Thursday, May 17, 2018

Update to 2018 Income Portfolio

Updated 2018 Portfolio

Some don't add to losers but I do when the fundamentals are still good.  Remember this blog concentrates on income and income that grows.  

Wednesday, May 9, 2018

Working the 2018 Call Portfolio

Today, I sold another call on AAPL.  I went out a little further than I normally do using an August 17, 2018 expiration date.   Going out this far does provide for two dividend payments. One of those has been declared and the ex-dividend date is 5/11/2018.  I expect the next quarterly dividend to carry an ex-dividend date of 8/10/2018.  The first dividend is $.73 and since the dividend was just recently increased, I anticipate the second dividend to also be $.73.

AAPL - August covered call

The table below uses my covered call calculator to present the data on this trade.

AAPL - Part of 2018 Call Portfolio

This year I wanted to put capital to work to create income.  The stocks in this portfolio are different from my dividend machines.

The point is to record and measure how this strategy works out.  I have to get 5% income from my portfolio.  At 5% I create enough income to make required minimal distributions without having to tap my capital.

The table below shows AAPL specifically and the second table shows the total 2018 call portfolio.

This portfolio has $68,222 in capital working to create income.  Current yield on that capital is over 6%.

M* MoneyMadam
Disclosure: Long RIOT, AAPL, NUE, GILD

Wednesday, May 2, 2018

Starter Portfolio of 5 percenters

I write for the individual, ordinary investor who wants to manage or monitor their own income stocks.  In this post I am looking at stocks that I call my "5 percenters."   These stocks are intended for retirement accounts.  Therefore, the universe of stocks does not include master limited partnerships due to their complicated tax implications.

  • Three percent is not enough
  • A pristine balance sheet is critical
  • Value is important
  • Dividend increases are desirable

Three Percent is not enough

When you can buy a totally safe instrument such as U.S. Treasury bonds that pay you 3%, why would you risk exposure to a stock?   Reasons are: (1) you either don't really need more than 3 % to live or (2) you think there is stock appreciation potential which you will tap for income by selling some shares. 

I have never been comfortable with the idea that I have to sell some shares to meet my income needs. Perhaps I have been in this business too long and know what can happen to stock prices in what seems like an instant.   1987, 1992, 1994, 2001 and of course the 2007 - 2009 debacle are fresh in my mind.

Another reason is my very low risk tolerance, especially in retirement account investments.   Once you retire, you cannot re-fill the coffers should you suffer a loss.  Moreover, so many people end up selling during a rout instead of waiting it out.   

You can wait it out better if you know your income will continue during times of turmoil.  If you don't look at the stock prices and only look at deposits from dividends and interest, you can make it through these difficult times.

I am not suggesting the stocks in my "5 percenters" portfolio will not suffer price declines.  I am suggesting, they will pay you an average of five percent and may even increase your income over time.

Selection criteria

I found five stocks that would make a good starter portfolio for retirees like me who need five percent.  I did not include any MLP's (master limited partnerships) that can deliver really high yields but also have complicated tax implications.

The average yield of these five stocks is 5.22%.  The range is 4.26% - 6.1%.  

Several stocks did not make the cut due to balance sheet issues.  I want a really solid balance sheet as measured by D/E ratio (debt to equity.)   General guidelines suggest a D/E of one or less or within industry standard is a desirable hurdle.  

The average D/E ratio of these five stocks is .59.  The range is .11 - .89.  All are within industry standard.

Earnings always have to exceed dividend paid out and some dividend growth is desirable.  


Let's assume, the investor reading this post has just received their corporate retirement payment.  Now they have to invest it.  You don't want to start by buying high.  Nothing can make a new retiree more uncomfortable than seeing the value of their holdings go down and that can happen in the best managed portfolios.

I am using P/E ratio (price earnings ratio) to measure value.   Current common wisdom suggests many good stocks are over valued.   Stocks are considered cheap when their P/E ratio is under 15 and expensive when their P/E ratio is over 20.   

Growth stocks almost always carry a high P/E ratio.  If you are going to live a full and long retirement, you will need some growth but this post highlights five stocks to consider not for growth but for five percent income.  

The average P/E ratio of these five stocks is 12.20.  The range is 6.61 - 17.64.

My Five 5 Percenters

Years ago when I would advise a client on a starter portfolio it almost always included names like Johnson and Johnson (JNJ).   Today stocks like JNJ pay too small a dividend.  JNJ's yield is not even 3%.   And, JNJ has had some earnings issues making their current P/E quite high although, JNJ will improve that metric in 2018.  

The five stocks I have selected are quite diversified and I am pleased to see that result.  I did not go into this study trying to find diversification, but I did hope to end up with a diversified portfolio.

All data is on the five percenters is presented below.


In the table below, I bought $40,000 worth of each of the five stocks.  You can see the dividend income and yield.

Investors who want to live off of their dividends and interest payments, need to look carefully at this chart.  This chart presents very realistic expectations of income from dividend stocks.


In the table below, you can see the EPS (earnings per share) as compared with dividends paid out.  Also note  D/E ratios of these five stocks.  Finally P/E ratios are displayed.  P/E ratios are based on previous earnings rather than future earnings.  However, when I look at projected earnings the P/E ratios change only a bit.  T's P/E is projected to increase from 6.61 to 9.60 and NHI's P/E is projected to decrease from 17.64 to 12.41. 

Also presented are the dividend increases over the past four quarters.  To calculate dividend increase %, I summed the most recent four quarter dividends, and compared them with the prior four quarters to create the dividend increase %.

Everyone of these stocks has some trouble.  That is why they are considered cheap.  Yet I believe their fundamentals are strong enough that I am using them in my personal portfolio to create 5% income.

M* MoneyMadam
Disclosure:  Long all stocks discussed

Wednesday, April 18, 2018

IBM covered call

I have been away due to a death in the family but I am back and trading again.  Consider this IBM trade.  
  • Revenue Beat $19.1 billion versus $18.8 billion estimate
  • Cloud growth 14%
  • EPS up 4%
  • Dividend Yield 3.8%

IBM is getting crushed today and I decided to take a chance on Big Blue.  I remember a mentor of mine talking about IBM never really creating anything new.  His view was they used their big blue boots to take over new ideas.   Today's IBM is doing the same thing and it takes a while.  

With the positive points listed above what is the problem you might ask.  Well, cloud growth in 2017 was 24% so that suggests cloud growth is slowing.  Forward guidance on profit remained flat at $13.80 per share.  And the balance sheet is not exactly pristine.  D/E (debt to equity ratio) of 2.26 is well above industry standard which is 1.30.   

I can justify all the negatives with the positives noted above. And one theory of using cheap debt is that when invested wisely, it can be the catalyst for growth.   Here is the trade I made today and the call I wrote on it.

Note that I actually think IBM will increase the dividend.  Their latest dividend increase from $1.40 to $1.50 or seven percent was four quarters ago.  I expect a similar increase to about $1.60.  I used the $1.50 dividend in my calculator for total return.  Also note that these calls are volatile and you may get more or less of a premium if you make a similar trade.

My bet on this stock is not for the long term.  Long term to me is over three years.  Rather, I think with the positive news noted in the bullets above, IBM's stock price will rebound.  I will pocket the dividend and the call premium.  If it the stock price does not reach $160 by the time the call expires, I don't expect the price to plunge again.   You never know but that is my strategy on IBM.   If it gets called away, I will be happy.  If it does not, I will probably exit this position.

M* MoneyMadam

Disclosure:  Long IBM with calls

Friday, April 6, 2018

Twitter - 16% iin just 11 days

A high risk trade.   How about 16% increase in just 11 days.   Nice money if you can get it.  Remember however, your upside potential is capped at 16%.  Your downside is you are stuck with Twitter for 11 days and when you can sell it, it could be lower than when you bought.

M* MoneyMadam

Wednesday, April 4, 2018

Risking QCOM loss with call option

I have updated my 2018 Calls.   To remind you, the point of this account is to employ the capital to create income using covered calls.  This strategy varies from my dividend machine strategy.  My dividend machine stocks have to pay a dividend that is greater than the 10 year U.S. Treasury (2.75%.)   I also use other criteria to pick those stocks.

My call portfolio is designed to create income through short term calls.  So far the shortest term call I sold was 4 days on Twitter, symbol TWTR.   The longest duration call so far is a call I sold on Apple, symbol AAPL.  I bought AAPL on January 22 and sold a call with a duration of April 20 or 88 days.  My strike price is $195.  With AAPL trading at about $176 right about where I bought this lot, I think I will be selling more calls on AAPL once this call expires.

Although the overall market is down again today, a number of calls are enticing.  Only one applies to my call portfolio and that is Qualcomm, symbol, QCOM.

I am taking a risk on a Qualcomm by selling a call with a strike price that is below my basis.  I have already sold one call on QCOM that expired.  My basis on that call was $64.87.  QCOM has corrected by over 16% to $54.00  I added 100 shares today at $54.00 which will bring down my basis to just under $60.00.   That makes the strike price of $60.00 more palatable.

I sold two  June 15, 2018 $60 call for $1.31 today.   If I retain ownership of these shares, I should also receive the dividend before the call expires.

I don't particularly like this new call but I am willing to lose my QCOM and move it into another stock with more calls.     I will be nervous until this call expires or is assigned.  If these calls on QCOM are exercised here is my return adjusted for my new cost basis and including both dividends and the call premiums.

One of the interesting sides to publishing my ideas, is I have to face the music when I am wrong or my strategy does not work.  Honest reporting here.

The table below represents all trades made in the 2018 covered call portfolio.  Overall I have a positive view of the economy but I know external influence will keep the market volatile.  Depending on when the volatility affects stock prices will determine how well I do on these trades.

M* MoneyMadam

Disclosure:  Long all stocks with calls listed