June 20, 2016
The Value of an Income Stream
As I sit in our office there remains 2 days 5 hrs and 30 minutes until the British exit (BREXIT) vote from the European Union (EU). This vote will decide if Britain will remain as part of the EU or if they will strike out on their own without the financial support of the remaining member countries.
Leaving the EU will have a negative impact on the UK’s credit rating as seen from this chart.
However, the BREXIT movement appears to be focused less on credit risk and more on gaining independence from a group that some feel is expensive to be apart of, and not real helpful.
Regardless, we have no way to know which way the vote will go. Polls suggest the risk of Britain leaving is subsiding which is helping reduce uncertainty, this is why stocks are up today. Most of the impact of this vote will be felt in Europe, but there will undoubtedly be ripple effects felt here in our country as currency valuations and bank stability are now global concerns.
In light of this news, how should we react in our investing? Should we sell everything in case this event causes stock and bond prices to fall reducing our account balances?
The answer is, of course, no. This news is a perfect example of financial noise that can distract us from our normal operations of financial planning and portfolio management for our clients.
We do this by treating our income portfolios not as a pot of money, but as a stream of income (approx. 5% today annualized) that just happens to be worth more today than it has in months. Please remember though, the value of that stream of income could also be worth less tomorrow, or next month, if some global financial event happens, like BREXIT.
The result is on days like today when our income stream is worth more, we don’t sell everything and sit in cash because of financial noise. We instead look to the weakest parts of the portfolio and sell companies that might cut their dividends at the next economic downturn.
This is why we sold one of the highest paying and highest risk pipeline companies we owned Energy Transfer Partners ETP on June 6th. Although ETP was paying a high rate of income (approx. 10.94%), we were concerned about the safety of the dividend and, to be honest, should have sold it earlier when Josh Peters, CFA from Morningstar did. We feel like now is the appropriate time to take some risk off the table and add to our modest cash position to be used at the next pullback.
We’re happy portfolio values are up currently, but after mountains come valleys, and we’ll be ready for the next one.