lasting.

Have you ever asked why gold (SLV) is worth more than silver (SLV)? While there is about 19x more silver than gold (including amounts beneath the earth), gold is worth about 80x the price of silver on an ounce to ounce basis. The most commonly accepted reason is that gold is more globally accepted as an alternative currency than is silver. This could be because of the scarcity, the relative uses in industry, or any other reason.

The same rationale is emerging with cryptocurrencies.

Just think of the wording associated. A Bitcoin is a Bitcoin, but everything else is an altcoin (short for alternative coin).

Source: Trading View

Bitcoin’s market cap as a percentage of all cryptos, is about 65%.

When institutional investors move assets into cryptocurrency, they buy Bitcoin.

From the onset of Bitcoin and blockchain technology, there was no doubt that the applications would be numerous. The bubble which happened a few years ago, was not unlike the tech bubble of the turn of the decade: a promising technology, everyone running to raise funds on a promise, nobody quite knowing what to do with it.

At the end of the day it all comes down to trust. Bitcoin cannot be likened to the US Dollar, but the likening to gold is cunning. In a digital money world, its history of safety and first mover advantage, might just make it the crypto-gold of the future. Gold is generally accepted as a store of value, yet it is extremely volatile, and serves as a “fear” trade. In a digital world, Bitcoin might take a place at the table, alongside gold, as a reserve currency.

In the end, it is all down to trust. If we can trust that gold is an immutable store of value, it is. If we can trust that Bitcoin is an immutable store of value, it is. We then price these assets in US dollars. The quantity of US dollars moving around the economy naturally affects its value, and the relative value of a US dollar to other assets (crypto, gold, stocks, other currencies) depends on the authorities ability to maintain trust and stability in the asset.

This is why I have moved 10-15% of my cash to Bitcoins.

But while it sits there idling in my digital wallet, what if I could put it to use?

Get 6% interest on Bitcoin.

If you are willing to take on some risk with your cryptocurrency, you can go to firms like BlockFi which will let you deposit your crypto, and pay you interest.

You’ll get paid anywhere up to 6% on Bitcoin, and up to 10% on “stable coins (cryptos pegged to the US Dollar).

In the case of BlockFi, they will take your crypto, and lend it to institutional clients, mostly prop traders or market makers. These crypto operators need crypto for their operations, but do not want to bear the price risk, and as such are happy to pay high rates on these loans.

It’s called rehypothecation, and it is just like the MJ example above. From the company’s website:

“Why do we want rehypothecation in the crypto market? Let’s look at 5 key points regarding rehypothecation in traditional markets and how this capability is unique with Bitcoin:

• Securities rehypothecation generally lowers the cost for consumer access to products. For example, this can be seen in financial service providers offering free custody, free trading, and ever-declining asset management / ETF fees. In BlockFi’s case, it’s what enables us to offer a yield on Bitcoin and Ether.
• Rehypothecation promotes market liquidity and price discovery by enabling market participants to express a multitude of views. So far, our experience has been that borrowing crypto is part of arbitrage, market making, and short selling activities. This helps balance supply and demand for Bitcoin globally, at all the different and fragmented marketplaces. This activity supports fair and orderly markets, which lead to prices being closer to Bitcoin’s true value, and are paramount to the growth and usefulness of Bitcoin.
• With Bitcoin, settlement isn’t instant but we do have a settlement layer that is much faster when compared to traditional markets. It’s kind of like having the DTCC already built-in, but with more transparency. Bitcoin operating firms might need to borrow Bitcoin for their inventory, but don’t want the price risk. Bitcoin settles fast but not instantaneously, and there isn’t a traditional settlement cycle. This means that you need to have the Bitcoin before you transfer it. Having good actors to facilitate this flow in a “one to many” or network model is important for scale.
• Rehypothecation was not responsible for the financial crisis. Poor underwriting, too much leverage and miscalculated risk (especially at large insurers) were the culprits. The benefits of rehypothecation far outweigh the costs – which are effectively zero if it’s done correctly. Other thought leaders have described “good vs bad” lending in the Bitcoin market and BlockFi falls squarely in to the good camp.
• Our goal as an industry is to effectively compete with the traditional financial system. In order to do that, we will need to use existing tools from the traditional financial system and leverage the blockchain to improve on their function.”

Now it is important to note the risk here. I own Bitcoin to reduce exposure to USD, but by taking part in BlockFi’s rehypothecation puts my Bitcoin at risk.

Is 6% good enough? At the end of the day, it is a risk that I am willing to take. It is backed by companies like Fidelity, Peter Thiel led Valar, and others. A lot of people a lot smarter than I am believe in the project. Given that I am open to the idea of owning bitcoin, I’m okay on the idea of depositing it. Unlike deposits at a bank, it is not insured, and unlike banks, they are not regulated.

You might look at this and think that you would be crazy to partake in this sort of investment. However there are multiple firms which operate in the space: BlockFi, Celsius, Crypto.com. If you own crypto, and if you want to partake in this sort of investment, you might be best served spreading it out across platforms, as doing so would come at no added cost.

Conclusion

As we come to the end of a long term debt cycle, the government will likely fight tooth and nail to push back against deflationary pressures. This might go the over way and result in runaway inflation, if massive QE and fiscal stimulus prevail in upcoming quarters.

If that happens, I don’t want to be caught with my US assets and income not supporting my foreign expenses and liabilities. By holding a variety of currencies, fiat, gold and crypto, I sleep a little better at night.

Given my situation, I can afford the risk of seeking high yields on these assets. This is very likely not suitable for most. As laid out in this article, the percentage of these assets relative to my portfolio is small, and their impact on my retirement plans in the case of a more or less stable USD will be null.

One last word…

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