Buying Real Devastation – Forget the “Dividends”

Well, just yesterday ConocoPhillips (COP) announced a substantial dividend cut which has now become the talk of the blogosphere. I can’t honestly say that I was the least bit surprised by the move… Matter of fact, I thought the writing was on the wall months ago, and in full disclosure I will confess that I had recently opened up a short position on COP prior to yesterday’s announcement…

But let’s set the record straight here — For the most part, I am a long-term investor/speculator. I am absolutely dreadful when it comes to market timing so the short game really isn’t suited for someone like me… Nevertheless, when one of those “brain dead opportunities” pops up every now and then, I’m willing to throw aside a small amount of gambling money in hopes of winning it big…

Just like Kinder Morgan (KMI) before it, one of the energy sector’s most beloved companies is now residing in the doghouse…

Hey, no one said investing was easy! In an era of Negative Interest Rate Policy (NIRP) and Zero Interest Rate Policy (ZIRP), you gotta do what you gotta do to try and secure some “stable” income! When it comes to stocks, most every retail investor has flocked to the high yielding energy stocks, despite the fact that the world is beyond oversaturated with oil right now, China is slowing down, global trade has grinded to a halt, and the world has essentially entered into a stealth bear market that is highly deflationary for all commodities.

Anyway, as readers are well aware, I hate chasing after assets that everyone else is fixated on… For example, once Bay Area real estate really caught fire, I said, “See ya later!

And right now, oil is still SEXY! Everyone and their mother is out looking to buy, with many claiming that the oil majors, such as Chevron (CVX), Exxon Mobil (XOM), and hey, even COP are “buying opportunities of a lifetime!


When the retail investor isn’t running for the hills in fear, I ain’t interested in buying! It really takes no skill at all for anyone to examine the balance sheets of many of these companies (not all) to find that there are some serious cracks in the foundation…

For instance, CVX has been cash flow negative for awhile now, and has even taken on debt to continue servicing their enticing “5% yield”.

From Seeking Alpha:

For instance, despite the reduced future capital expenses, their amount is still too high compared to the earnings and the free cash flow of the company. More specifically, while Chevron is expected to earn just $3.35 B this year, the expected capital expenses are $26.6 B for this year and about $22 B per year for 2017-2018. As the annual dividend of $8 B is much higher than the expected earnings, it is evident that the company will struggle to maintain its dividend this year. This is already evident from the free cash flows of the last 5 quarters (see chart below, assets sales are not included), which have been clearly insufficient to support the dividend.


Of course the company sold assets worth $6 B last year and plans to divest another $5-10 B of assets during 2016-2017 but still it cannot cover the wide gap between its dividend and its free cash flows. That’s why the company increased its net debt (as per Buffett, net debt = total liabilities – cash – receivables) from $65 B in Q3-2014 to $86 B in Q3-2015. Obviously, the company cannot keep adding debt at this pace for long. This is also confirmed by the rating cut of the company by S&P today.


Further, CVX has slashed CAPEX/exploration, laid off employees, and is basically doing everything possible to appease its shareholders.

No, no, no, no…

Dude, you’re doing it all wrong!!!

And I’m the Idiot?

First, let’s start with the insane idea of taking on more debt to fund a dividend… Call me crazy, but I thought that dividends were a function of POSITIVE earnings and free cash flow… I mean, that’s Real Estate Investing 101 for you… Never buy a rental property that doesn’t generate POSITIVE cash flow on Day 1!

Last year, I refinanced two rental properties to pull out ~$200,000 in capital… To do that, I had to take on more debt, which in turn increased my monthly mortgage payments. My rationale was that I was being “smart” because I was creating more liquidity for myself… In other words, I feared a prolonged market downturn and wanted to have lots of cash on hand to be more nimble (and more ammo to chase assets selling for pennies on the dollar).

However, despite the added burden created by refinancing, I was still very much cash flow positive on each rental (meaning my tenants serviced 100% of PITI and I still had $$$ left over each month). So, yes, the debt load went up, but it wasn’t me who was paying for it! Since my rentals are currently priced about $400-$500 BELOW MARKET RATE, I would say that I’m sitting in a comfortable position. Obviously, real estate and leverage are never without risk, but c’mon give me a break here!

In life, you know how freekin’ difficult it is to have all your ducks in a row?!?

When does that ever really happen!?!

So, I’m just doing the best that I can… And I’ve got over $400,000 in liquid funds, uncorrelated with real estate to help me out in case things get rough.

Despite my best efforts, I still received a ton of criticism and flak last year when I made the original announcement of my refinancing. Critics were calling me an idiot for confusing debt with “real cash”. In their minds, my $200,000 wasn’t legitimate, and if anything, I was just digging a larger hole for myself…

As I’ve always believed, and still do today, “It’s not debt that will destroy you. It’s the lack of liquidity!

Everyone knows that real estate is the ultimate inflation hedge. Unlike these private companies, my debt service for all my rentals are also 30 year fixed, low interest rates… And for these two rentals in particular, they are among my best assets and located in Class A locations…

So, long-term, I very much believe that I will come out of all this a mile ahead… But I’ll gladly confess that having an extra $200,000 in liquidity for a rainy day gives me a lot of peace of mind…

But going back to a company like CVX, their “cash flow” isn’t sufficient to service their expenses (debt, G&A, dividend payouts to shareholders, etc.), so they’ve been forced to get “creative”.

More debt!

And for some strange reason, most of CVX’s shareholders have no problems with that!!! The very same people who were giving me a hard time about my own financial situation are somehow able to turn away from these actions!

What? That makes no sense to me!

Dividends can be blinding!

As investors, we become so damn fixated by passive income that it distracts us from the underlying fundamentals… So many investors who are applauding CVX for being able to “navigate through tough times and keep the dividend intact” are the same ones who are now ripping COP management apart because of their prudence to eliminate an expense that they could not realistically hope to support…

Management lied to us!

That’s a COP out!

The writing was on the wall with COP… I don’t even follow the oil/energy space closely and I knew that the dividend was unsustainable…

And anyone who’s willing to spend 5 minutes going over CVX’s balance sheet would know that the situation over there isn’t all that much better either… Yes, CVX is more diversified and vertically integrated, but low oil prices are low oil prices… Unless you know how long this pain will go on for, why take the risk of jumping in right now?


If I continued to take on more debt, eliminated all my positive cash flow from my rentals, sold off my assets at the bottom of the cycle for pennies, do you think anyone would be interested in buying shares of FI Fighter LLC?!?

Real Devastation

Truth of the matter is, I am in absolutely no rush to load up on any oil/energy plays right now, especially not the majors.

Why not?

Simple. As a strong buyer of gold/silver mining stocks, I think I have a pretty good idea of what real devastation looks like in the commodities sector…

And what we are seeing in the oil patch is NOTHING!

In comparison, just take a look at all the gold majors: Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC), etc. who were forced to slash dividends years ago…

When an entire industry is in severe liquidation, the following will occur: dividends are slashed/eliminated, exploration grinds to a screeching halt, CAPEX is reduced quarterly, there are massive layoffs, the weak companies start dropping off like flies, juniors trade for less than cash in the bank, the retail investor has ZERO interest in the space, the conferences/events have declining attendance, and the share prices are absolutely decimated!

Will the same thing happen to oil/energy?

Maybe, maybe not.

If not, I don’t buy…

If you are a follower of deep value investing, you really don’t give a sh!t about dividends… Don’t get me wrong, I’m a financial freedom fighter, so I obviously recognize the importance of passive income to sustain early FI, but I couldn’t care less about it when I am hunting for bargains.

As I have stated before, I LOVE Dividend Growth Investing (DGI), but I just so happen to believe that it’s a most suitable strategy for an investor who is already in early FI… Since I’m not quite there yet, my focus is still on capital gains and appreciation.

Of course, I hope that will change in the near future, but until then… I’m shopping for assets with the most upside potential (which I hope to convert to safer, less risky investments, later).

The reality is, if companies are still paying (or even growing) their dividends, they haven’t experienced real devastation yet (this limits the upside potential)…

I would rather “back up the truck” and load up on COP shares at $25/share with a sustainable 4.0% yield, than to buy at $50/share with a fictitious “8.0% yield”. Hell, I would prefer $15/share and ZERO DIVIDEND!

Same with KMI. At around $13/share or so, even if the dividend is only 3.0%, that to me is a way better deal than before.

As if it wasn’t clear already, it’s not that I have anything against oil/energy, or the companies involved in that space, but as a deep value investor, I don’t discriminate!

Real estate, index funds, dividend stocks, gold/silver, oil/energy…

There’s a time and place for everything…

I even bet big on Tesla Motors (TSLA) once upon a time… These days, it’s one of my favorite SHORT candidates!

Look, at the end of the day, my allegiance is to early financial freedom… Whatever vehicle I can take to get me there, I will use.

I don’t get caught up in “shiny object” syndrome (dividends)… Although, gold is quite shiny and alluring in its own right…

Anyway, if you focus on deep value, you really can’t go wrong… I don’t lose any sleep with my gold stocks because they don’t issue any dividends to begin with (the companies I own most likely can’t afford to!)… They have NOTHING to cut! 😉

Gold stocks were already in the dumpster when I finally decided to start getting interested; I’ve been rummaging through the trash trying to find gems ever since…

And that’s just the way I like it!

When it comes to commodities, I will NEVER again invest in the space unless real devastation has already taken hold of the sector.

I’ve seen far too many people getting burned by buying at the wrong time (luckily I sold out of KMI, CVX, SDRL, RIG, LNCO, etc. before things really turned south!); with commodities, you should ABSOLUTELY ONLY buy at/near market bottoms.

I seriously dodged some major bullets there…

Lesson learned!

Lastly, when a sector struggles, it’s in our own best interest to target the companies with the best balance sheets… There’s a reason I’m a big fan of companies like: Lake Shore Gold (LSG), Klondex Mines (KLDX), Teranga Gold (TGZ.TO), Richmont Mines (RIC), etc.

I pay no attention to any majors who got reckless at the top of the cycle and are now encumbered with so much debt that they have to sell off assets at the bottom of the cycle.

That’s not creating long-term value for your shareholders!

On the flipside, a company like KLDX, cash strong and nimble, buying up Rice Lake assets for $32 million (C$375 million in capital investment had previously been spent on this project) might actually add long-term value for shareholders!

So, while the retail crowd chases after: Freeport McMoRan (FCX), BHP Billiton (BBL), CVX, etc., I look elsewhere…


But what do I know? I’m that crazy lunatic with far too much debt and no gameplan…


Fight On!

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4 years ago

Your gold stocks/miners have to be positive at this point with the run up we’ve incurred. Are you still lightening your load on rallies or holding tight? just curious. I hope you are making bank. In regards to your article, you can review your comments in the past (nov 2015) when I warned your readers about KMI BEFORE the cut to dividends. I could see through the smoke and mirrors much like your article is doing today. Thank you for that service, you could be saving people tons of money if they heed your call. People were fixated on a… Read more »

No Nonsense Landlord
4 years ago

Never under estimate the ability to tax the oil companies out of existence. There was a time we had a coal industry in the USA.

Financial Samurai
4 years ago

Ever thought about quitting your job as an engineer and work in trading, financed equities?

Seem like you have a real passion for it, and you can also make a lot bigger compensation.

4 years ago

I’ve thought about leaving the 9-5 and trading full time. I am actually very good at it and I am passionate about it. In fact the way you can tell if you love what you do is if you dread the weekends and anticipate mondays. I love mondays because thats when the US market opens and I get roll up my sleeves and get to work (in the markets). I don’t do investing for my full time job, I do it for myself. The only problem is I have a lot of “fixed” cost and a family depending on me… Read more »

4 years ago
Reply to  FI Fighter

sure we can chat about trading as much as you like. In this comment post I put a better email to reach me at. Feel free to message me whenever works best for you. In regards to real estate, I think those are good measures of when I can walk away. The dilemma I am in (as you posted in prior articles) is the fact that I am not sure if I want to pay down my loans. Yes it would enable me to have more freedom and flexibility but I lose the interest tax incentives and the benefit of… Read more »

Midwestern Landlord
Midwestern Landlord
4 years ago
Reply to  mike


IMO the focus on real estate should be cash flow for early retirement / vocation flexibility. Not on other speculative factors. You indicated that your real estate cash flow does not quite meet all of your expenses at this time. Obviously it would be better if it did before you make a risky change.

I don’t see an issue with having loans at all if they are 30 year fixed loans. If not, then yes that adds a little risk to the overall profile.

4 years ago

I am interested in what you are saying and thank you for taking the time to respond. When you say not on speculative factors what do you mean? Option A: Pay off all my loans hyper aggressively > more cash flow, more peace of mind if property is vacant. Flip side > No tax incentive (interest write off), no letting inflation wash away the debt, lose out on locking in historically low interest rates. Option B: Accumulate more properties when the time is right > greater cash flow with quantity. Flip Side > Real estate cycles move much slower and… Read more »

Midwestern Landlord
Midwestern Landlord
4 years ago

Mike, Regarding speculative factors I probably misread what you were saying in your original post. Under no circumstances would I pay off low interest 30 year fixed rate debt early. For all of the factors that you have already noted. It is just too valuable of a financial instrument. And what return would you be getting if you did (3% to 4% range?). I would much prefer to accumulate cash then pay down this type of mortgage debt. Based upon your post, it sounds like you live in an area that has already seen a large amount of appreciation and… Read more »

Midwestern Landlord
Midwestern Landlord
4 years ago
Reply to  mike


If you are concerned about RE prices going down because the government may at some point get out of the 30 year fixed business, I would suggest the following points:

1) The 30 year fixed interest rates that you have are now even more valuable because they are not available in the marketplace anymore.

2) As long as you have cash flow, who cares what the price of real estate temporarily does. I assume you have cash flow on your properties.

4 years ago

Ok I see the confusion here. The Fannie comment was a side ramble from me. It is not influencing my decisions today. I was just saying that the only reason that housing prices can stay at these elevated levels is because there is easy money and fannie will buy the loan. In my finite understanding they own over 90% of all US mortgages. If I convert a majority of my net worth into real estate to capture cash flow. I am playing a very dangerous game if Fannie decides to take away the punch bowl. It would be cataclysmic for… Read more »

george puck
4 years ago

Here is the thing, IF say Freddie and Fannie stopped providing loans, sure it would be more difficult to get loans. but the flip side is that you would have a much larger pool of renters. From a cash flow perspective, you might actually be better off as fewer people would own and more people would lease driving up the rental market. PLus one thing you have to remember especially in rental markets, a huge portion of properties purchased were purchased in cash. I forget the exact number but 3-4 years ago, S. Florida properties were something like 70 all… Read more »

The Dude
The Dude
4 years ago

At these interest rates, why not take out $200k to have extra liquidity? Seems completely rational to me. Especially, to reduce risk of declining rents in the Bay Area, which could be precipitated by layoffs resulting from lower valuations in tech both in public and private markets. I suspect we’ll start seeing pressure on valuations in 2016 in the private sector as we’ve begun to see a change in valuations in the public sector. Since tech employs roughly 13% of San Francisco’s workforce (2012 number so it’s probably larger now) and there is roughly a 2x multiplier in employment for… Read more »

The Dude
The Dude
4 years ago

Yeah, exactly. Liquidity is key and having the extra cash to ride it out is really smart. Private equity isn’t going to stop and the Bay Area get 25% of GLOBAL private equity, so even if there is a short term slowdown (2-3 years), the investment community in the Bay Area is would be difficult to replicate elsewhere. Like China’s numbers, India’s numbers are met with a degree of skepticism. But now that I dig deeper into the gold numbers I’m understanding it a lot more and can understand the thesis much better. Let me lay out my thinking and… Read more »

Income Surfer
4 years ago

Hey buddy. I saw the interview below, last night and thought of you. I always enjoy Kleinschmidt, like most of the eccentric contrarians….haha. If I was wealthy, I’d probably be considered one myself. Since I’m not, well I might just be crazy. Hope you have a great weekend. Next week I’m digging into uranium


Budget Nerd
4 years ago

Thanks for the article! I honestly haven’t even considered looking into resource investments, although I can see how important it is to diversify.

Midwestern Landlord
Midwestern Landlord
4 years ago

Jay, Yea, I finds posters thinking its risky or illegitimate pulling out $200K in cash on long term 30 year fixed low interest rates on property that pays for itself odd as well. I guess some people are just really debt averse but this is the best debt that you can have. An extra $200K in the bank is an extra $200K in the bank. It does not matter where it comes from as long as the fundamentals are still good. Obviously you are not going to blow the $200K. You will keep it for reserves / investing purposes. The… Read more »

george puck
4 years ago

I have three issues with cashing out equity in RE at a top, especially in a ovlitile market like SF. 1) It lowers your cash flow. If the market really does turn down the ability to be cash flow positive become nearly impossible. 2) if rents and home values drop say 40%, then you end up unable to sell your property if needed because you would be upside down. 3) you make less money because you are paying interest on the additional money. I applaud Jay for laying his finances out there, but I still think his best move would… Read more »


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