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Stacking The Deck For Dividends

April 14th, 2014 at 11:53 am

The success of my stock investing strategy is based on actually being paid the dividends offered by the companies in my portfolio*. But those promises to pay depend on the future earnings success of those companies. And the further out one looks into the future, the more speculative those promises become. But that is not the case for all companies. There are some that have their earnings locked in for years to come -- which makes their dividends a lot more reliable. Here is how I have stacked the deck for dividends in my portfolio with those companies.

Certain types of companies, in certain industries, have business models that allow them to (1) operate based on longterm sales contracts and/or (2) enter into financial operations that guarantee the future price of their products. This makes it possible for me as an investor to have visibility well into the future regarding those companies' sales and cash flow. And that is what the continued payment of dividends depends on.

As I write this, 15 of the 20 companies in my portfolio have those types of business models. It is only because of my stock diversification strategy** that I do not have 100% of my portfolio companies falling into those categories. But the 15 I do have give my portfolio a more reliable future dividend payment stream.

Longterm equipment lessors. As I write this, I am holding stock in 6 companies whose business model it is to own equipment which they lease out on multi-year contracts for set daily rates. This includes companies owning and leasing out dry bulk cargo ships, container ships, offshore drilling rigs, and tankers. Because of that business model, I am able to see that the cash flow to pay out dividends is (almost) sure to be there years into the future.

Basic materials producers. As I write this, I am holding stock in 6 other companies whose business model it is to dig stuff out of the ground and sell it to other companies that then process it. This includes companies extracting oil, natural gas and soda ash (trona). Not only do these companies sell their production by future contracts, but they also engage in hedging operations that allow them to predict and secure how much they will be paid in the future for their production. Because of that business model, I am again able to see the future cash flow that will support my dividends.

Fee-based servicers. As I write this, I am holding stock in 1 company whose business model it is to own pipelines and storage facilities that its clients contract to use on a multi-year basis at guaranteed rates for specific storage capacities and volume flows. Because of that business model, I can project that the cash flow to pay out my dividends will be there years out.

Interest and dividend accruers. As I write this, I am holding stock in 2 companies whose business model it is to provide financing to other companies through mixes of secured loans and equity investments under contract terms that lock in set rates of return for years out into the future and also secure substantial termination fees if the loans are paid off ahead of time. Because of that business model, I am able to see where the cash flow is going to come from to pay out my dividends well ahead.

What all these companies share in common is longterm cash flow predictability. That predictability makes my future dividend flow more reliable and lowers the risk of my high-yield, high-risk portfolio***. And that is what I call stacking the deck for dividends.

# # #

*Why I Only Buy Dividend Stocks:
http://retired-to-win.savingadvice.com/2014/01/01/why-i-only...

**Stock Diversification My Way:
http://retired-to-win.savingadvice.com/2014/04/13/stock-dive...

***My High Yield, High Risk Investing:
http://retired-to-win.savingadvice.com/2013/12/20/my-high-yi...

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