We continue to focus in on dividend-yielding stocks as a means of providing income as well as growth in these days of the new normal of low interest rates and turbulent markets. In this review, we relax the requirement for dividends but look for companies with strong free cash flow.
Dan Caplinger of the Motley Fool lines up the cash kings of the Dow. His focus is on finding companies that are generating cash as those are the most healthy. To my mind, a company that is generating free cash flow is one of interest. Added to this, we are talking about large-cap stocks that are going to be able to weather the current storms.
Operating Cash Flow
Free Cash Flow
|General Electric (GE)||$33.87||$14.46||$19.41|
Source: S&P Capital IQ. As of Jan. 12. Numbers in billions. Rounding may affect results.
Note that this doesn't necessarily turn into dividends and that there is less diversification. Nevertheless these are five strong equities that are worth measuring to see how they compare with our dividend-bearing ETF portfolio:
|Asset||Fund in this portfolio|
|REAL ESTATE||(ICF) iShares Cohen & Steers Realty Majors|
|FIXED INCOME||(TIP) iShares Barclays TIPS Bond|
|Emerging Market||(VWO) Vanguard Emerging Markets Stock ETF|
|US EQUITY||(DVY) iShares Dow Jones Select Dividend Index|
|US EQUITY||(VIG) Vanguard Dividend Appreciation ETF|
|INTERNATIONAL EQUITY||(IDV) iShares Dow Jones Intl Select Div Idx|
|High Yield Bond||(HYG) iShares iBoxx $ High Yield Corporate Bd|
|INTERNATIONAL BONDS||(EMB) iShares JPMorgan USD Emerg Markets Bond|
- The Cash Kings of the Dow -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||2%||22%||10%||77%||8%||57%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||1%||6%||15%||96%||2%||8%|
|The Cash Kings of the Dow||10%||43%||15%||67%||2%||6%|
With only five equities in the selection, there will be more volatility and therefore a lower Sharpe score. My view of these results is that free cash flow will be looked at more carefully in the era of the new normal and free cash flow can always be turned into dividends that will further enhance the stock.
Three-Month Chart One-Year Chart Three-Year Chart Five-Year Chart
The five-year chart is interesting to me. I see these can be volatile stocks with precipitous drops but then clawing back. I think that strong free cash flow is going to be an important metric as you have a strong business base to ride out the storm. Given that these are strong companies, this is a selection and a method of screening stocks that is worth consideration. More...
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.