Volatility is the Real Price of Income

This article was written with Steve Cordasco, of Cordasco financial network. It's part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

David Evanson and Steve Corasco

TheStreet.com, Fall, 2012

NEW YORK (TheStreet) — Right now, itzzs easy to criticize Wall Street. Itzzs not so much a place anymore as it is a target-rich environment. Not that the denizens of Wall Street have done much to immunize themselves from these criticisms.

I want to add one more to the list: Conditioning investors to focus on total return instead of cash returns.

For decades, investors have been keeping score of their investment performance by looking at the total account value, as they have been trained to focus on total account value when investing for retirement through a 401(k), IRA, mutual fund or brokerage account.

A good market rewarded investors with gains and a bad market reduced account values. The total sitting on the front page of the investorzzs statement is the bottom line. This makes sense since one day this total value will be converted to income producing investments and in the meantime, will serve as an ego boost in good markets.

Today, investors who are close to or in retirement, who normally would be shifting to bonds or safe assets but are being forced to seek needed income through dividend paying stocks, must shift how they are keeping score and look beyond the total account value. The new way to keep score for dividend investors should be the investment income column of the statement.

If you look at monthly or quarterly statements — many of which represent an advancement in the art of obfuscation — itzzs hard to even find the income. The focus is on portfolio value. This is the wrong way to look at things because it causes investors to think about, or worse, actually re-allocate their portfolio, when in many cases they should simply sit still.

As a case in point look at Intel (INTC). On May 2, INTC shares were trading at $29.27. Currently, theyzzre trading at $23.30, or a decline of about 20%.

What hasnzzt changed is the cash flow. Intel is still paying the same 84 cents a share. With $5.2 billion in cash and $8.3 billion in short-term and liquid investments, therezzs a good chance the dividend is secure. In fact INTC has grown its dividend at a compound annual growth rate of nearly 27% since 2002.

The stock is being punished because it gave a warning that it may not do as well in the future based on the economy. Consequently, big Wall Street investors who seek growth have sold some shares. Apparently, a lot of them. Yet, no analyst is questioning the dividend INTC is paying shareholders.

Remember, the large Wall Street money managers play a game where the score is kept quarterly. Main Street investors should not keep score this way. When they do, they get spooked by volatility and make poor decisions.

Like Intel, venerable Hewlitt-Packard (HPQ), another Dow component, has seen its price swoon by nearly 35% for the year to date. But also like INTC, the cash flow it offers investors, a now healthy 3% yield, has not changed.

This income-amid-volatility is not confined to tech issuers. Even “stable” utilities have shown volatility. Take Aqua America (WTR), a water utility.

After an uneven run-up over the past year, the stock is falling again and is 6.4% off its recent highs. But since 2002, WTR has raised its dividend from 32 cents to 63 cents, nearly double. Who can say they have doubled their income in the last 10 years?

I donzzt think investors and retirees enjoy the volatility in the market. Unfortunately, I fear itzzs a fact of life for the foreseeable future.

In fact, it seems as if withstanding the volatility is the price investors must now pay to earn stable cash flows that outpace inflation.

However, I believe and recognize that this is half the battle. Because once investors understand that sustaining income is more critical than portfolio valuation, volatility is reduced to little more than a frightening nuisance.

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