Steve Cordasco and David Evanson
TheStreet.com, Summer, 2012
NEW YORK (TheStreet) — I have five kids. The oldest is 14, the youngest is 4, with the rest in between. I get all the reading time I want between 7:00 p.m. and 9:00 p.m., as long as I stick to childrenzzs books.
Dr. Seusszzs famous work, “The Foot Book,” is now burned in my brain, traveling so easily down my synapses, that I often find myself saying, during odd moments during the day, such as waiting for an elevator, “Left foot, left foot . . . ”
Call me loopy, or sleep deprived, but I think therezzs something very important for investors in this book.
Specifically, I think the brokerage industry has gotten investors thinking too much about the left-hand side of their statements, which shows the growth of the portfolio and its total value, and not enough about the right-hand side, which details the income.
I was fine with this kind of thinking for younger investors with many years to retirement. But for Baby Boomers itzzs time to shift the mindset and learn a new investment language of retirement investing: Income, income, cash flow, cash flow.
To the consternation of many, Bill Gross recently said equities are dead. I donzzt think theyzzre dead, but I do believe robust growth is dead for a few years. In its stead, investors need to think about the income they are realizing from their investments, with much less focus on the volatility of their investments.
Remember: Income, income, cash flow, cash flow — especially the high levels of income that can be earned from stable companies around the world, producing real products and real cash flow. This should be the new mantra for Baby Boomers looking to maintain their standard of living in retirement.
As a result, I firmly believe Boomer investors need to go back to the kind of investing past generations did before the engineering of modern investment packaging and sophisticated investment technology. That is, they need to select individual stocks that will deliver income, maintain the kind of balance sheet that provides some measure of protection against market downdrafts and, finally, offer some prospect for growth, perhaps 2% to 3% annually above the income, or approximately equal to the rate of inflation.
Focusing on income doesnzzt mean buying the Vanguard High-Dividend Yield(VYM) index fund paying a 3.2% dividend yield, or the S&P 500 yielding 1.96% as the core of your investment plan and letting it ride like you did in your 401(k). An over-allocation in this type of investment during the retirement phase will not provide the necessary cash flow many investors will need.
Itzzs better for many Baby Boomers to select a diversified mix of individual companies across the globe as the core of their investment plan and low-cost funds as a minor complement to the plan. Think globally, and think higher yields, like GDF Suez ((SZE_):Amex ADS), a French producer of natural gas and utilities, which is currently yielding about 8%.
Regarding financial strength, there are strong companies that deliver income in diverse fields including nondiscretionary consumer products, energy, agriculture and health care, to name a few. For instance, GDF Suez has a current ratio (current assets/current liabilities) of about 1.0, which means that basically, itzzs unlevered.
In the world of equities, where valuations are driven by logic and emotion, seemingly in equal measure, therezzs no such thing as safe, only safer. Under this logic, look at AT&T(T_), with a current ratio of 0.64. In a bad market, T will have more downside risk, and in an up market, will give more growth; along the way, GDF will pay double the dividend.
Finally, regarding growth, I donzzt see therezzs much to be had above the rate of inflation. Boomers holding income-producing stocks in tax deferred accounts will — for now — avoid taxes and more or less keep the purchasing power of their investments in tact.
Though Izzve referred to Baby Boomers a lot in this article, Izzm not sure Gen X, Gen Y and Millenials wouldnzzt benefit from an income rather than growth orientation. After all, a 5%-to-8% dividend reinvested on a tax-deferred basis, with a tailwind of perhaps 2%-to-3% annual increases in value via inflation is growth.
Make note, the strategy of investing for cash flow globally through individual stocks and bonds is a more expensive strategy, but for Baby Boomers, can be a net win. For a younger investor, you can pair the strategy with low-cost, high-growth index funds.
Donzzt get me wrong, this is no panacea. Therezzs risk. But I think the game has changed, and investors will need to assume more risk for the foreseeable future to get what they need from their investments.