Cash Flow Is King

By Steve Cordasco and Jason Mardinly

NEW YORK ( TheStreet) -- One of the worst mistakes I see investors make is to automatically equate investment performance with total account value.

They tear open the monthly statement, look at the principal and immediately judge the performance of their investments based on which way the bottom line moved.

Then they compound that mistake by making reallocation decisions based on this information in an attempt to "fix" the perceived problem (or chase illusory profits).

Principal is certainly an important measure, and it's hard to watch it take a hit. However, there's another indicator that can be even more critical -- especially to retirees: cash flow from dividend-paying stocks.

I like to make a comparison to real estate investing, because it so aptly illustrates how investors should look at their holdings. Specifically, if you own income-producing real estate, you're not keeping a tally of the market value of each property every month. What you are doing is looking at the cash receipts coming in from tenants. Over time, the principal value assets will fluctuate, but the cash flow from a good asset is consistent.

Remember when the S&P 500 was down 38%? Those who held dividend-paying stocks saw much less change to their actual cash flow as the dividend payers such as Kinder Morgan ( KMG) and Lockheed Martin ( LMT) helped offset some of the price decline.

In 2008, KMG paid more in 2008, $3.89 per share, vs. 2007's $3.36. In 2012 KMG paid dividends of $4.85 per share, more than outpacing the federal government's reported amount of inflation. Likewise, Lockheed paid $1.42 in 2007 dividends but $1.83 in 2008. In 2012 Lockheed paid common shareholders a whopping $4.12 per share in cash dividends.

The monthly (or quarterly) statement shows more than just the account summary; it also has an income summary, which includes dividends earned.

Hypothetically, if you had $100,000 invested in the 10 dividend-paying stocks below in 2008, you would have seen a cash flow of approximately $5,000, or a 5% cash flow return. If your principal followed the S&P 500 that year, it would have fallen to $62,000.

KMP and LMT dividend history courtesy of dividata.com

Markets are unpredictable. All asset classes, from stocks, to bonds, to commodities, go through periods of volatility. Things will change: For instance the Keystone Pipeline may have a significant positive or negative impact on Kinder Morgan. And Lockheed will need to weather sequestration. However, if you focus on cash flow, you can keep some consistency and stability to your income. As a stock investor, you even have the ability to raise your cash flow by buying companies that continuously raise their dividends.

So with this in mind, breaking the habit of judging your portfolio exclusively by the principal listed in month-to-month statements can be one of the most profitable moves you can make.

At the time of publication, the authors held positions in LMT, MO, T, CTL, LLY, FE, KMP, MCHP, RDS.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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