For years now I’ve been pounding the table on two big themes…
The first is that income investing is a great way to boost not only your returns but your cash flow. And second, that every investor should have a substantial chunk of their portfolio invested in commodity stocks.
Here’s the good news: it is perfectly possible to combine the two strategies, earning the benefits of both worlds.
In fact, by investing in income-producing commodity stocks, you get a steady stream of income along with the best possible protection against the ravages of inflation.
That combination is tough to beat. Let me explain…
Commodity Stocks With Income + Appreciation
The truth is, income investing is crucial for three reasons.
The first is obvious. No matter how well-off you become, the bills just keep getting worse and worse. I never met anyone that couldn’t use more cash.
The next two aren’t nearly as evident to most investors – even though both are of the utmost importance to their portfolios.
Stocks that pay steady, consistent dividends add a measure of certainty to share prices. It’s why top quality dividend stocks typically do well even in bear markets. Conversely, since earnings are so easily manipulated, companies with fancy bottom lines but no dividend usually turn out to be a scam and end up being priced accordingly when things turn south.
Finally, dividends themselves keep management honest (or fairly honest). Cash that is paid out to shareholders cannot be used for grandiose expansion plans, or to pump up the stock price to help inflate top management’s stock options.
As a result, companies that pay decent dividends are less likely to suffer value-destroying scams than those that don’t and are likely to be around longer. For investors, that offers stability – invaluable these days.
Why You Should Favour Commodity Stocks
As for commodity stocks, I’ll be the first to admit they are not a universal panacea. But two long-term factors currently favor them.
The first is in emerging markets which tend to consume more commodity-intensive goods as their national wealth grows.
The second trend is a bit less agreeable though one of the most powerful movers of commodity prices. It’s the world’s central bankers.
For the past five years, global monetary policy has been jammed into accelerator mode, with interest rates far below the inflation rate. This tends to raise commodity prices, especially in gold and silver, since they are thought to be good protection against inflation.
But here’s the payoff for investors: commodity stocks are actually cheap right now.
Commodity prices have come off their spring 2011 highs, indeed declining more than the stock market in general. Still, commodity prices have remained quite strong, so many commodity-related stocks are selling at very attractive valuations. With global monetary policy becoming even more expansive and emerging market growth continuing strong, the stage is set for a sharp commodities-related rally.
In fact, even if the markets as a whole are weak in the second half of 2012, commodity stocks with moderate leverage and good dividends are likely to outperform.
Martin Hutchinson
Contributing Editor, Money Morning
Publisher’s Note: This article first appeared in Money Morning (USA)
From the Archives…
The Credit Market Debt Bubble and the Role of Gold
13-07-2012 – Greg Canavan
How to Survive and Thrive from China’s Bust
12-07-2012 – Kris Sayce
Payday Loans: Why This Lender of Last Resort Isn’t the Bad Guy
11-07-2012 – Kris Sayce
What A Slowing Chinese Economy Means For Pork Chops
10-07-2012 – Dr. Alex Cowie
Late News: Bankers Rig Interest Rates, No-One Fired
09-07-2012 – Dr. Alex Cowie
How Commodity Stocks Provide High Yields and a Hedge Against Inflation
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Tradervox.com (Dublin) – The sterling pound closed the week almost a cent higher than the previous week, following some strong releases at the end of the week. The strong Manufacturing production and industrial production reports came in above the market expectation hence boosting the demand for pound as a safe haven. However, the pair has pared its gains at the start of trading on Monday, after Rightmove HPI report showed that the index fell to the least in eight months. The index fell by 1.7 percent.
Tradervox.com (Dublin) – The pair has been trading on its regular trend but lost uptrend support last week. With Bank of Japan’s monetary policy meeting minutes due to be released this week, the cross is expected to remain neutral over the course of the week. The Bank of Japan resolved last week to keep the interest rates between 0.0 percent and 0.1 percent and made a technical move of moving 5 trillion yen from its credit facility fund to its asset purchasing program. There are two major events this week that will affect this pair from Japan. Here is a look at those events as technical analysis for the cross.