Steve Cordasco and David Evanson
TheStreet.com, Winter, 2012
These are volatile times. In September Apple (AAPL) seemed unassailable and spiked to $705 per share. Then there was the maps fiasco, sentiment waned and suddenly it became a $520 stock. The fiscal cliff problem was solved, then it wasnzzt. Europe was on the brink of salvation, then implosion.
As we enter what I expect will be a recessionary environment in 2013, I am focusing on companies that offer nondiscretionary products and services, because their customers and cash flows tend to be more reliable.
One way to do this is with newly created investment motifs, which are similar to indices and are very cost-effective. You can read about this type of investing at Motif Investing.
One motif is called simply Utility Bills. Itzzs different from most utility indices and ETFs because it encompasses more than just payments homeowners and renters make to gas and electricity utilities. It also includes services such as cable TV, telephone and trash pickup.
This motif gives you exposure to companies that benefit from peoplezzs desire to come home to a brightly lit and clean house, a hot bath, cable TV and maybe a cup of tea.
Many people consider these nondiscretionary services, so demand for them is likely to remain more consistent in a sluggish economy than demand for, say, luxury travel, dining out and new cars.
The 25 stocks that make up this motif, including AT&T (T), Comcast (CMCSA) and Waste Management (WM), are believed to offer investors the benefits of dividends and lower volatility.
To see the stability of cashflows that can come from providing, say, Internet services, consider Comcast and its very popular on-demand services.
Letzzs say a customer is behind on his monthly payment to the Internet giant but is spending a snowy Saturday afternoon at home. When he tries to watch The Dark Knight Rises, he will be instructed to contact Xfinity (the Comcast brand for a variety of Internet services) to pay up.
Hezzll be able to use a credit card to get current on his bill and will be watching his movie in 15 minutes. Meanwhile, Comcast still has a customer and a way of getting future bills paid.
Popular technology companies have significant unknown variables. Maybe Apple is winning the tablet war, maybe it isnzzt. Maybe Oracle (ORCL) will capitalize on the momentum of cloud computing, and maybe it wonzzt. Moreover, in tough times, upgrading an Apple iPhone is not as important as keeping the heat on, or keeping the trash from piling up.
But with utility-related equities, there are many, many more knowns: the number of customers under contract, average bills, length of contracts, regulated rates, seasonality. Under these circumstances, revenue, earnings and cash flow are much more predictable. Fewer surprises frequently translates into lower volatility.
Then therezzs income. Utility-type companies typically throw off cash in the form of dividends. For instance, venerable AT&T now has a dividend of approximately 5.3%. Portland General Electric (POR) currently has a 3.9% dividend. Dividends can and do make a material contribution to an investorzzs total return.
But therezzs another element to dividends that investors often donzzt consider: growth. That is, some companies have proven to be particularly adept at consistently raising their dividends, which over the long haul, can have a positive impact on investor returns. For instance, Aqua America (WTR), which is in the Utility Bills motif, has doubled itzzs dividend over the last 10 years, from 32 cents per share in 2002 to the current annualized dividend of 70 cents. In less than five years, Comcast has nearly quadrupled its dividend, from 18 cents per share to the current 65 cents.
With 10-year Treasuries paying less than 2%, dividends of 3% to 5% can look very attractive, even though the stocks that pay them carry more risk. This theme may sound redundant because it has been in favor the last few years.
Many investors who are worried about dividends and a change in tax code, have been selling dividend stocks anticipating the strategy is played out. I donzzt believe so. Of course, if taxes on dividends go up and continue to be assaulted by Washington politics, these stocks could be exposed to downward pressure. I would suggest, however, to buy on weakness. Over the past 12 months, the stocks in the Utility Bill motif returned 26.1%.
So go ahead. Let the world gyrate around you. When you finally get home to your oasis of peace, remember that the boring and predictable stuff can make for a great addition to you investment mix.