Steve Cordasco and David Evanson
TheStreet.com, Spring, 2012
NEW YORK (TheStreet) — Headline news last week read therezzs a run on Greek banks going on and eurozone chaos. As an adviser, I see a classic Greek tragedy, but I also see opportunity. Wezzll get to the opportunities, but first I want to discuss the fallout from the tragedy.
In a word, itzzs this: inflation.
Call it what you will, stimulus, quantitative easing, monetary policy, but to me itzzs all the same: printing money. Itzzs happening in the U.S., and itzzs happening in Europe. Historically, printing money leads to inflation.
Inflation is to savers what kryptonite is to Superman. Itzzs even worse in a low-yield environment, such as the one we are faced with. High inflation and low yields often result in negative returns when measured by purchasing power.
For example, someone heading into retirement with $1 million earning 4% may be doing OK. If they are facing 3.5% annual inflation however, their purchasing power will be cut in half over the ensuing 20 years. At 5% inflation, the damage to their purchasing power is devastating.
Further, investors want to know when inflation will materialize. My answer: usually when you least expect it.
The opportunity is to put together what I call a global cash-flow strategy. Despite whatzzs happening in Greece, Europe and domestically, there are still great opportunities all around the world, in real asset companies, with real cash flow, that pay investors dividends and over time, increase these dividends. This is hardly a new story; it has been in the news a lot lately. But smart investors will take it to the next level and seek out lesser known U.S. and foreign companies.
Now is the time to start doing your homework by creating a wish list and starting to accumulate some of these assets. By doing so, you are likely to increase the cash flow from your investments, and hedge yourself against the inflation that can erode your purchasing power. To me thatzzs the ultimate success story for Baby Boomers in their retirement years.
One way to think about a global cash-flow strategy is to start with countries that are not printing money to prop up their economies. Here are four good ones: Canada, Norway, New Zealand and Australia. Here are some examples of whatzzs out there.
Sydney Airport Holdings (SYD: ASX). Right now the Sydney Airport, a public company trading in Australia and on the Frankfurt Stock Exchange, is indicating a yield of 22 cents annually or about 9%. In 2004, it was paying 12 cents a share. Even during the worst year of the financial crisis, 2009, it paid 21 cents a share.
EnerVest Diversified Income Trust (ENDTF: TSX) is a diversified, closed-end fund that invests in income-producing and growth-oriented companies that trade primarily on the Toronto Stock Exchange. The fund makes distributions monthly and is currently indicating a yield in the neighborhood of total 2012 distribution of $1.20 a share (the same as 2010, 2011). With a current price of $12.23, the yield is about 9.8%. The top five equity holdings as of April 30 were Suncor Energy, Royal Bank of Canada, TELUS, TD Bank and Imperial Oil.
Telecom Corp. of New Zealand(NZT_). Telecom is the largest provider of telecommunications and IT services in New Zealand. The company has paid a quarterly dividend continuously since at least 2002. Right now, the stock has been paying more than 6%. With an economy unburdened by government intervention in the money supply, many are speculating that New Zealanders are not going to stop talking anytime soon.
SeaDrill Limited(SDRL_) is a Norwegian company headquartered in Bermuda that provides offshore drilling and well services. Currently the company is indicating a 7% annual yield. SeaDrill trades on the New York Stock Exchange and the Oslo Stock Exchange.
Yes, therezzs a lot of negative news out there. And if thatzzs all you focus on, thatzzs all youzzre going to hear. But now is the time to take advantage of bad news. The bottom line is you must not give up on maintaining the purchasing power on your money over time. The show must go on, and that means basic companies, providing basic goods and services that people must have, is one way to provide yourself a hedge during the turbulent times.
By the way, I donzzt own any of the stocks for funds mentioned here. Some of my clients do, however.
Finally, next week Izzll be sitting down with uber-investor Jim Rodgers who co-founded the Quantum fund with that other legendary investor George Soros. Jim and I will be discussing “real asset investing” casually as part of a panel discussion at Temple University. Izzll be sure to report some of the insights I learn from Jim in a future column. Stay tuned.