What’s this about, body parts moving erratically? Like restless leg syndrome?

Of course, you’re familiar with the test your family physician has conducted on every annual physical ever since you’ve been a baby. The doctor gently bangs your knee. If your knee jerks forward, he/she knows that this reflex is in good working order and moves on to the rest of the exam.

Look at the smiling faces in the above picture. Both doctor and patient are smiling; the doctor, because she’s happy to see the right response, the patient because it’s always a pleasant sensation, a bit like getting tickled.

A Different Type Of Knee Jerk Reaction

In the financial markets, a wholly different knee jerk reaction is in evidence every time there is a significant move in interest rates, either up or down. When interest rates jerk higher, this is how most individual investors react.

This often happens because most investors react to the inverse relationship between interest rates and prices in a negative way. When rates rise, the price of interest-sensitive stocks declines. And since most investors are focused on stock price changes, when the prices of their stocks decline, sometimes they’re ready to jump off the highest building.

Inverse Relationship

This inverse relationship between interest rates and asset values can most easily be demonstrated using bonds as an example.

If you bought a bond at face value of $ 100.00 yielding 5%, you’d be entitled to $ 5.00 per year of interest.

.05 X $ 100.00 = $ 5.00

If, after you bought this bond, interest rates on the bond market rose to 6%, this means that new buyers, buying a newly issued bond at $ 100.00 face value would receive $ 6.00 per year in interest.

If a new buyer should be interested in buying your older bond from you, he’d want to receive the same 6% yield per year on his purchase, equivalent to the same rate that is being offered on new bonds.

The only way he could get that 6% yield from your old bond would be to offer you less than the $ 100 you paid for it. That is because your old bond carries an interest coupon of just $ 5.00 per year.

So, how could the new buyer derive 6% per year of interest from a bond that pays only $ 5.00 per year? You’d have to offer him a discount, that’s how. And if you’re willing to sell it to him, you’re going to take a capital loss on your investment in that asset.

.06 X $ 83.33 = $ 5.00

Because your bond pays out $ 5.00 per year, the only way for the new buyer to obtain the new going rate of 6% on new bonds is to offer you about $ 83.33 for your old bond.

This is the way that interest rates are tied inversely to the price of underlying assets.

Yields up, prices down. Yields down, prices up.

Remember the investor pulling her hair out because interest rates were rising and causing the price of some of her stocks to decline?

In contrast to her, here’s what I look like when rates rise:

O.K., I’m a little older and less fit than this guy, but you get the idea. Why am I so sanguine when rates rise while others are pulling their hair out?

It’s rather simple, really. While others are focused on prices, I’m at a different stage in life and I’m focused on wringing out the highest income I possibly can from my investments. I’m interested in building, growing and protecting my income so that it supplements my meager Social Security check for a comfortable retirement.

Strategy Session

Rates on the 10-year Treasury bond have recently risen from the 2.06% level to a significantly higher 2.31% on Wednesday. In a very recent article, “Fed Signals New Direction: Whetting My Appetite For This High-Yield Utility”, I discussed the real possibility that this rate may be on its way to 2.50% in short order and recommended snagging a high-yield utility, Southern Company (SO), if its price retreated to a level such that its dividend would give a 5.0% yield. Please read if you’d like to learn what price that would be.

For quite some time, we’ve had Omega Healthcare Investors (NYSE:OHI) on our radar for further stock accumulation at the right price. We’ve been waiting patiently and now it is coming closer to our price target of $ 28.97 per share. Omega currently pays an annual dividend of $ 2.56. At Wednesday’s closing price of $ 31.25, it is now yielding 8.19%.

Warren Buffett Is A Wise Old Man, Duh…

You know what Warren Buffett famously said. “Be greedy when others are fearful”.

Here’s a way to visualize how others have been fearful the last several weeks.

Since September 15 till now, nervousness surrounding the Fed’s intentions has been rising. Market participants have been trying to divine whether one or more interest rate increases will be promulgated by the Fed before year end.

In addition, the Fed just recently announced that beginning in October it would commence winding down a large portion of its $ 4.5 trillion in its inventory of Treasury and mortgage bonds it bought as part of its QE program to boost the economy off its Great Recession floor.

This is how the bond market dealt with this news.

Ten Year Treasury Bond, 9/15/17 To The Present

As that benchmark rate rose, let’s see how investors in Omega Healthcare Investors dealt with the same information.

OHI Price from 9/15/17 To The Present

Notice the close relationship? Interest rate rises and the price of this REIT falls.

A longer term view shows the relationship even keener.

Over the past year, as rates have been on a slow and steady incline, REITs like OHI have seen their prices decline in concert.

OHI One Year Price Path

From a high around $ 37 per share it has fallen to $ 31.25, or 15.54%. Another few percent from here and we’re talkin’ bear market territory for this fine healthcare REIT.

Call me crazy, but when their knees jerk, mine say “BUY”

Because most investors have a different objective than me, I’m happy to take the other side of the trade when these types of declines occur. If they’re willing to sell, I’ll take their shares for $ 28.97 apiece. That’ll give me a beautiful high yield on a very safe, reliable company of 8.84%.

About Omega Healthcare Investors

“Omega Healthcare Investors is a triple-net, equity REIT that supports the goals of Skilled Nursing Facility [SNF] and Assisted Living Facility (ALF) operators with financing and capital. They are partners with over 75 of the most future-focused, growth-oriented operators in the U.S. and U.K., accelerating their growth strategies with a $ 1.25 billion unsecured credit facility and proven access to the largest public equity and debt markets in the world.”

Source: company website

Yield Comparison

Omega has a four-year average dividend yield of 6.3%. Buying at an 8.84% yield point will give us a decent amount of downside protection.

Its five-year dividend growth rate is strong at 53.4%. Institutions hold 72% of the outstanding shares, evidence of confidence by the largest banks, mutual funds, hedge funds, insurance companies and pension funds in the company’s future prospects.

Recent Dividend History

The company has been raising its dividend on a consistent basis, a penny each quarter.

Source: Yahoo Finance

Omega Healthcare Investors Outlook Going Forward

The company has partnered with some of the largest, most reliable skilled nursing, senior care and clinic operators in the country. Its tenants are widely diversified geographically. The senior population that these partners serve can only increase as 10,000 baby boomers reach the age of 65 each and every day. As long as reimbursement rates are not threatened by the Medicare and Medicaid programs, Omega’s tenants should be able to afford the annual escalators built into their leases.

Because these are triple-net leases, the company has insulated itself from repairs, maintenance and insurance costs that might vex other companies.

When the company’s dividend yield reverts to the mean, it will have a good deal of capital gain built into the price for those investors interested in that aspect of the investment.

The Fill-The-Gap Portfolio

The FTG Portfolio contains a good helping of these types of dividend growth stocks. It was built with the express purpose of benefiting from this and other strategies.

Two and a half years ago, I began writing a series of articles on December 24, 2014, to demonstrate the real-life construction and management of a Portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near-retirees face today between their Social Security benefit and retirement expenses.

The beginning article was entitled “This Is Not Your Father’s Retirement Plan.” This project began with $ 411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.

The FTG Portfolio Constituents

Constructed beginning on 12/24/14, this portfolio now consists of 21 companies, including AT&T Inc. (NYSE:T), Altria Group, Inc., Consolidated Edison, Inc. (NYSE:ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (NYSE:MAIN), Ares Capital (NASDAQ:ARCC), British American Tobacco (NYSE:BTI), Vector Group Ltd. (NYSE:VGR), EPR Properties (NYSE:EPR), Realty Income Corporation (NYSE:O), Sun Communities, Inc. (NYSE:SUI), Omega Healthcare Investors, W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), The GEO Group (NYSE:GEO), The RMR Group (NASDAQ:RMR), Southern Company, Chatham Lodging Trust (NYSE:CLDT), DineEquity (NYSE:DIN), and Iron Mountain, Inc. (NYSE:IRM).

Because we bought all of these equities at cheaper prices since the inception of the portfolio, the yield on cost that we have achieved is 7.48% since launch on December 24, 2014. Current portfolio income now totals $ 30,768.58, which is $ 588.00 more annual income than just last month. This represents a 1.95% annual income increase for the portfolio.

When added to the average couple’s Social Security benefit of $ 28,800.00, this $ 30,768.58 of additional supplemental income brings this couple annual income of $ 59,568.58. This far surpasses the original goal set to achieve a total of $ 50,000.00 which is accepted as a fairly comfortable retirement income in many parts of the country. That being said, this average couple now has the means to splurge now and then on vacation travel, dinners out, travel to see the kids and grandkids and whatever else they deem interesting.

Taken all together, this is how the FTG Portfolio generates its annual income.

FTG Annual Dividend Income

Your Takeaway

“When Smith Barney talks, investors listen”. That was the familiar tag line in that company’s ads on radio and T.V. Today, when Janet Yellen, the Fed chair talks, I listen.

Famous for giving obscure smoke signals that used to be difficult to discern, this Fed chair believes in transparency. The clearer her message, the lesser chance that she will be misinterpreted by the market. The more clarity she brings to news conferences, the less her pronouncements have to upset the markets.

While other investors spend countless hours fretting over this development and that development, we stand ready to gobble up cheapened share prices in order to raise our income.

As income investors, we can appreciate the other side of the coin and the possibilities for income enhancement that it represents to us.

Should Omega continue to share a growing stream of income in the form of a penny a share increase each quarter, we can come to see this as a built-in inflation fighter for our portfolios.

After all, maintaining buying power in an economy in which the Fed is determined to see it rise to its desired 2% level is job #1, especially for those near or in retirement.

Our subscriber portfolio uses these and many other strategies as we actively manage it on an ongoing basis to generate steadily growing, reliable income for retirement. In addition, subscribers get the benefit of instant free texts and receiving material days before the public in addition to many exclusive articles, updates, commentary and analysis throughout the week. If you’d like a taste of even better performance and faster dividend growth, before the free two-week trial offer expires, I encourage you to try it before you buy.

Author’s note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.

For a few more days, feel free to join hundreds of your fellow readers who have taken advantage of a free two-week trial to our premium newsletter subscription. Try before you buy, with no obligation.

To learn more about this highly rated premium service, click “Retirement: One Dividend At A Time.”

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As part of our premium subscription program, all subscribers receive a free Portfolio Income Tracker to track income production in the subscriber portfolio and stay focused on income production in their own portfolio.

My promise to you: With every exclusive article, email, instant text and chat, I’ll help guide you to:

• Increased income for retirement, one dividend at a time.
• Under-valued stocks for a greater margin of error and higher capital appreciation.
• Methods to safely diversify your portfolio.
• Strategies to build, grow and protect your income for retirement.

As always, I look forward to your comments, discussion, and questions. Do you have any REITs in your portfolio? Have you found healthcare REITs to be a reliable source of income for you? Do you incorporate these types of dividend growth stocks in your portfolio? When do you execute your buy decisions? Please let me know how you approach these situations in your own portfolio and how you arrive at your decisions.

If you’d like to receive immediate notification whenever I write new content, simply click the “follow” button at the top of this article next to my picture or at the bottom of the article, then click “Follow in real time.”

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Disclosure: I am/we are long OHI, SO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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