Wednesday, February 19, 2020

Adding another name to my Private income ETF

I am in the continuous process of creating my own ETF to create income from dividend stocks.  In this personal ETF I use covered call options.

  • Dividend Machine stocks are essential when building a stock income portfolio
  • Dividend growth at a reasonable price is required for a stock income portfolio to keep up with inflation
  • Solid fundamentals allow you to sleep at night when the market gets volatile on the downside
  • Call income can add as much as 25% to the income stream
Last week I wrote up a post about Prudential.  This week I am adding UPS, United Parcel Service.
I always start with fundamentals and then I look to see if covered call options are available.

You cannot expect every stock you pick for your portfolio to be a winner. To use a sports analogy, some stocks will deliver home runs and others will allow you to bat for average; and some will just be another strike out.

Look at the portfolios I built between 2011 and 2018 and you will see evidence that using solid criteria to pick stocks that I call Dividend Machines will produce a solid portfolio with some home runs, lots of batting for average and yes a few real strike outs.  

The second stock I am adding for 202 is UPS.   Let's look at UPS's fundamental performance over the past 11 quarters (data from Nasdaq.com.)

UPS DIVIDEND MACHINE FUNDAMENTALS


Fiscal Quarter
2019
2018
2017
 UPS (Fiscal Year) (Fiscal Year) (Fiscal Year)
March
   Revenue $17,160(m) $17,113(m) $15,510(m)
   EPS 1.28 (3/31/2019) 1.55 (3/31/2018) 1.33 (3/31/2017)
   Dividends 0.96 0.91 0.83
June
   Revenue $18,048(m) $17,456(m) $15,927(m)
   EPS 1.94 (6/30/2019) 1.7 (6/30/2018) 1.58 (6/30/2017)
   Dividends 0.96 0.91 0.83
September
   Revenue $18,318(m) $17,444(m) $16,173(m)
   EPS 2.01 (9/30/2019) 1.74 (9/30/2018) 1.44 (9/30/2017)
   Dividends 0.96 0.91 0.83
December  (FYE)
   Revenue $19,848(m) $18,975(m)
   EPS 0.52 (12/31/2018) 1.26 (12/31/2017)
   Dividends 0.91 0.91
Totals
   Revenue $53,526(m) $71,861(m) $66,585(m)
   EPS 5.23 5.51 5.61
   Dividends 2.88 3.64 3.4


Dividend payout is less than earnings, revenues are growing which fuels dividends.   UPS allots some of  that growth to us, the investor, by increasing the dividend over time.  And now the yield is within my range at over 3%.  Moreover, their balance sheet has improved over recent quarters.

I use debt to equity ratio (D/E ratio) when I write up posts about my stocks.  D/E ratio is a measure of balance sheet strength.  Many other investors use different measures and I applaud any investor who can delve more thoroughly into the balance sheet to determine balance sheet strength.

The chart  below presents UPS's debt to equity and free cash flow on a quarterly basis.  Debt to equity has gone down significantly over the past four years and that is good.   Free cash flow is greater than debt to equity and that too is good.   However, UPS's D/E ratio is quite high.  With that in mind you may want to be more careful with this stock


The table below is a nice summary of UPS's Dividend Machine fundamentals.

UPS Earnings Dividend
 Earnings > Dividend $5.14 $3.84
 Debt to Equity 4.76
 Dividend Yield 3.62%
 3 Yr. Rev. Growth 6.41%

Notice the revenue growth in the table above.  Then look back up at dividend growth in first table and we can see a stock that delivers for the income investor.

When a stock, even a relative value stock like UPS, has growth potential, you can sometimes see that in their call option premiums.   UPS does not command premiums like Nvidia but it does have some option activity to work with for the purpose of our personal income ETF.

COVERED CALL BOOST INCOME 25% or MORE

Here is a call I sold today on half of the shares I added today.  I didn't sell this call because UPS is going to be a growth machine like Nvidia.  I sold the call to boost my income by at least 25%.


UPS $106.65 4/17/2020
Cost Basis:   2/19/2020 $106.17
Strike Price: $110.00
Call Premium:  $1.52
Dividend  2/24/2020 $1.010
Call Yield on Basis 1.43%
Call + Dividend Yield on Basis 2.38%
$ Gain if Assigned $6.36
Max Return  if Assigned 5.99%


The call doesn't look that impressive until you analyze it from an income viewpoint.   By selling this call with an expiration under 2 months, I have  added income greater than a quarterly dividend.  The next dividend will be $1.01 and the premium I received today was $1.52.

UPS goes ex-dividend on February 24 and to get both the dividend and the call premium you have to own the stock by 2/24 and sell the call by 2/24.  You can buy it on the 24th at least at Schwab.

Selling the call on half the position allows me to keep upward potential if the stock goes higher by not risking losing half the shares.   On the other half of the shares, this strategy gives me a chance to book a quick nearly 6% gain in fewer than 60 days.  And if I get to keep both lots, I have good dividend yield with 25% more income than I would have by not selling the call.

INDUSTRY INFLUENCE

Regarding the industry.  Amazon has impacted Fed Ex (FDX) more than UPS.  I fell comfortable with the revenue growth and dividend growth and the fact they are tackling the debt issue.

Good Income Investing:

M* MoneyMadam

Use this calculator (or click on the call options at the top of this blog) to calculate how a covered call will work for you.



    

Enter Cost Basis:
Enter Strike Price:
Enter Call Premium:
Enter Dividend if ex-div before Option Expiration:
Call Yield
GAIN
Total Return Percent if Assigned

Saturday, February 15, 2020

My first 2020 Dividend Machine

  • Finding a Dividend Machine was difficult in 2019 due to high price valuations
  • Prudential provides income investors with a good yield and regular dividend increases at a low valuation
  • Revenue growth suggests dividend increases will continue
  • Prudential has very little debt
  • Covered call options add to the desirability of adding this stock
  • A growth catalyst would be increasing interest rates but in an environment of low interest rates, stocks with good yield and dividend growth are valuable.


While I constantly troll my excel screens for income opportunities, the stock profiled today is my first Dividend Machine of 2020.  You can look at previous Dividend Machine stocks by clicking on the individual portfolios created between 2011 and 2018. http://www.themoneymadam.com/p/blog-page_11.html

Lately, I have concentrated on creating income with covered call options on mostly dividend stocks but also on a few growth stocks.   In 2019 I tended to add to positions with good dividends, good dividend increases, and good balance sheets and then sell calls on those new shares to boost income.

My theory is that if I am called away and lose the upside opportunity on the new shares, I will still have the original shares, most of which are at a lower cost basis.   On the other hand, if the shares are not called away, I add to my Dividend producing portfolio and wait for the next opportunity to sell calls.

During 2019, desirable stocks seemed expensive.  P/E's (price earnings ratios) where very high.  Deeply discounted stocks with low P/E's were not interesting as they didn't carry as solid a balance sheet as I would like or were in industries with poor forecasts.

Yet I have found a stock that I am adding.  This stock meets all the criteria I like in a stock I call a Dividend Machine.  Let's look closer:

PRU Earnings Dividend
 Earnings > Dividend $10.27 $4.00
 Debt to Equity 0.33
 Dividend Yield 4.17%
 3 Yr. Rev. Growth 2.36%

  • Earnings per share greater than Dividend payout
  • Dividend yield over 4% and dividend increases that beat current inflation: most recent dividend increase was from $1.00 to $1.10 effective 2/14
  • Solid balance sheet as measured by D/E ratio (debt to equity ratio)
  • Revenue growth
It's important to note that PRU's P/E/ ratio (price to earnings ratio) is under 15.  PRU's most recent 11 quarters are presented below.  The table presented below looks at revenues, earnings, and dividends.


Fiscal Quarter
2019
2018
2017
(Fiscal Year) (Fiscal Year) (Fiscal Year)
March
   Revenue $15,091(m) $13,757(m) $13,670(m)
   EPS 2.22 (3/31/2019) 3.14 (3/31/2018) 3.09 (3/31/2017)
   Dividends 1 0.9 0.75
June
   Revenue $15,388(m) $14,655(m) $13,441(m)
   EPS 1.71 (6/30/2019) 0.48 (6/30/2018) 1.12 (6/30/2017)
   Dividends 1 0.9 0.75
September
   Revenue $15,105(m) $16,148(m) $16,313(m)
   EPS 3.42 (9/30/2019) 3.89 (9/30/2018) 5.08 (9/30/2017)
   Dividends 1 0.9 0.75
December  (FYE)
   Revenue $18,432(m) $16,265(m)
   EPS 1.99 (12/31/2018) 8.57 (12/31/2017)
   Dividends 0.9 0.75
Totals
   Revenue $45,584(m) $62,992(m) $59,689(m)
   EPS 7.35 9.5 17.86
   Dividends 3 3.6 3
(Source Nasdaq.com)


You can easily see the revenue trend and the dividend trend.  It is important to note the earnings trend as well.   While earnings in 2017 were $17.86 per share they dipped to $9.50 per share in 2018.  In 2019, earnings are rebounding.

Many people use free cash flow instead of earnings per share to evaluate a stock.  I have no argument for using free cash flow.  Most of my readers don't get that into an income statement with earnings per share easier to find.

The dip in EPS is explained by Prudential as global pressure in an uncertain market.  They weathered that storm and you can watch a video of their report that was published 11 months ago by clicking here.  Prudential report on earnings

Selling calls on half my position is a way of boosting income. Here is the call I executed at the end of last week.

Stock Price on Open Call Expiration 
PRU $95.95 3/20/2020
Cost Basis:   2/12/2020 $95.89
Strike Price: $97.50
Call Premium:  $1.27
Dividend  2/14/2020 $1.100
Call Yield on Basis 1.32%
Call + Dividend Yield on Basis 2.47%
$ Gain if Assigned $3.98
Max Return  if Assigned 4.15%


I am a bit frightened of every market as I am a very conservative investor.  That feeling translates into my desire to invest in stocks that will continue to pay a dividend even if the market goes down, but also have enough positive sentiment that another investor is willing to buy a call from me.   My fear keeps my expirations short.  I give up some gain by picking a strike price close to but above my basis and a call premium that is equal to or greater than the quarterly dividend.   Thinking of it as getting 5 dividends in a year if you end up holding the stocks.  That is 25% additional income.

Prudential is really in the financial segment.  It will benefit if interest rates rise.  It can invest it's money for a higher return than the payout to its customers.   Who knows when interest rates will again go up.   Perhaps the interruption of supply chains will make the formula for inflation reappear.  Remember inflation occurs when there is too much money chasing too few goods.

For right now, I am very happy investing in a stock that pays me more than 4%, has the revenue growth to continue to increase the dividend, is reasonably priced with a solid balance sheet, and has enough upside sentiment to sell covered calls.

Happy Valentine's day and President's weekend.

M* MoneyMadam
Disclosure:  long PRU with calls

Call Calculator:   Call prices change all the time as does the price of a stock.   Use this interactive call calculator to measure how a call you are considering will provide income.


* If the calculator does not work with your browser, try this link.  http://www.themoneymadam.com/p/covered-call-calculator_01.html






Enter Cost Basis:
Enter Strike Price:
Enter Call Premium:
Enter Dividend if ex-div before Option Expiration:
Call Yield
GAIN
Total Return Percent if Assigned