No Need for Income Investors to Worry in 2016 … Or Beyond

Blackstone Group (NYSE: BX) Vice Chairman Byron Wien once again ventured forth with his annual “10 Big Surprises” prediction. Barron’s, along with a number of other prominent financial media outlets, has again republished Wien’s prediction.
Why, I’m not so sure.
Wien’s record leaves something to be desired. In 2014, Wien was right with four of his 10 predictions. In 2013, he was right with three of 10. If we go back further, we see Wien whiffed in 2010.
Of course, it’s all harmless fun, until someone puts an eye out or attempts to turn a buck on Wien’s soothsaying. As someone, somewhere once observed, “Prediction is very difficult, especially about the future.” (Former New York Yankees catcher and malaprop king Yogi Berra is wrongly accredited with this observation. The original author remains unknown; derivations of the observation are found as early as the mid-1800s.)
Actually, predicting is easy; predicting right is very difficult. For this reason, I keep my predictions to a minimum. It’s also the reason I’m mostly an investor, as opposed to a speculator.
An investor, in my lexicon, focuses on the concrete – cash flow. Specifically, cash that flows to him. A speculator, in contrast, focuses on the abstract. He attempts to profit on future price movements. The better you are at predicting, the more profitable speculating becomes.
To be sure, I speculate, but cash flow – dividends, distributions, interest, rents – is my focus. Focusing more on cash flow means focusing less on China, the Middle East, the Federal Reserve and other exogenous factors that are so difficult to predict.
The good news is that as cash flow goes, so goes investment value.
At High Yield Wealth, we have a mixture of high-yield income and low-yield dividend-growth investments. The former group is composed mostly of REITs and MLPs. Price movement tends to be staid, and the price band tends to be narrow. As long as these investments maintain their dividends and distributions, share and unit prices hang around a central value.
The latter group, in contrast, offers income investors the opportunity for significant price appreciation, regardless of prognostication skill.
Dividend-grower McDonald’s (NYSE: MCD) was the very first High Yield Wealth recommendation, made in January 2011. McDonald’s is hardly an off-the-radar recommendation, but we thought McDonald’s was value priced. At the time, the company’s emerging-market growth had stalled and its menu had grown stale. Our initial recommendation price was $75.17 a share. The annual dividend at the time was $2.44 a share, which produced a 3.3% yield.
Here we are five years later, and the 2011 issues have been mostly resolved. McDonald’s shares trade at $118 each. The annual dividend has been ratcheted up annually to the current $3.56 per share. The yield on our initial cost basis has been elevated to 4.7%. When annual dividend growth and share-price appreciation are combined, we get a 76% total return on our McDonald’s recommendation.
As long as income investments generate income, prognostication skills are thankfully superfluous. Reliable high-yield income investments will generate returns predominately through cash flow. Dividend growth will generate returns through income and price appreciation, maybe not immediately, but eventually.
Again, I turn to McDonald’s. Its shares lost half their value in the 2000-2002 recession. But McDonald’s continued to raise its dividend annually. McDonald’s share price recovered, regained lost growth, and then moved on to claim higher ground.
McDonald’s has grown its dividend annually – through booms, busts, bull markets and bear markets – since 1976. McDonald’s share price is up 9,500% over the past 40 years. That’s an unqualified investing success.
The current bull market is nearly seven years long. The S&P 500 has appreciated 1,300 points. This is long by historical standards. Could the bull market give way to a bear market in 2016? It could, but because I’m an income investor, I’m not obsessed with making an accurate prediction.