A Wealth of Common Sense’s Ben Carlson posted an interesting article on his site in early June highlighting how America’s piggy banks are full. Thanks to the pandemic, Americans are sitting on home equity of $31.79 trillion, up from $6 trillion in 2008, a compound annual growth rate of 11.03%. That’s a tremendous return over 16 years.
Carlson estimates that half might be cashable, or $16 trillion that’s sitting in an illiquid asset. One reason is that mortgage rates are high. Secondly, HELOC (home equity line of credit) rates are also high. Carlson noted his bank charges 8.3% for one. Ouch.
Although HELOCs are expensive right now, there may be a situation where it makes sense to get one. Just a note: I’m Canadian, so my U.S. tax knowledge is limited. Always seek financial and tax advice if unsure about your specific situation.
Starting in 2018, the interest paid on home equity loans and HELOCs have only been tax deductible for home improvements or repairs. So, if you own your home mortgage-free and have $100,000 cash sitting in the bank, you might consider borrowing the $100,000 to improve your home and take the cash in the bank and invest it in stocks and other appreciating assets.
You write off the interest on your HELOC, thereby cutting your outlay on the debt by approximately half while increasing your passive income generated through stocks and bonds.
Here are three ways to play your idle home equity if you’re comfortable with the risk involved.
Global X SuperDividend (SDIV)
The Global X SuperDividend ETF (NYSEARCA:SDIV) invests in 100 of the highest dividend-paying stocks in the world. It has monthly distributions for 12 consecutive years. It currently yields 11.3%.
SDIV was launched in June 2011. It has gathered $768 million in net assets, trading at a slight discount to its net asset value of $21.88. The ETF tracks the performance of the Solactive Global SuperDividend Index, a collection of 100 high-yielding dividend stocks.
Stocks selected must have dividend yields of 6% or higher if they’re not part of an index. If they are, the minimum yield is 3%. They must have a market capitalization of at least $500 million with a stable dividend forecast. On the selection day, the 100 with the highest yields are chosen. Closed-end funds and BDCs (business development companies) are excluded.
The index is rebalanced annually on the last business day in February, with quarterly reviews in May, August and November.
The ETF’s top three sectors by weight are financials (22.6%), energy (18.9%) and real estate (17.4%). The top three countries by weight are the U.S. (32.5%), China & Hong Kong (18.1%) and Brazil (5.1%).
In addition to the risk of using leverage for investments, including home improvements, SDIV has two-thirds of its net assets invested outside the United States. America’s stock markets have outperformed every developed market over the past decade.
Ares Capital (ARCC)
Ares Capital (NASDAQ:ARCC) is one of the world’s largest BDCs with $13.22 billion in net assets. It currently yields 9.0%.
The BDC invests primarily in first-lien (46.1% of net assets) and second-lien loans (13.7%) of private middle market companies, with additional equity investments (30.5%) and other debt instruments accounting for the remaining 9.7%.
Ares Capital is one of the largest direct lenders in the U.S. It targets loans of between $30 million to over $500 million, with companies generating annual EBITDA (earnings before interest, taxes, depreciation and amortization) of $10 million to over $250 million.
The top three industries by weight are software & services (22.6%), health care services (12.5%) and commercial & professional services (10.2%). The top three regions of its investments are the Western U.S. (24.2%), Midwest (23.8%) and Southeast (18.6%). Investments outside the U.S. account for less than 6%.
ARCC is externally managed by Ares Management (NYSE:ARES), a global alternative manager with $428 billion in AUM (assets under management). It provides its clients with a combination of credit-focused, equity-focused and a combination of the two.
Income from this BDC will more than generate enough to cover your interest payments.
Adams Diversified Equity Fund (ADX)
In the first two investments, I focused on income. However, the important thing here is to generate a total return. It doesn’t matter if it’s income, capital appreciation or a combination of both. The important thing is to deliver a return that is positive.
Adams Diversified Equity Fund (NYSE:ADX) is a closed-end fund investing in high-quality large-cap companies. Launched in 1929, it has $2.8 billion in net assets invested in 91 holdings.
The top 10 ADX holdings represent 37% of its net assets. I’d say that I’d buy all 1o holdings, including the Adams Natural Resources Fund (NYSE:PEO) at 1.8% of the closed-end fund’s net assets.
In terms of sector weightings, the top three by weight are technology (29.8%), financials (12.8%) and healthcare (12.3%).
If you’re looking for big companies to invest in, ADX’s weighted median market cap is $292 billion, putting it well within the large-cap category.
If you want to read a quarterly report worth reading, ADX is it.
“For the twelve months ended March 31, 2024, the Fund’s total return on NAV was 32.6%. Comparable figures for the S&P 500 and Morningstar U.S. Large Blend category were 29.9% and 29.1%, respectively. The total return on the market price of the Fund’s shares for the period was 35.2%,” stated ADX’s Q1 2024 report.
Discount or premium, ADX has delivered.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.