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PAY ME.
There’s one thing that still works in these markets. It’s not about guessing about turnarounds. But rather making sure that what you own is going to pay you and keep paying you.
By Neil George
I’ve never met a man gone broke with regular checks coming in.
And sure, just like in this market you can still lose a lot in sinking stock prices. But if you can continue to buy and own a collection of stocks and bonds that have the ability to keep the checks coming for the years to come you’ll make it through pretty much whatever Wall Street might stick you with along the way.
For years I’ve been focusing on my mantra of getting paid. In a market that’s overflowing with Wall Street pitchmen and CEOs interested in feathering their nests while stripping away yours – investing in dividend paying stocks and bonds has always been the solution.
This isn’t the way of Wall Street. As instead - it has been built by pushing IOUs that promise growth rather than paying you a cut of profits if you would only just trust them.
But as the rest of the world is learning – even they don’t trust themselves anymore – so why should we?
Now, we know first hand that Wall Street has dumped on just about everything. As recently it hasn’t mattered whether a stock was a cash generating machine or a scam – it’s gotten battered.
But this doesn’t mean that you need to flee – only to understand the power of cash coming in.
Dividends build up your portfolio’s value. Wall Street might take swipes at it – and it can knock it down – but it can’t stop the growing pile of cash from the right collection of stocks and bonds.
And that power of dividends only gets stronger over the years. For as the year’s progress – the compounding of those dividends starts to add up. And two things matter with dividends – the longer your get them and how much you’re getting along the way.
It’s compelling to try to grab the highest dividends – but as I’ve written over the past year – often it’s not the highest yielders that generate the best longer-term returns – but the more reliable if not more modest payers.
This is why over the past year I’ve recommended selling several higher dividend paying stocks and bonds – favoring those that pay a bit less now – but continue to be more likely to continue to keep paying.
So my bottom line continues to be that getting paid consistently adds up to covering a lot of near term market losses. And over the years – it makes it more likely that you’ll be worth more than if you just bet on Wall Street’s pitch to bet on growth.
Checks Aren’t For Free
Dividends work – but only if the stocks paying them keep paying. Nothing in this market or any market should be taken at face value. This is why I have four rules of vetting my recommendations.
First of course is that the stock has to pay us. It doesn’t have to be the highest dividend – but getting your cut of the profits throughout the year makes it not only more likely that you’ll profit over the years – but it also helps to prove the validity of the company that has to cut the checks.
Sure, there are some exceptions to the dividend rule. But in these rare cases – the companies have to sorely justify the reinvestment of profits with compelling regular performance and not just a promise of someday all will be profitable.
Second, the business behind the stock has to be sustainable. Cash can’t come from a company that’s bleeding capital. So, I’ve always looked not at the best business environment – but the worst when looking at survivability.
A case in point can be seen with one of my recommendations - WD-40 (NSDQ: WDFC). While history doesn’t prove future prospects – it can demonstrate how companies deal with adversity.
In the last recession – the company continued to bolster revenues and both gross profit and operating income continued to be hefty with margins during the depths of the last recession still in the upper double-digit percentages.
Third, the company behind the stock has to be financially sustainable. As we’ve seen before – a good business can be run into the ground if it can’t keep funding its current operations as well as funding expansion.
This is where I look at the balance sheet and the income statements and run my what ifs. Part one is to look at the current debt and the maturities and rollovers of that debt. This means that I can see when the company has to deal with creditors to keep funding going.
Part two, I need to see that the assets of the company provide enough backing for lender’s comfort and that cash on hand as well as cash coming in can sustain debt coverage.
A case in point is another recommendation - Linn Energy (NSDQ: LINE). The petrol producer has a loan maturing in 2010 and a smaller bond in 2018. In addition it has a revolving credit line. From a balance sheet basis – its debt is only 48 percent of asset – making it under leveraged and more creditworthy.
And from a cash standpoint – its revenues – even at lower petrol prices like its peers in the portfolio can still continue to remain steady to rising at expansion rates in the double-digits currently running at an annual rate of 20 percent.
Fourth – I need to assess market risk for the stock. As the adage goes – the market can be wrong about a stock a lot longer than we can be solvent is ever more important now.
You might ask – if the company is business and financially sustainable should we be as concerned over the market’s price of the stock if we are prepared to ride out the market’s woes?
The challenge here is that if the market does send the price low enough – the company’s market capital can be reduced to make it harder to keep up its financial stability.
My response continues as it always has to be to watch the market’s pricing ever carefully and monitoring the equity capital. If it continues to fall to levels that begin to threaten the financial stability – then I have to sell.
Quality Quartet
We continue to have four primary groups of heavy cashflow paying investments in the By George portfolio that continue to prove out through our four-point vetting process. They include my favorite minibonds, bond funds, utilities and steady operating companies.
Each group isn’t impervious to market selling over the past several months. But for me – it’s the underlying sustainability of the companies and the strong dividend flows that justify my call to you to keep buying and owning them.
I start with bonds. Bonds aren’t about what happens in a month or a quarter – but over several quarters and years. And over the past five years the core benchmark US bond market continues to prove out in generating positive returns with the average annual rate earning you over 5 percent.
We continue to better them with my specific collection of government and prime corporate bond funds including the AllianceBernstein (NYSE: AWF), Blackrock (NYSE: BNA), Pimco (NYSE: RCS), Templeton (NYSE: TEI) and Western Asset (NYSE: EFL).
Yes, over the past several weeks we’ve seen horrific volatility – but through it all the underlying bonds continue to generate dividends in the high single to low double-digit plus range - while also performing so that the funds are worth more on average to the market’s current pricing.
Second includes several of my favorite corporate individual minibonds. I call them mini’s for short – but what they really boil down to being are simply regular bonds that have been cut into pieces that trade right on stock exchanges.
That means easy access for individual investors – and even better – as they trade on exchanges appearing to many as just odd-looking preferred shares – they often provide additional yield over the regular full-sized bonds traded in the OTC bond market.
A few to note that I have inside my portfolio of By George include: the AT&T 7.12% Mini (OTC: KTBB) yielding around 7.6 percent and is a great buy under 25. Next is the DPL Inc. otherwise known as Dayton Power and Light 7.875% Mini (NYSE: MJT) yielding around 8.7 percent and is a buy under 25.
Another utility - Qwest Communications has a 7.75% Mini (NYSE: PKH) yielding around 15.3 percent which is a buy under 25. Health insurer - Unum Group has a 7.4% Mini (NYSE: PJR) yielding 12.3 percent and should be a buy under 25.
And two more phone companies - US Cellular 7.5% Mini (NYSE: UZV) yielding 10.6 percent is a buy under 25 while the Verizon 7.625% Mini (NYSE: PJL) yielding 7.7 percent is another buy under 25.
Third includes my collection of essential utilities. While up and down in price – over the years they keep paying us and performing with average annual returns for this group including Southern (NYSE: SO) running at over 13 percent.
Fourth includes some my favorite operating companies including partnerships that span various industries – principally in steady cashflow industries. The returns keep coming with high cash payments despite market and economic woes. A couple prime examples to look at would include Enterprise Products Partners (NYSE: EPD) yielding around 9.3 percent and is a buy under 25 - while Linn Energy (NSDQ: LINE) yielding around 15.3 would be another buy under 18.
Neil George is editor By George.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
