Finding a Cash Cow to Milk

by Investing School on February 29, 2012

The term cash cow defines a product or business that is capable of generating a remarkably high profit margin. In fact, that margin can be so high that it is responsible for a significant percentage of the company’s profits. That profit is typically higher than what is necessary for generating the item’s business so that the additional income can be shunted to other uses.

Another interpretation of a “cash cow” is an asset, business or product which has been developed or acquired which no longer costs the company anything to maintain and which will continue to produce cash flow for the rest of its viable lifespan. The cash generated by such products/assets is funneled into other projects or to repurchase shares which are already on the market, improving the company’s position.

An example of a consistent cash cow could be Apple’s iPod. The classic iPod has been in production for many years, no longer requires any investment in development and brings in cash year after year. There are some risks to holding such a profitable cash cow from the perspective of the business. Complacency is a killer in any business, and since a cash cow doesn’t require as much attention, management may mistakenly ignore it until market trends force a new look. Nevertheless, every company wants to be fortunate enough to possess at least one cash cow in their inventory.

If you are looking for a cash cow to include in your portfolio you want a stock or bond which has a history of consistent, exceptional performance. Finding companies which own several such assets is a good place to start.

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