My personal investing philosophy is that cash flow to the investor matters most.
Don't misunderstand. I'm all for price appreciation. But to count on price appreciation alone to provide return on investment is to speculate, not to invest. It's impossible to quantify when and where, or even if price appreciation will occur with certainty. Cash flow to investors - and I'm speaking of dividends - is different. Dividends of quality companies - like those that comprise the High Yield Wealth portfolio - are quantifiable and can be used to gauge credible investment value through discounted cash-flow analysis.
Besides, the idea that return is generated mostly through price appreciation is really a fallacy. The truth is that most of the return generated by equity markets in developed countries is attributed to dividends, not price appreciation. Just look at the data covering the past 10 years.
MSCI County Index | Price Index Return | Total Return |
Australia | -0.2% | 4.2% |
Canada | 3.9% | 6.3% |
France | -1.8% | 1.5% |
Germany | 1.5% | 4.3% |
Japan | -2.6% | -1.0% |
United States | 1.7% | 3.8% |
United Kingdom | 0.2% | 4.0% |
Source: MRB Partners
Total return has been nearly nonexistent in most of the aforementioned countries. Those returns would be even more nonexistent had it not been for dividends.
More than half the return in United States stocks over the past 10 years was due to dividends. In Australia and France, dividends turned negative returns into positive returns. It's little wonder, then, that index investing has been a dead strategy since 2000.
I don't see the outlook for broad indexing to improve in the near future. There are too many structural impediments - intractable unemployment, tight lending standards, higher regulation, and tax uncertainty - for the broad market indexes to move significantly higher. The fact that broad-market stock indexes offer little in the way of dividend payout makes their return prospect even grimmer.
High yields and rising payout investments are another matter altogether. I've seen strong dividend streams lift returns in the High Yield Wealth portfolio ... and lift them much higher than the broader market indexes.
Business development corporation Ares Capital Corp. (NASDAQ: ARCC) is a perfect example. Ares has offered little in price appreciation since I added it to the portfolio in February 2011, yet it has returned more than 12%, with most of the return attributed to a high distribution yield and a growing cash flow stream. As for Ares' high cash flow, it yields 8.8% as I write. Moreover, that flow has been increased in three of the past four quarters.
The good news is that a persistent, rising cash flow to the investor is usually enough of an impetus to get the share price rising. Year-to-date, the Ares share price has advanced 11% and is now above my initial entry point.
Altria (NYSE: MO) is an even clearer example of dividends driving share price. The maker of Marlboro has raised its dividend every year for the past 40 years. Altria's dividend accounts for 5% to 6% of the 20% average annual return it has posted over the past four decades. I attribute the price gains to the rising dividend stream.
Altria has been part of the High Yield Wealth portfolio for little more than a year, and has already returned more than 35%. Though a slow-growth company, Altria consistently moves the needle forward through efficient cost-cutting and forays into market-dominating ventures, such as UST and its Copenhagen and Skoal chewing tobacco brands.
Many analyst would say that Ares' and Altria's stock are riskier than a quality bond. I disagree. Yes, bonds have a higher asset claim should the company run into financial difficulty. But the payments on bond are fixed. We live in an era of monetary inflation, and over the years a fixed payout will continually lose value.
That's not the case with quality dividend-paying stocks. An investment that continually raises its cash flow to investors annually is really the less risky investment over the long haul, because that investment maintains purchasing power through time, unlike the payment stream of a fixed-income bond.
Disclosure: None
