The Dance of Investing
Investing is a kind of dance. You dance between the risk of not having the money you need when you need it and the risk of losing all the money you have. How you dance, your personal investing dance, is up to you. You can dance in the safest area, the center of the dance floor, put your money in low yielding investments and hope to earn enough to outpace inflation. Alternately, you can dance nearer to the edge, aiming to make much more money, not at some hypothetical future time, but now.
This article is about your income, today's income. It is not about long-term investing, future returns or dividend growth. Oh, those are all good things - it is just not what this article is about. We are talking about your personal cash flow, the stuff that passes through your current account and rests briefly in your wallet - folding green, Ben Franklins, legal tender for all debts public and private. It is the stuff that is honored above all else by every merchant and purveyor of services in the world.
While they say that money does not bring happiness, it is certain that a paucity of money can bring unhappiness, even misery. I contend it is much better to have the money you need now, plus a little more, than not enough. For me, any situation, which leads me to not have the money I need when I need it, is a very risky one. Near the top of the list of those risky investments is putting your money in the bank. Buying US Treasury Bonds comes in a close second. On the other hand, an investment that yields 20% a year sounds too good to be true, and probably is. That is, at some point dancing near the edge sets you up for a fall. Where on the dance floor is your favored spot?
Income Investing Today
Once upon a time, not so long ago in this very land, bank savings accounts paid 3% and bank CDs yielded 6% or more. Investors in government and corporate bonds received interest in the same range and equity investors could make money too.
There is a lot of writing and discussion about dividend growth investing on Seeking Alpha and I have done some of it. It is probably the best way for anyone under 65 to accumulate wealth and a good way for a retired person to make sure its dividend income increases with inflation. It's a future oriented strategy. However, when you are pushing 70 or are older than that, or perhaps your working years ended early, you may need income today - you simply cannot live without it.
Let me repeat, my idea of a risky situation is one that puts me in a place when I do not have enough money when I need it. Here are some possible examples. Let us say my rent is $1,200 a month. How about if I go to the landlord and say, "I can only give you $600 this month because interest rates are so low." How about if I go through the checkout line at the grocery store and the total comes up to $114.23. Do you think they would settle for $57 and change, and a promise that I would pay them at some future time when my dividends grow? Right. You are at a ball game and the hot dog vendor wants $5. I do not think that is negotiable. You want to fill up your gas tank. A 10-dollar bill might have done it in 1975 when gas was 57 cents a gallon, but not today.
Invest for 3% or 6%
How much would you like to earn on your money? If you invest in the highest quality blue chip stocks you can average a 3% yield. That is dancing in the center of the floor and you can invest in Microsoft (NASDAQ:MSFT), Procter & Gamble (NYSE:PG), Emerson Electric (NYSE:EMR), General Electric (NYSE:GE), Chevron Oil (NYSE:CVX), McDonald's (NYSE:MCD) or Johnson & Johnson (NYSE:JNJ) and get 3%. In my opinion, that is not enough. In fact, I'd like to have twice that, let us say, 6% or 7%. That would mean twice as much income today. How does that sound?
That is possible, and even if you do not embrace the ideas that follow completely, you can certainly take three giant steps toward much more income. Income today is of the most importance for us for whom geezer status has arrived or is immanent, and for a lot of other people too. We need to pay the rent, like to eat on a regular basis and have to put gas in our cars. The good news is that 6% and higher returns are available.
Looking in the Right Places
If you use Yahoo Finance's Screener, and you look for companies amongst the 3,857 choices, you will find that 474 of them pop up in a list with yields over 6%. It turns out that some of these are funds, so if we eliminate those and eliminate the ultra-high yielders, that still leaves 85 companies. Going through the same exercise on FinVis or Y-Charts produces essentially the same results.
An important step in choosing the stocks to buy is to select ones that are not producing high yields because their price has tanked, or ones that might not be profitable in the future. One way to start is to look at earnings, make sure they bear a reasonable relationship to the price (P/E) and check that the professional analysts expect them to have future earnings growth. (Future 5-Year EPS Growth). I often use the FinVis Screener to do this. That approach gives us quite a few candidates, and I have picked out some with yields from 6% to over 12%. The table below provides some information on these companies. We note that they fall into several categories.
There are large numbers of energy companies, including oil and gas exploration, pipelines and refining that pay dividends in the 4% to 9% yield area. That is in part because of the special tax break they receive. The pipeline companies, the oil and gas exploration and refining companies above are all publicly traded master limited partnership (MLPs). An MLP distributes all available cash flow from operations to shareholders after the deduction of maintenance costs. They report partnership earnings on a form K-1 rather than the more conventional 1099 tax reporting form. Often the actual earnings are very small because of the depreciation involved and some of the paid-out cash flow is a return of capital. Pipelines have a steady tollgate-like income, paid for the passage of oil and gas through their pipes. The do not take ownership of the product and are not subject to commodity price fluctuations. The companies produce steady income and the share prices of MLPs are often more stable than many other kinds of investments. MLPs include Buckeye Partners (NYSE:BPL), Atlas Pipeline (NYSE:APL), Boardwalk Partners (NYSE:BWP), Calumet Specialty (NASDAQ:CLMT) and SeaDrill (NYSE:SDRL).
BDCs, Business Development Corporations, are also tax-advantaged structures that must pass earnings through to shareholders, though they do tax reporting in the usual manner. Main Street Capital (NYSE:MAIN) and Pennant Park (NASDAQ:PNNT) provide loans and sometimes invest capital in small and mid-sized private firms. They provide a very useful function in a niche market too small for investment bankers and large venture capitalists.
Real Estate Investment Trusts, REITs, are yet another special form of company that is tax advantaged. For the most part, they are limited to dealing in land and buildings, like Hospitality Partners (NYSE:HPT). Dynex Capital (NYSE:DX) and Annaly Capital (NYSE:NLY) are a special kind of Real Estate Investment Trust called an mREIT, or mortgage REIT. They do not hold real property but are rather in the mortgage and financing business.
Westpac Banking (NYSE:WBK) is an Australian money center bank and is one of the 6 largest banks in that country. It is and the only one traded in the US as an ADR, and the dividend you receive is "fully franked," which means that you owe no Australian taxes on it. Australia has a very sound banking system, very much in contrast to the American and European systems. The other bank is New York Community Bank (NYSE:NYCB). It is a multi-bank holding company with about 300 branches, mostly in New York and New Jersey.
PDL BioPharma (NASDAQ:PDLI)
PDL BioPharma is a very profitable $1.1 billion market cap company. It is involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases, as well as other medical conditions. It is based in Nevada and was founded in 1986.
A Blended Approach
Let me suggest that if you want to add to your income, while holding a core of blue chip dividend growth stocks, you can add any number of these stocks to your portfolio and increase your income to your most comfortable level.
In my portfolio, I hold a variety of stocks. I have four which have a yield of 3% or lower. Microsoft is the lowest at 2.70%. I own two that yield over 10%, one of them being Dynex Capital at 10.9%.
I believe that investing is always a dance between two risks - the risk of not having enough money and the risk of losing your money. My comfort zone today is in the area of an average current yield of around 5%. I go out to dinner whenever I want and sleep well at night. And there's just a little left over, which I hope I use appropriately.
What more could one want?
Disclosure: I am long CVX, PNNT, DX, WBK, PG, JNJ, EMR, MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.