(technically I'm not writing another email on the subject, just passing along an article) PF
http://seekingalpha.com/article/222965-dividends-for-depression-era-investing-part-2
Dividends for Depression Era Investing,
Income. It is what the baby boom generation will need in order to survive. As they all know now - relying on capital gains to fund a secure retirement is a major risk. With the stock market not going anywhere over the past 11 years, and with many baby boomers either retiring or losing their jobs, they are finding themselves starting to worry about how they will pay the mortgage and the electric bill. If someone retires with $500,000 and is taking $30,000 per year from his portfolio with the stock market not going up, they will run out of money in 16 to 17 years. This seems like an absurd idea, but if you retired in Japan 20 years ago with a stock centric portfolio, you would have run out of money very fast as the Japan stock market has lost about 75% over a 20 year period of time.
That said, what can an investor do?
We are very big advocates of investing for income streams, whether it be from stocks or bonds. We don't worry about the value of the investment we own, instead mostly about how much that investment can pay our clients and most importantly, how likely they are going to continue paying, even in a depression. We like to tell our clients to stop looking at the value of their investments, and instead look at the income stream the investments are producing. You don't want to have to rely on higher stock prices to meet your retirement goals. You will sleep better at night knowing you are getting a solid stream of income no matter what the market is doing. WIth that income stream, you can pay your bills every month as the cash from the investments hits your account.
If we are building a plan based on income streams, we better be very good at making sure we have a high probability that the income stream will be there no matter what kind of market environment we are in. One way we do this is by attempting to buy only companies that sell products people have to buy, even in a depression. Make no mistake, we think historians will one day name this period in time as the 2nd Great Depression before it is all done. With that mindset in place as the foundation, what do people have to buy? Do they need a new iPad? No. Therefore, Apple (AAPL) does not make the list. Will they need a new car, or can they use the old one? There go companies like Ford (F), off the list. In a depression, people still need to drink water, or use soap, eat food, etc. Therefore we want to focus on companies that sell products people have to buy. With that as the beginning foundation, we set ourselves up for protecting against the loss of income when we may need it most.
Today I am going to give you 5 of the 95+ companies that we own. These companies are the core of our portfolio, although they are some of the lower yielding securities that we own. We still love them due to the fact they sell essential products and services and that they yield more than the 10 year bond. This is not a potshot on the bond though. As my readers are aware - I actually am one of the few humans left who doesn't despise the bond market.
Besides having to sell products and services people have to buy, even in a depression, and having to yield more than the 10 year, I want companies who have very large Free Cash Flow (FCF). With a large FCF business, we will own companies who have enough money to run and expand their business, and also have enough left over to pay the real owners, you and me. Below is my list with a quick description of the company, what their yield is, and what the potential yield could be if they paid out 100% of their free cash flow to the owners after all capital expenditures.
Waste Management (WM) - 3.8% yield and a 7.48% potential yield as all FCF was paid out. The company offers collection, transfer, recycling, disposal, and waste-to-energy services. Even in a depression, people still have to throw away refuse. Tracs is one of the last services people will cut.
Sysco (SYY) - 3.5% yield and a 6.7% potential yield. Sysco Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States.
AT&T (T) - 6.3% yield and a 11.19% potential yield. AT&T Inc. provides telecommunication products and services to consumers, businesses, and other telecommunication service providers under the AT&T brand worldwide.
Atlantic Power Corp (AT) - 8% yield (before Foreign Tax of 15%) Atlantic Power Corporation, an independent electric power production company, owns interests in and manages a diversified portfolio of independent non-utility power generation projects.
Kimberly-Clark (KMB) - 4.1% yield and a 9.97% potential yield. Kimberly-Clark Corporation, together with its subsidiaries, engages in the manufacture and marketing of various healthcare products worldwide.
We will give another 5 in future updates. For now, do your own due diligence on these companies and see if you too come to the conclusion that getting paid a nice income from companies that sell products that people have to buy is a great strategy for your portfolio.
In Part 1 of this article, I had mentioned that I would give 5 more investments that meet our requirement, the requirement being you can only invest in companies that sell products people have to buy, even in a depression. These companies have to have managements who then take those profits and give them to us in the form of dividends. The yields from the dividends also have to pay our clients more than they could get from buying a 10-year Treasury bond. While I still plan to give another 5 companies, today I wanted to focus on some different kinds of dividend payers that litter our portfolio as well. I will also explain why I like the investment along with the yield they give.
Before we get started with the list though, I want to spend some time talking about a mind-set change. For decades, investors have been conditioned to think almost exclusively about the growth in the value of the stocks they own. Many baby boomers have become discouraged over the last decade because they were expecting stocks to continue to return 10% per year over the next few decades. They thought they were conservative in their retirement planning by using a 7% number as the yearly growth figure they were "sure to get from their portfolio." Looking over the past 11 years, they are starting to think, "Hmm, now what? Hopefully we will get back on track with 15% gains a year for the next decade. This will bring the 20 year total back in line!" "Hope" may work for a campaign slogan, but like the reality of the current economic times, it sure does not work for an investment plan either.
While 15% a year for the next decade would certainly do a lot for the baby boomers who are retiring, we are just as likely to have the next decade look like the last. All one needs to do is look at Japan. While we just came off a great 80% rally off the lows in 2009, one has to remember that Japan saw no less than four 50% or greater rallies from certain new low points during the past 20 years. I am sure those rallies brought hope to their retirees as well that things were turning around for the better. But the truth is, 20 years later, and Japan is still 75% lower than the peak, and near the lower quartile of value currently.
Mindset change alert: DO NOT RELY ON CAPITAL GAINS TO FUND YOUR RETIREMENT
The best way I can help you visualize this new mind-set change is to give you an example of you buying a business. Imagine you were heading into retirement with $500,000 for example and you decided to buy a business that would produce $30,000 per year in income, and the income would grow by $1200 per year. The business is recession proof because you sell products people will always need, even people on welfare. You sign the documents to buy the business, and hire your manager to run the business for you. You just plan to collect the checks and keep an eye on the manager to make sure they are running the business the way you would if you were there working.
Day one of your new business comes, and the first person walks through your door and instead of buying your products, offers to buy your business from you for $480,000. Oh my word, you just lost 4% in one day! That is almost as much as you will make all year. You head into a slight case of depression and sulk in your tears over how much money you have just lost in one day and how painful your retirement will be.
Your manager walks up to you and reminds you that business the rest of the day went as planned. The projected profit was on track and the paycheck you were going to receive is on target. You become emboldened and start to realize that you no longer care what some yahoo off the street thinks your business is worth, because you are not selling. You bought that business because you needed an income stream, and you know the income stream is solid. You start to hope that the value of your business drops, because you plan to use some of your profits to fund the purchase of more income stream in the near future. If the income stream is solid at say $30,000 per year, you would rather pay $400,000 for the next business rather than $600,000 because the value went up.
You have arrived. Your thinking towards your business and investments has changed from the idea that you want to sell at a higher value to a greater fool, into one of wanting to buy a solid paycheck at ever lower prices. Welcome to a sleep filled retirement.
Now, let's get a few more solid income payers for a sleepful retirement. (Again, I will get back to the core stock list in a future article, but wanted to cover some of my favorite investments now.)
- Breitburn Energy (BBEP) 9.3% yield. BreitBurn Energy Partners L.P. engages in the acquisition, exploitation, and development of oil and gas properties in the United States. It is an MLP which brings along certain tax benefits for those who want to hold in a non-retirement account. Breitburn trades at a market cap of around $900 million, but the liquidation value based on book is $1.2 billion. The company is worth more dead than alive. They could sell all their assets, pay off their debts, and have enough money left over to give us a 33% return on our cash. So we own the shares waiting for the true value of the company to be recognized, and we get paid 9.3% while we wait. Seth Klarman and the Baupost Group, one of the world's greatest value investors, owns over 15% of the company.
- Rivus Bond Fund (BDF) 6.3% yield. Rivus Bond Fund is a closed end bond fund that currently trades at a 7.91% discount to the Net Asset Value of the bonds in its portfolio. That basically means they could liquidate their entire bond portfolio and return the money to the shareholders who in theory would gain 7.91% on their money. 86% of the fund is corporate bonds and another 10% is mortgage backed securities. 7.5% of the portfolio is AAA rated, 3% AA, 25% A, 40% BBB. That is over 75% investment grade. At the moment the fund does not use leverage. The fee is a bit high at 1.21%, but with a nice 7.91% discount, we are looking at 6.5 years for the fee to eat into the discount we are getting buying shares here.
- Aspen Insurance Holdings (AHL) We are buying the preferred shares, but want to share about the company who is paying the dividend on the preferreds first. Aspen Insurance Holdings has a rock solid balance sheet. The book value of the company stands at $3.3 billion as of the 2nd quarter 2010. The current market cap of the company stands at $2.15 billion. This means the company is worth 50% more dead than it is alive at the moment! I sure wish I had an extra $2 billion laying around. AHL has posted between $500 million to $700 million in free cash flow the past 3 years. That is a huge return on a $2 billion market cap, and the 6.2 P/E shows the value here. The chance we get paid seems very high. Investing guru David Einhorn an Greenlight Capital is the largest institutional holder of the common stock at around 5% of the outstanding shares. While the common stock pays a decent 2.1%, it does not pay more than the 10 year bond which is one of our requirements. I might take the common if the dividend were growing, but over the past 5 years, the dividend has remained constant. If the 10 year treasury dips to 2%, I will start buying AHL shares aggressively. In the meantime, one way to take advantage of this rock solid balance sheet and still get paid a respectable and solid income is to buy the Preferred A shares (AHL-PA). The preferred shares have a par value of $25, which is currently 11.11% higher than where they trade currently. The issuer can redeem them Jan of 2017 at $25 if they so choose. The shares pay .4625 cents per quarter which gives a current yield of 8.22%. This dividend is set through 2017. That is 7 years of solid income! After 2017, the shares will pay the yield of the 3 month LIBOR plus 3.28% and will reset quarterly. Keep in mind - the LIBOR shouldn't be able to go under 0%, and currently, it is pretty close. So worst case scenario, if rates stay low forever, in 2017, we would get paid 3.28%, which is still better than the 10 year. More importantly, we will then be in a variable rate investment. If rates rocket higher, so will the income we recieve. Starting in 2017, we will have a "fixed" income investment in which we not need to actually worry about rising interest rates. In the meantime, we will get paid over 8% from a company with a rock solid balance sheet. Sign me up for that deal!
Disclosure: Author long BDF, AHL-PA, BBEP
