Why A Recurring Revenue Business Is Perfect For Income Investors…
Recurring income. Those two words are music to my ears.
My High-Yield Investing premium subscribers have heard me use the term previously on numerous occasions. But what exactly does it mean? Well, the textbook definition of recurring is “occurring again repeatedly.” So this would be an income stream that flows in over and over on a regular, predictable basis – perhaps monthly or quarterly.
Think of it as an ongoing paycheck for work long completed.
Just ask any famous musician. Their song catalogs may be dated, yet those old recordings can still earn gobs of money from radio play, music streaming sites, album sales, and other sources. So the artist keeps on cashing royalty checks in perpetuity. Heck, Elvis died back in 1977 and his estate still took in $23 million last year.
Or how about actors who open their mailbox each month to retrieve residual income checks from reruns of old shows? The last episode of the 90s sitcom Friends was filmed nearly 20 years ago, yet the cast members are contractually entitled to 2% of the yearly syndication revenues – about $20 million each.
Now I’m not suggesting you pick up a guitar or join a theatre group (unless you want to). There are publicly-traded businesses that rake in billions in recurring income each year while barely lifting a finger. They can’t put you on the cover of Rolling Stone magazine, but they can lead you to a lavish lifestyle over time.
Of course, most companies don’t operate this way.
The business world is far more accustomed to one-off dealings that end at the point of sale. Your home computer dies, so you run over to Best Buy (NYSE: BBY) and purchase a new one. The cashier puts the money in the register, hands you a box and a receipt, and the transaction is over.
These kinds of sales go on the books today. But tomorrow, the companies must start back over at zero. There is no carry-over to the next quarter or next fiscal year. If the business doesn’t close any new deals, then it doesn’t report any revenue for that period – so it’s always hungry for the next sale.
But companies with recurring income continue to feed off the last sale (sometimes for decades).
Recurring Revenue = Predictable Income
Take Duke Energy (NYSE: DUK), which provides power utility to homes and businesses across six states. The company might not pick up too many new customers in the near future. But that’s okay because it already has 8 million on the books who get billed every month. That means Duke will collect about $24 million (give or take) recurring payments this quarter. And then another $24 million next quarter – even if it doesn’t connect a single new account.
No wonder it hasn’t missed a dividend payment in 95 years.
Then there’s Verizon (NYSE: VZ), which has built up a base of 120 million wireless connections over the years. Retail employees around the country will clock in at 9 AM tomorrow fighting for more. But even without signing up a single additional customer, that’s already a massive pool of recurring revenues to fall back on.
Some of those customers may have come on board in May 2015. Or maybe they joined in September 2018. But the financial benefits didn’t end there. These subscribers continue to dutifully send in a steady, predictable stream of cash every 30 days — like clockwork. Verizon welcomed another 699,000 connected devices to its network last quarter. These new customers will generate incremental income starting day one – and every day forward (unless they switch providers).
You can see why recurring income can be preferable to one-and-done transactions, where yesterday’s sales count for nothing today – let alone tomorrow. The beauty of repeatable revenues is that they continue to flow long after the initial sale has been made, even during economic slumps and down-cycles. That’s what makes companies like Duke and Verizon special.
Their slate isn’t wiped clean at closing time each day. It builds. And builds. Instead of melting away the moment it falls to the ground, this kind of cash snowfall accumulates. Even when the economy is shaky. Even when inflation runs rampant. Even when interest and borrowing costs are rising.
The Gift That Keeps On Giving…
For dividend investors, recurring income is truly the gift that keeps on giving.
Analysts are constantly trying to forecast the sales and earnings of the companies they follow. These same companies release their own internal guidance projections. But at the end of the day, such figures are all just educated guesses. Sometimes, they are wildly off the mark and must be drastically revised up or down.
Needless to say, that can lead to erratic trading and volatility in the stock.
But if you have 1 million subscribers paying $29 per month for a service, then predicting next quarter’s revenues is an exercise in simple elementary-school arithmetic. Sure, you might lose a few subscribers here and gain a few there. But you have a pretty good idea where revenues will land.
In the notoriously unpredictable financial world, this is a coveted trait.
That’s one reason why many enterprise software developers and other product vendors are transitioning away from physical sales to fee-based subscription models. You’ve probably heard of software-as-a-service (SaaS). Or communication-as-a-service (Caas).
It’s nice to match inflows with outflows. And this is a common element among our portfolio holdings over at High-Yield Investing:
- One holding generates fixed daily income from multi-year charter contracts on its shipping fleet.
- Another pockets steady rental income from tenants like Walgreen’s and Circle K.
- Our insurance holding hauls in repeatable income tied to the monthly premiums.
- An energy holding collects pre-determined income from the sale of renewable wind and solar electricity under long-term agreements.
I could cite more examples, but hopefully, you get the point.
Now, these businesses aren’t invincible (none are). But they have good earnings visibility and well-covered dividend distributions, often with contractual cash flows that aren’t particularly sensitive to changing economic weather.
They’re the closest thing to “bulletproof” you can get. And that’s why, if you’re an income investor, then these are exactly the kinds of holdings you want to have in your portfolio.
That’s why I recently released a special report about 5 “bulletproof” dividend payers you’ll want to own for the long haul.
These picks have weathered every dip and crash over the last 20 years and STILL handed out massive gains. And each one of them carries market-beating yields, with dividends that rise each and every year. Go here to check it out now.