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 retirment 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.
>> Continue to Part 2
Disclosure: Long WM, T, AT, KMB, SYY in personal and client accounts