Saving for retirement can be daunting for some investors, but it doesn’t have to be that way. While some may choose to set it and forget by regularly buying the S&P 500 (SPY), one needs to be prepared for potential stretches of underperformance considering the historically high multiple at which the index is now trading at.

As shown below, the 28.9x PE multiple that SPY now carries is at the highest point outside of the tech bubble run-up in the early 2000s, and the lead-up to the Great Financial Crisis.

For how much longer the market will run up is anyone’s guess, and with a 1.2% dividend yield that’s grown at a just a 4.8% 5-year CAGR, the income isn’t going to be much consolation for anyone holding the index during an extended correction period.

This brings me to the following 2 picks, which provide a good balance of high yield and dividend growth and a track record of market-beating returns. Both are trading at attractive valuations with strong growth prospects, so let’s get started!

#1: Sixth Street Specialty Lending

Sixth Street Specialty Lending (TSLX) is an externally managed BDC with a very strong track record of value creation. As shown below, TSLX has produced a 193% total return over the past 10 years, surpassing the 181% of the S&P 500 and the 119% of the Van Eck BDC ETF (BIZD)

I last covered TSLX in January, highlighting its impressive total return and strong fundamentals. The stock price has declined by 1% since then (3.4% total return) despite continued steady results.

TSLX’s strong performance includes continued NAV per share growth in Q1 2024 to $17.17, due in part to $0.14 per share benefit from an accretive equity raise at a premium to NAV during the quarter. As shown below, TSLX’s NAV per share has improved every quarter since mid-2021 and sits at just one penny shy of its all-time high of $17.18.

At the same time, TSLX is generating healthy returns with an NII return on equity of 14.4% over the trailing 12 reported months, sitting higher than the 12.9% average amongst all BDCs, and the 13.8% of the top quartile of BDCs, as shown below.

This enabled TSLX to generate NII per share of $0.58 during Q1, which more than covered the $0.46 regular dividend rate at a 126% dividend coverage ratio. The dividend coverage ratio remains a safe 112% when including the $0.06 special dividend that was declared during the second quarter.

Meanwhile, TSLX maintains a safe investment profile, of which 92% is comprised of first lien secured loans. The remainder consists of second lien / subordinated debt at 3% of the portfolio and 5% being equity for a potential kicker to NAV appreciation. The portfolio is also in good shape with investments on non-accrual represents just 1.1% of portfolio total.

The portfolio is subject to low cyclical risks given its defensive nature and diversification, with no single investment representing more than 2.6% of portfolio total. As shown below, top segments include business services, e-commerce, financial services, and healthcare represent TSLX’s top segments comprising 62% of portfolio total.

Management sees opportunities this year in helping clients to restructure their balance sheets considering the continued slowdown in IPOs this year. As such, according to Pitchbook’s lead analyst Tim Clarke, 2024 is expected to be “a breakout year for exit transactions involving continuation funds”, which will involve a mix of both private equity and venture debt players like TSLX.

Opportunistic deal funding is supported by TSLX’s strong balance sheet with BBB-/BBB investment grade credit ratings from S&P and Fitch. It also has $764 million in total liquidity, representing 2.9x TSLX’s unfunded commitments.

TSLX isn’t necessarily cheap at the current price of $21.72 with 26% premium to NAV. However, this doesn’t appear to be unreasonable as it sits within the 0% to 40% premium to NAV range over the past 5 years.

While TSLX is not a bargain at present, I believe it’s deserving of a premium considering its aforementioned strong track record of value creation with market-beating returns and its well-covered 8.8% regular dividend yield and 9.7% yield including special dividends. Plus, trading at a premium to NAV makes future equity raises accretive to shareholders, thereby reinforcing the value proposition. As such, I continue to view TSLX as a ‘buy at current levels.

#2: Prologis

Prologis (PLD) is a self-managed REIT that’s a global logistics leader, with a focus on owning and leasing out properties in high-growth, high barrier-to-entry Tier 1 markets. It has 1.2 billion square feet of rentable square feet in 19 countries, serving 6,700 customers across B2B and Retail/E-commerce fulfillment channels.

Like TSLX, PLD also has a strong track record of market-beating returns due to strong lease spreads and the in-demand nature of its properties, driven by e-commerce growth. As shown below, PLD has produced a 267% total return over the past 10 years, beating the 181% of the S&P 500.

I last covered PLD in August last year, highlighting its solid fundamentals and undervaluation. However, the stock declined by 4% since then (-1% total return including dividends) as the market remains wary of REITs in a higher interest rate environment.

Nonetheless, PLD is executing well in the current macroeconomic landscape. This is reflected by Same Store Cash NOI growing by 5.7% YoY during Q1 2024. It’s worth noting that PLD’s SSNOI would have been 7.5% when one-time items are excluded. PLD’s respectable growth was driven by continued strong demand for its properties with its new leases seeing an average 70% lease spread during the first quarter.

Management is guiding for more challenging 2024 than previously expected, as reflected by a 75 basis point reduction in the occupancy ratio to 96.25%, at the midpoint of range, by the end of the year. Similarly, SSNOI was guided down by 150 bps from the previous estimate to 6.0%.

Despite a slowdown expected for this year, I believe the long-term growth thesis for PLD remains intact. This is supported by management’s expectation for lower incoming supply to the industry, which should drive better pricing next year.

Moreover, PLD has development potential across the portfolio, asset management opportunities, as well as greenfield opportunities in solar, given the vast square footage that its properties have to offer. These points were made by management at the recent NAREIT conference in June as follows:

We own or control about 12,000 acres worth of land that embedded in that land portfolio is about a 225 million square foot build-out, representing about $39 billion worth of TEI. So a long runway for growth in the development business. Third is our strategic capital business. Around the globe, we have 11 different vehicles, public and private, that we manage. It represents about $60 billion of AUM. We have very consistent cash flows from the asset management fees to the tune of $2.5 billion a year.

The fourth bucket is what we call essentials, which is an umbrella of new business lines that were building on top of this incredible platform we have. We’ve got 1.2 billion square feet of warehouses, that’s 1.2 billion square feet of roofs. So right now, we have about 540 megawatts of solar on these roofs. And that covers less than 5% of our roofs. So we have a long runway for growth in building out that solar business.

Importantly, PLD carries a REIT industry-leading ‘A’ credit rating from S&P, enabling it to raise $4.7 billion of debt during the first quarter with a relatively low interest rate of 4.7% over a 10-year maturity. This brings PLD’s total liquidity to $5.8 billion to fund the development pipeline, which is estimated to achieve a 5.7% stabilized yield, sitting above PLD’s cost of debt.

PLD currently yields a respectable 3.4%. The dividend is well-protected by a 70% payout ratio, leaving plenty of retained capital to fund growth. It also comes with 10 years of consecutive growth and a 5-year dividend CAGR of 12.6%.

While PLD isn’t cheap at the current price of $114 with a forward P/FFO of 21.1, this valuation does sit below its historical P/FFO of 22.7, as shown below.

Plus, while PLD is expected to have a reset year in 2024 due to slower growth, sell side analysts who follow the company expect for growth to pick up next year with estimates for 10-12% annual FFO/share growth in the 2025-2027 timeframe.

I believe those estimates are reasonable considering the aforementioned rebound in pricing expected for next year as well as development and new business opportunities. Even with a 3.4% growth and 6-7% SSNOI growth (a low case based on 2024 expectations), PLD could produce market-level total returns with plenty of upside potential beyond that.

Investor Takeaway

Sixth Street Specialty Lending and Prologis are two attractive investment options offering a balance of high yield and strong growth potential, making them viable alternatives to the S&P 500 for retirement savings. TSLX, an externally managed BDC, boasts a robust track record with a 193% total return over the past decade and maintains a safe investment profile with a well-covered and high dividend.

Prologis, a leading global logistics REIT, has achieved a 267% total return over the same period and continues to thrive with strong lease spreads and development opportunities, supported by its industry-leading ‘A’ credit rating. Both companies are well-positioned for continued success despite market fluctuations, offering investors reliable income and growth prospects.