Transforming cash into productive assets

In one of my latest posts, I wrote about a MAJOR FINANCIAL DECISION my wife and I have taken.

In fact,

• we decided to stop looking for real estate projects and
• instead step up our investment process into dividend paying stocks.

We plan to reduce our cash pile which has been originally designated as down payment for a house.

USD 60’000 will be invested in the stock market, that amount will be put to work in addition to our monthly savings from our day jobs. We are committed to keep our savings rate well above 50 %, which in combination with the cash amount of USD 60’000 will fuel our investment process quite substantially.

These additional financial resources will give our passive income generation a boost

• from roughly USD 7’000 in the current year
• to well above USD 10’000 in 2019.
• And we are optimistic to even make another jump to USD 15’000 then in 2020.

In October, we took advantage of falling stock markets by investing the total amount of USD 12’000 into shares of Anheuser-Busch, Dufry and Covestro. These acquisitions will boost our 2019 dividend income by over USD 300.

And we pulled the trigger in the first week of November to make two interesting stock buys which strengthens our stock portfolio (with a current market value of  USD 230’000) even further by adding USD 500 to our forward dividends in 2019.

Let’s have a look at these stock acquisitions.

Taking a stake in mining giant GLENCORE

Glencore is one of the world’s largest diversified natural resource companies. The business has been founded in the 1970s as a trading company and has become a major producer and marketer of commodities. It’s just a massive business, employing 146’000 people around the world, its operations comprise around 150 mining and metallurgical sites, oil production assets and agricultural facilities.

Since the recovery of the “commodity price crash” a few years ago, Glencore has deleveraged and streamlined its operations, cash flow generation has been improved substantially over the past years.

Stocks of Glencore represent our third position in the mining sector, together with BHP Billiton and Rio Tinto. We currently have an exposure to that industry of around 5 % of the market value of our total investments.

These cyclical, capital intense businesses don’t come without a risk, but so far as BHP Billiton and Rio Tinto are concerned, for us they have been good investments, rewarding us nicely with very attractive dividends.

From time to time, my wife and I like to spice our investment portfolio a bit up. But the backbone clearly is represented by defensive businesses such as CONSUMER STAPLE COMPANIES (like Nestlé, Unilever, Heineken, Diageo, Coca Cola, PepsiCo, J.M. Smucker, Britvic, Nichols, Reckit Benkiser etc.) and PHARMA BUSINESSES (like Roche, Novartis and Glaxo Smith Kline). These are the kind of businesses rewarding their shareholders for doing Nothing, their dividends keep marching up over time.

With mining companies, it’s different. Their profits are extremely volatile with giant cash generation and juicy dividend payouts when times are good, but don’t be surprised to see a dividend cut, when times are rough.

There is always a flipside, when it comes to investing in high yielding stocks, but on the other side, these stocks offer very attractive entry prices from time to time which can be truly rewarding over the medium and long run.

There clearly is a constant need for the resources provided by BHP Billiton, Rio Tinto and Glencore. And these businesses are giants with a HUGE ECONOMIC MOAT.

Doubling down on BRITISH AMERICAN TOBACCO

British American Tobacco is the world largest cigarette producer with brands like Camel, Lucky Strike, Kent, Dunhill, Pall Mall, Rothmans.

We acquired 75 shares some months ago in April and recently added 90 shares. Tobacco stocks have further declined quite nicely over the last months providing us with the opportunity to buy roughly 20 % more shares of British American Tobacco for the same amount of money.

Falling cigarette volumes and some uncertainties with regard to the success of so-called “Next Generation Products” (vapour products like e-cigarettes and heated tobacco products) clearly are factors to be aware of when investing in that sector.

But having been following the financial performance of the five largest publicy traded tobacco companies (Altria, Philips Morris, Imperial Brands, Japan Tobacco, British American Tobacco) for some years now, I still have the impression that these businesses remain EXTREMELY PROFITABLE despite huge headwinds. They are still able to make attractive long term investments due the combination of

• very low or even pessimistic future expectations and therefore low valuations and
• strong and stable profits (enabling high dividend payouts, stock buybacks and bolt-on acquisitons).

It was some time ago that we took the decision to attribute between 5 and 7 % of our portfolio’s market value (currently USD 230’000) to the tobacco sector. With our stakes in Imperial Brands and British American Tobacco in the total amount of roughly USD 16’000, we are well in that range.

 

What about you, fellow reader? Did you make some nice stock acquisitions recently?

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.