4 Cash Cows for Bad and Good Times
01/21/2013 11:00 am EST
Knowing you have solid investments that will cruise through hard times and blossom in good times is the greatest base you can build as an investor, writes Neil George of Liberty Investor.
Nothing will be immune to massive short-term selling when everyone is betting on the worst parts of the Bible unfolding on any given trading day. And when seemingly every next day brings just more of the same doom-and-gloom selling, few investments beyond cash can hang on.
But no one can retire and live on cash. Not unless you have a whole lot of it and enjoy burning through it to pay your bills. Instead, we all have to work with the markets.
But what happens when the markets seem to be completely unworkable? The key is to know your stocks and to be sure that they will be able to continue to keep paying you even as the rest of their peers run into a genuine Apocalypse.
This doesn't mean that the prices on even the best companies' stocks backed up with solid, cash-generating assets won't take hits. They have and they will.
Take, for example, one of my long-term favorites in the petroleum pipeline businesses: Enterprise Products Partners (EPD). The company has continued to serve its investors by building up assets and revenues and paying the lion's cut to shareholders from day one. Yet, if you look at the performance of the stock, it has not been without some big price drops now and again throughout its history.
But as the cash has continued to be generated and paid, it hasn't affected near-term price gyrations, since the performance has been anything but a huge success. It has enjoyed an average annual performance of more than 17% against an anemic and still volatile S&P 500 index average loss in price alone of more than 4% over the quite volatile past five years.
The key is to know thy stocks and know when a company is going to make it or is going down for the count. This is what you should do every time you open your investment account statements. Each stock has to be considered to be worth a new buy, or it should be sold off in favor of better opportunities.
The downdrafts in the market aren't without some opportunities. And while seeing so many of anyone's stocks getting slammed is harrowing, it does provide some upside potential. Having a portfolio so heavily invested in high-dividend-paying investments means you have access to cash to buy more of the quality stocks, bonds, and funds when they're put on sale.
This happens all of the time. In any given day, month, or quarter, any one of my favorite investments will have a bad trading time in the markets, in effect providing a markdown sale for you to buy or buy more. And now and again, the markets will unleash the worst selling sessions, which has provided some really great sales on some of the greatest investments.
Take, for example, another long-term favorite of mine: the AllianceBernstein Global High Income Fund (AWF). This closed-end investment company owns a great collection of the world's improving creditors rather than those that are heading into credit hell. And it pays amply all along the way.
In 2008, the markets were headed into real trouble, with investors and traders alike thinking that it was potentially game over for most of the markets worldwide. But it was one of the greatest times to buy what you knew was going to keep working. The market woes set up a sensational opportunity to buy and/or add to the AllianceBernstein, which in turn has continued to deliver more than 35.6% average annual returns since then.
No one can guarantee that the current market mayhem won't end up being the end of days. And no one can assure you that Enterprise Products, AllianceBernstein, or others of my favorite bigger-dividend-paying investments won't run into genuine trouble.
But the internal guts of these have proven out in their stress tests of revenues on their income statements and their debt servicing on their balance sheets. They have what it takes to keep working and keep paying you to own them, despite what the stock markets might be doing to them.
Cash Keeps Coming
What should you be focusing on during the next few months-especially if Congress and the White House continue to bicker and dither? The answer, of course, is to make sure that you own more and more solid and high-yielding cash cow investments.
Cash cows are there to make sure that despite any market price action, your portfolio is paying you in order to ensure that you can pay your bills while building up your portfolio with cash piling up.
This means starting with my four favorites, which have been around for years and years: AllianceBernstein noted above, and its favored peers Templeton Emerging Markets Income Fund (TEI), PIMCO Strategic Global Government Fund (RCS), and Legg Mason Partners Income Trust-Western Asset Emerging Markets Debt Portfolio (ESD). These four global bond investment companies continue to do what they've always done.
Even with all of the current and recent market concerns and fears, all four of these continue to perform. Combined, the four are generating an annualized return of more than 19%. Sure, you've seen some ups and downs; but 19% is still 19%. And this is pretty much the continuation of the long, multi-year history of these four cash cow investments.
One of the keys to their success is that the managers of these investments don't buy into the hype of the AAA markets which are priced to fail, as has become the fate of the US Treasury. Instead, they invest in the markets where debt is low, revenues and exports are high and rising, and capital flows into not out of them. In other words, they're invested in sustainable markets and economies.