(note: I began writing this article in JULY 2010! But feel it is very appropriate to finish this now in January of 2011)
7.26.2010 & 1/4/2011
Investing for “Cash Flow”
Looking at the investment landscape, I am seeing waves – waves of stock prices going up and down, up and down. And all the more so in my mind because financial media focus on such a short term time horizon, if I simply look at the news in December of 2010, I feel like stocks have been rising all year – at least that’s the impression I get from the headlines.
However, in reality, when looking at longer time periods, we see that the market started the year rising then collapsed following the “flash crash” in May. After trolling around down below, the market began rising again, slushed around in the summer then started a huge rally in the late summer & fall. It’s been quite crazy! And if you look at the past 10 years, it’s even crazier as the market has basically flatlined over the 10 year period but the ups and downs have been HUGE.
What to do about this?
I say go for cash flow – at least how I view getting “cash flow.”
And there are many ways to get it. Good old-fashioned dividends can work, but finding the right dividend stock can be dangerous. Amateurs often go for the highest (bigger is better right?) dividend but sometimes high dividends are the result of a low dividend paying stock crashing on its way to bankruptcy.
What I Do
Historically, many studies have shown that a combination of income and growth in stocks helped investors through rough periods when planning for long term retirement asset growth. Going for income and growth can also help with your portfolio overall and I don’t mean just with dividend-paying stocks!
And with markets manic depressive as they are now with government/hedge fund/big bank manipulation of asset prices, dividend strategies are just one of a few strategies to consider in choppy markets to boost cash flow. Here is a list of things I do, including dividend strategies, to try to make sure I have a chance to earn something when doing investment portfolio planning:
- Some of my emergency fund is in a merger-arbitrage (M&A) mutual fund – for you this may seem risky but for me, I don’t want my emergency fund earning 0% at the bank (thanks Ben). I studied a fund and its response to various market cycles and I feel for my risk tolerance I can handle this (I actually can’t handle the risk of 0% on my money!). And if I can improve my own ability with M&A strategies, I might try to emulate Warren Buffet who earned roughly 20%/year+ from M&A investing. Potential Upside: 3-8%/year vs 0% on cash on money invested in the fund
- Put strategies – when the market is falling especially, I sell out of the money puts on blue chip stocks that I would like to own at lower prices anyway. I did this in the first half of 2010 as markets wre choppy but stopped after the late summer run-up in prices began. Potential portfolio upside: 1-4%
- Buying dividend stocks on dips – buying a dividend paying stock with a decent yield when the price is dipping is not fool-proof but has worked well for me over a 2-3 year period. For example, let’s say you bought AT&T stock (T) because you were an iPhone fan. And let’s say you bought in September 2008 @ $33/share after the stock had fallen from 40 to around 33 because you thought it had fallen “enough.” Of course you were upset when it proceeded to fall farther and hit a low of 20.90 a few weeks later! Ouch! But if you still held AT&T, your stock would be at 29.76 (price at the moment I am writing this on 1/5/11) and you would have earned $1.72 in dividends for one quarter in 2008, all of 2009 and 2010. That’s roughly $3.87. 29.76 + 3.87 = $33.63. A little above your purchase price. not bad considering it was the worst crash since 1929!
- Selling half of my speculative stock positions on a “double” – if I own a very speculative stock, and it rises quickly in a hot market, I almost always sell half when it rises by 100%. This strategy is espoused by some investors I follow and I adopted it for my own use. Unless you have conviction about the long term success of an investment (and even if you do), it helps to “pocket” some gains on speculative stocks. Therefore, if they spike and plummet repeatedly (as some speculative stocks tend to do) I can capture gains and still let 100% of my original investment stay at work.
These are the four strategies I use (on top of my process for actually picking the investments in the first place) to try to help my clients and me make something of a messy market. I have doubts about a 3-5 year rally going forward (who knows with Bernanke printing all that money), like the ones we had from 2003-2007, 1995-2000 and 1982-1987. Therefore, cautious as I usually am, I use these strategies to help me feel better and protect and try to grow our assets. Each one of these strategies adds “cash flow” in one way or the other, at least according to how I think.
For you, you must choose your own strategy. Note that some of these strategies are better done in an IRA since you won’t pay current tax on the
income or gain you generate and you won’t have to fumble around with the tax forms at the end of the year. I am trying to keep more of my long term holdings outside the IRA and do some of these strategies above inside my IRA. All in all, it would help if you consulted an advisor. This is not meant to be advice specifically for you, but just to give you insights that just buying and holding are not the only ways to do things. Also, don’t take this as tax advice – consult your CPA or advisor before making tax strategies.
If you have any questions, call us – 781.393.0021 – or send us a Quick Contact; or talk to your own advisor.
Thanks for reading and hope this helps and please see my disclaimer because I don’t want you to take this as specific advice for you (because I can’t guarantee any results) but more as helpful thoughts in sharing how I think: Disclaimer
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