1. In term of comparison of debt, i must point out that debt /revenue is not a fair and reasonable indicator as you overlooked one very important operational difference between PBR and all its peers: PBR is the largest offshore shore oil producer in the world, 95% of its oil production derives from offshore drilling, while all is peers are 90% onshore drilling producers. This resulted PBR has far superior profit margin, the 5 yr average EBITDA MARGIN PBR 39% while CVX XOM 19% AND TTE 19.3%, LEVERED FCFC MARGIN : PBR 20%, while CVX XOM 6%, TTE 7.6%. Therefore debt/ levered cash flow is a much fair and objective comparison, if that is the case, PBR has the lowest debt/fcf ratio of 7.39, while XOM 8.35 CVX 7.86 BP 17.63 TTE 11%.
2. I HIGHLY commend you that you point out PBR generates 70% revenue in real but most it's debts are issued in USD, THAT is the most risky geo aspect for foreign investors. The good news is the REAL is stabilised now, it has been surprisingly appreciated against USD recently. My main is about its internal political conflicts will have negative effect on its currency.
3. I am attending conference in Florida next week, will make further comments upon returning home as PBR IS my most over weighting holding in my retirement portfolio.
Just wanted to say thanks again for your comment a while back — your point about debt vs. cash flow for offshore producers like PBR was really helpful.
I ended up using your insight in my latest piece (part 3) and made sure to give you a shout-out.
From reading your articles, my understanding is that your ultimate goal is to construct a portfolio of equities that will generate sufficient income for an early retirement. What is the primary factor that will enable you to call an early retirement ? Is it the total balance of your portfolio or the anual income that you can derive from your portfolio? If the definition of retirement is to establish a new source of reliable income to replace the income you receive from your full time employment, then the answer must be the latter: INCOME.
Does that mean a portfolio of global equities with high yield dividend will enable you to achieve such a goal? May I say your retirement will not be a pleasant one considering the followings:
a. dividend distributed by business enterprises is highly economically cyclical and volatile, your could be very happy with handsome income during the boom time but your income can be reduced by 90% during the economic slow downs.
b. By company constitution, dividend payment to shareholders is not enforcable, the payout ratio out of net profit is subject to the discretion of board directors, so even the company earning is very profitable, it is still possible that nil dividend will be paid in the name of capital need for growth.
What is the solution? I like to open this topic for our further discussion.
You’ve put your finger on the essential question: retirement is funded by income, not by paper gains. Bills are paid with cash flow, not with portfolio balance. That’s the core philosophy behind my approach.
1. On Dividend Cyclicality and Volatility
You are absolutely correct. Dividend payments are cyclical, and a portfolio of high-yield equities will see its income fluctuate with the economic cycle. This is an inherent trade-off. However, my strategy is built to manage this in several ways:
• A High "Margin of Safety" in Yield: A target yield of 8%+ provides a buffer. Even if my income were cut by 30-40% during a severe downturn, the remaining yield would often still be significantly higher than the 2-3% yield of a typical "Dividend Aristocrat" portfolio in a good year. I am consciously trading absolute stability for a higher average income over a full cycle.
• A Hybrid Approach with Counter-Cyclical Income: This is a key differentiator. I integrate actively managed covered call strategies (JEPG, JEPQ, and XYLD). Volatility is the fuel for these strategies. During market downturns, when fear is high, option premiums increase. This means these funds often generate more income during turbulent times, which can help offset dividend cuts from other parts of the portfolio. It acts as a natural hedge.
2. On the Discretionary Nature of Dividends
Again, you are 100% right. A board can cut a dividend at any time, even if profits are strong. This is the single biggest risk of a pure dividend strategy.
The solution is not to avoid these investments but to balance them through broad diversification. My portfolio is designed to mitigate this risk in three key ways:
• Diversification Across Companies: I use ETFs and funds that hold hundreds of companies. This ensures no single cut can devastate the income stream.
• Diversification Across Geographies and Currencies: My strategy embraces global diversification. By holding companies and funds that generate revenue and pay dividends in different currencies and from different countries (as we saw with JEPG's geographical breakdown), I hedge against both country-specific economic risks and currency volatility. As a European investor, relying solely on USD-denominated income is a risk, so my portfolio aims to be multi-currency.
• Diversification Across Asset Classes: My portfolio isn't limited to just equities. I also use investments like REITs for their strong commitment to distributions and Business Development Companies (BDCs), which are legally required to distribute a large portion of their income to shareholders.
In short, my goal is not to build a portfolio solely of volatile high-yield dividend stocks. That would indeed lead to an unpleasant retirement.
The solution is a hybrid model that combines different sources of income:
1. Traditional Dividends for long-term growth of the income stream.
2. Covered Call Strategies for high, counter-cyclical yield that performs well during volatility.
3. Diversification across sectors, geographies, currencies, and asset classes to mitigate risk.
This approach acknowledges the weaknesses of any single method and uses the strengths of one to compensate for the weaknesses of another. The goal is to construct an "all-weather" income stream that may fluctuate, but with a high floor and a strong average that meets my retirement needs over the long term.
This is the strategy and the intellectual framework I’ve spent years building. It is designed to directly address the main anguish of all income investors.
Beyond this, the biggest challenge remains: the long-term effects of demographic shifts on stock markets. While this is a source of concern, my "all-weather" approach is designed to navigate such uncertainties by prioritizing diversification over concentration. This is the framework I'm betting on.
Time will tell...and this ongoing debate is how we'll all refine our strategies together!
Sorry for the late reply! I am 48, and hopefully will retire at 58. I live in Europe, so having a coffee together might be tricky 🙂. But we are both still young enough to enjoy many years of conversation.
Great to hear you back. I feel we are very much on the same page in terms of our investing approach. We would have cafe conversations daily if we live in the same city. Just drop you a link regarding PBR, hope you find it useful. Cheers.
Thanks so much for your thoughtful and helpful feedback.
1. You're absolutely right about the offshore/onshore distinction — I hadn’t fully realized how much it impacts margins and debt comparisons. I’ll dig deeper into this and include it in the next update. Petrobras really is a fascinating company.
2. Thanks, comrade! And yes, the currency mismatch is definitely a key risk.
3. Enjoy the conference — I’m looking forward to your thoughts when you're back.
1. In term of comparison of debt, i must point out that debt /revenue is not a fair and reasonable indicator as you overlooked one very important operational difference between PBR and all its peers: PBR is the largest offshore shore oil producer in the world, 95% of its oil production derives from offshore drilling, while all is peers are 90% onshore drilling producers. This resulted PBR has far superior profit margin, the 5 yr average EBITDA MARGIN PBR 39% while CVX XOM 19% AND TTE 19.3%, LEVERED FCFC MARGIN : PBR 20%, while CVX XOM 6%, TTE 7.6%. Therefore debt/ levered cash flow is a much fair and objective comparison, if that is the case, PBR has the lowest debt/fcf ratio of 7.39, while XOM 8.35 CVX 7.86 BP 17.63 TTE 11%.
2. I HIGHLY commend you that you point out PBR generates 70% revenue in real but most it's debts are issued in USD, THAT is the most risky geo aspect for foreign investors. The good news is the REAL is stabilised now, it has been surprisingly appreciated against USD recently. My main is about its internal political conflicts will have negative effect on its currency.
3. I am attending conference in Florida next week, will make further comments upon returning home as PBR IS my most over weighting holding in my retirement portfolio.
Peter,
Just wanted to say thanks again for your comment a while back — your point about debt vs. cash flow for offshore producers like PBR was really helpful.
I ended up using your insight in my latest piece (part 3) and made sure to give you a shout-out.
Really appreciate you adding to the discussion!
From reading your articles, my understanding is that your ultimate goal is to construct a portfolio of equities that will generate sufficient income for an early retirement. What is the primary factor that will enable you to call an early retirement ? Is it the total balance of your portfolio or the anual income that you can derive from your portfolio? If the definition of retirement is to establish a new source of reliable income to replace the income you receive from your full time employment, then the answer must be the latter: INCOME.
Does that mean a portfolio of global equities with high yield dividend will enable you to achieve such a goal? May I say your retirement will not be a pleasant one considering the followings:
a. dividend distributed by business enterprises is highly economically cyclical and volatile, your could be very happy with handsome income during the boom time but your income can be reduced by 90% during the economic slow downs.
b. By company constitution, dividend payment to shareholders is not enforcable, the payout ratio out of net profit is subject to the discretion of board directors, so even the company earning is very profitable, it is still possible that nil dividend will be paid in the name of capital need for growth.
What is the solution? I like to open this topic for our further discussion.
You’ve put your finger on the essential question: retirement is funded by income, not by paper gains. Bills are paid with cash flow, not with portfolio balance. That’s the core philosophy behind my approach.
1. On Dividend Cyclicality and Volatility
You are absolutely correct. Dividend payments are cyclical, and a portfolio of high-yield equities will see its income fluctuate with the economic cycle. This is an inherent trade-off. However, my strategy is built to manage this in several ways:
• A High "Margin of Safety" in Yield: A target yield of 8%+ provides a buffer. Even if my income were cut by 30-40% during a severe downturn, the remaining yield would often still be significantly higher than the 2-3% yield of a typical "Dividend Aristocrat" portfolio in a good year. I am consciously trading absolute stability for a higher average income over a full cycle.
• A Hybrid Approach with Counter-Cyclical Income: This is a key differentiator. I integrate actively managed covered call strategies (JEPG, JEPQ, and XYLD). Volatility is the fuel for these strategies. During market downturns, when fear is high, option premiums increase. This means these funds often generate more income during turbulent times, which can help offset dividend cuts from other parts of the portfolio. It acts as a natural hedge.
2. On the Discretionary Nature of Dividends
Again, you are 100% right. A board can cut a dividend at any time, even if profits are strong. This is the single biggest risk of a pure dividend strategy.
The solution is not to avoid these investments but to balance them through broad diversification. My portfolio is designed to mitigate this risk in three key ways:
• Diversification Across Companies: I use ETFs and funds that hold hundreds of companies. This ensures no single cut can devastate the income stream.
• Diversification Across Geographies and Currencies: My strategy embraces global diversification. By holding companies and funds that generate revenue and pay dividends in different currencies and from different countries (as we saw with JEPG's geographical breakdown), I hedge against both country-specific economic risks and currency volatility. As a European investor, relying solely on USD-denominated income is a risk, so my portfolio aims to be multi-currency.
• Diversification Across Asset Classes: My portfolio isn't limited to just equities. I also use investments like REITs for their strong commitment to distributions and Business Development Companies (BDCs), which are legally required to distribute a large portion of their income to shareholders.
In short, my goal is not to build a portfolio solely of volatile high-yield dividend stocks. That would indeed lead to an unpleasant retirement.
The solution is a hybrid model that combines different sources of income:
1. Traditional Dividends for long-term growth of the income stream.
2. Covered Call Strategies for high, counter-cyclical yield that performs well during volatility.
3. Diversification across sectors, geographies, currencies, and asset classes to mitigate risk.
This approach acknowledges the weaknesses of any single method and uses the strengths of one to compensate for the weaknesses of another. The goal is to construct an "all-weather" income stream that may fluctuate, but with a high floor and a strong average that meets my retirement needs over the long term.
This is the strategy and the intellectual framework I’ve spent years building. It is designed to directly address the main anguish of all income investors.
Beyond this, the biggest challenge remains: the long-term effects of demographic shifts on stock markets. While this is a source of concern, my "all-weather" approach is designed to navigate such uncertainties by prioritizing diversification over concentration. This is the framework I'm betting on.
Time will tell...and this ongoing debate is how we'll all refine our strategies together!
I am 59, retired at 55. Just out of curiosity, do you mind sharing your location? I reside in down under Sydney. Looking forward to furthering our
coversation.
Sorry for the late reply! I am 48, and hopefully will retire at 58. I live in Europe, so having a coffee together might be tricky 🙂. But we are both still young enough to enjoy many years of conversation.
Great to hear you back. I feel we are very much on the same page in terms of our investing approach. We would have cafe conversations daily if we live in the same city. Just drop you a link regarding PBR, hope you find it useful. Cheers.
https://substack.com/@threeinvestments/note/c-83880847?r=ot5rc&utm_medium=ios&utm_source=notes-share-action
Thanks so much for your thoughtful and helpful feedback.
1. You're absolutely right about the offshore/onshore distinction — I hadn’t fully realized how much it impacts margins and debt comparisons. I’ll dig deeper into this and include it in the next update. Petrobras really is a fascinating company.
2. Thanks, comrade! And yes, the currency mismatch is definitely a key risk.
3. Enjoy the conference — I’m looking forward to your thoughts when you're back.
https://seekingalpha.com/comparison/new/MCUyQ3BiciUyQ2JwJTJDY3Z4JTJDeG9tJTJDdHRl?interval=10Y&metric=totalReturn