Cash cow investing is a strategy that involves seeking out and investing in well-established companies that generate consistent and substantial cash flows. These companies are often leaders in their industries and have a history of stability and profitability. The term "cash cow" comes from the idea that these companies generate cash like a cow produces milk.
By the name itself, one can understand the investing strategy is an appealing one. Warren Buffett too favors companies that generate more cash than necessary for their operational needs. Such companies can utilize free cash flow to reduce debt, distribute the cash to investors through dividends or buybacks, or reinvest in their operations.
Amplify ETFs recently launched a fund on this concept –
Amplify Cash Flow Dividend Leaders ETF ( COWS Quick Quote COWS - Free Report) . Inside COWS
It is a strategy-driven ETF investing in U.S. companies with high free cash flow yield and dividend growth aimed to provide long-term capital appreciation and monthly income distributions. The Index picks U.S. companies with both high free cash flow yields and a three-year history of uninterrupted dividend growth.
The fund holds 56 stocks. No stock makes up more than 2.70% of the fund. Energy (25%), Materials (20%) and Consumer Discretionary (19%) hold top three sectors of the fund. The fund charges 39 bps in fees, though net expense ratio is 0.00%.
How Does It Fit In a Portfolio?
Cash cow stocks are known for their ability to generate a steady stream of cash from their core business operations. Cash cows are typically in mature industries with limited growth potential. Investors often look to cash cows for reliable dividend income.
Cash cows are considered lower-risk investments compared to growth stocks or companies in emerging industries. Their stable cash flows can provide a cushion during economic downturns. Cash cow investing is typically a long-term strategy. With the most developed economies undergoing a slowdown amid central banks’ policy tightening, investors might be looking for safe investments.
The management “
evaluates free cash flow in totality, not only looking at trailing but more importantly, by evaluating future free cash flows, which enhances the dividend screen that is inclusive across all market segments,” said Kevin Kelly, CEO of Kelly Intelligence. No wonder, this would be a great investing opportunity for investors in a rough market. Competition
There are a few cash cow ETFs in the market, at present. The
Pacer U.S. Cash Cows 100 ETF ( COWZ Quick Quote COWZ - Free Report) selects 100 US companies with strong cash flows and healthy balance sheets, from the Russell 1000 index. It has over $14.4 billion in assets. The VictoryShares Free Cash Flow ETF ( VFLO Quick Quote VFLO - Free Report) holds profitable large-cap companies that not only have high free cash flow yields but also favorable growth prospects.
Global X U.S. Cash Flow Kings 100 ETF ( FLOW Quick Quote FLOW - Free Report) and the First Trust S&P 500 Diversified Free Cash Flow ETF ( FCFY Quick Quote FCFY - Free Report) are the newest entrants in the space (read: Why Investors Should Focus on High Cash Flow Stocks & ETFs).