Friday, June 15, 2018

Implications of June 15, 2018 Call expirations

Readers of this blog know I use calls, mostly on dividend stocks, to boost my income.  I have summarized the calls expected to expire and those expected to be assigned.  Every call expiration date comes with some uncertainty yet these ten calls are pretty straight forward.

  • Call premiums can be booked as income or as reduction of cost basis but not both.
  • When current price is greater than the strike price, you have lost opportunity.
  • Sell calls on only part of your position to preserve upside potential
  • Carefully selected strike prices makes selling covered calls an income strategy that works for income investors.

Let's first look at those calls that are outside my comfort zone.  


I wrote about taking a flyer on RIOT a block chain stock.   This trade is totally outside of my comfort zone.  I am an income investor.  I like dividends plus call premium income.  If my stock gets called away (assigned,) I expect to receive a capital gain.

Yet, even a disciplined investor like me occasionally makes stupid mistakes.   I was so successful with Twitter (TWTR) and Nvidia (NVDA) that I thought I could pull a fast one and make money on RIOT.

This did not work out well.  I still hold RIOT.  I have not lost everything.  I have received two call premiums and that helps salve some of my pain.   I want to make a point here about using call premiums for income.  You cannot both use the premium for income that you spend to pay your expenses and consider it a reduction of your basis.  Either you keep the money from your call premium in your account or you invest it in another security, but you cannot book the income twice once for spending and the second for cost reduction.  

The table below show how my RIOT trade has worked out so far.  Since I spend my income, I do not lower the cost basis.




Note that in the next section, I have included another trade on a stock that does not pay a dividend.  That stock is Novocure, symbol NVCR.   This stock was picked by my husband who is my biotech analyst.  You will notice, this trade worked out so far.

Calls I expect to be assigned.


Three calls should be assigned; they are CVX, NTR, and the above mentioned NVCR.  CVX is a bit iffy as the current price is just a bit above the strike price.  When you add in the call premium of $1.64 per share paid to me by the call buyer, they are not in the money if they take the CVX shares.

In my experience, they usually take these stocks.  Energy demand continues to grow with the overall economy and I would expect CVX's price to increase.   If they take these shares, I will be happy to book the gain and I have more shares on which I did not sell calls.

Nutrient symbol NTR is the successor to Potash.  This call and the NVCR call are examples of lost opportunity by selling calls.    If I really wanted to sell these two stocks, I would make more money selling in the open market rather than writing (selling) calls with a defined strike price.  This is because their current price is higher than the strike.  




The lesson here is to sell calls on only part of your position.  You get the call premium, dividends during the holding periods, and capital gain when the stock is called away.  If you continue to hold additional shares, you can participate in upside potential as well.

Calls I expect to expire.


These are the stocks I love.  They pay good dividends and those dividends tend to go up.  I sell calls above my basis so if they are called away (exercised or assigned,) I get a capital gain as well.  If they expire, I just keep working the calls to boost my income.

The table below illustrates the results of my favorite strategy for covered calls.  I love it when calls expire.  I just keep working them over and over again.



It is difficult to sell new calls right around the upcoming expiration date.  Wait until next week and start working those calls again.   This is an excellent strategy for income investors.

M* MoneyMadam
Disclosure:  Long all names with calls





Thursday, June 7, 2018

Two income ideas for this pricey market

Marty Zwieg (may he rest in peace) said "don't fight the fed. and don't fight the tape."  It is hard to buy into a hot market, but when you need income you have to deploy capital.  I am hoping Marty was right.  I am not going to fight the tape with two ideas for today.

  • Don't fight the tape, employ capital for income

  • Pristine balance sheets are very important for income investors

  • Covered calls are an income investor's friend

  • Do not ignore the risk of compromised upside potential when selling calls


Both of these stocks have pristine balance sheets.   A solid balance sheet does not mean a stock's price will not go down but it does go a long way toward making sure the company can continue to pay the dividend and that the company will not go down.

Every income investor needs to be confident that dividends will continue and hopefully increase.  We need to protect our principal since most of us are not working any more and depend on our money at work.  Covered call opportunities are icing on the cake for income investors.

Let's look at the fundamentals of the two stock ideas for today:   CVX and INTC.

Chevron - CVX


Chevron has been through a very rough patch.  Between the years 2014 and 2016 their revenue was cut in half.   The stock price suffered and earnings were less than dividends paid out for a while.  But things have turned around with the increase in oil prices.

During the bad years, CVX, increased the dividend but not by much.  Their average dividend increase over the three year period of May, 2015 through May, 2018 was only 1.55%.  This too has changed.  CVX's most recent dividend increase was 3.7%.  I really like a 4% dividend increase but 3.7% is o.k. Since CVX has a yield of 3.53%, it beats any U.S. treasury available today.

The table below presents the fundamentals I use to evaluate my income stocks.

























In summary, CVX has a good balance sheet, increasing revenues, earnings per share greater than dividends paid out and a growing dividend.  These are good fundamentals.

Intel - INTC


Intel is a totally different stock than CVX.  What they have in common is the solid balance sheet, growing revenues and growing dividends.   Take a look at INTC's fundamentals presented in the table below.

























Both stocks carry a current P/E (price earnings) ratio in the mid 20's.   Both companies have enough earnings growth that their forward P/E's are expected to be in the mid teens.  This is somewhat comforting as we don't like to buy stocks that are too expensive during times when we try to not "fight the tape."

CVX is more vulnerable to price fluctuations than INTC because CVX is dependent on the price of oil whereas INTC is not dependent on any one factor.  Technology will continue to develop and I believe Intel will not be left behind.

Covered Calls on CVX and INTC


Both of these stocks have calls that are intriguing.  Remember with calls you risk limiting your upside potential.  Therefore, you may want to sell calls on only part of your position.  If you are like me and feel there is always another stock to buy if you lose your shares in either stock, then you can make this a short term income trade.

Calls on CVX


I found two calls I like on CVX.  One expires in August and pays you 1% yield on the strike price of $135.   However, the ex-dividend date is just one day before the call expires and the call buyer could exercise the call just before the ex-dividend date and you get only the 1% premium plus the capital gain.

In the second call, you have to wait until September for the call to expire but you get a 1.5% yield from the call premium and most likely will receive the dividend as well.  If exercised, you will receive the same capital gain.



Call on INTC


The Intel call is more straight forward.  I selected an August 17, 2018 expiration date with a strike price of $60.   The premium on this call is $1.08.   INTC's ex-dividend date is expected to be about August 4, 2018 and you should receive the dividend of $.30 provided the call is not exercised early.




These are two ideas to consider.  I executed all three today.  I bought more CVX and INTC and sold the two CVX calls and the INTC calls.  Let's see how we do.

M* MoneyMadam
Disclosure:  Long CVX and INTC with calls

Tuesday, June 5, 2018

Updated Portfolio Summaries as of June 5, 2018


As an income investor and reader of this blog, you cannot lose sight of our major investment objective which is to retire with income that grows.  Dividend Machines are the stocks I use to create ever increasing and safe income over time. I also use covered calls and discount bonds in my three legged strategy to create retirement income.



No strategy is perfect.   Take a look at how the dividend strategy has worked by reviewing the portfolios created so far.   Only you can decide if this strategy is for you.






To review the criteria I use to select a stock as a Dividend Machine, please click on the page Dividend Machine Criteria. 





Good Income Investing,   M* MoneyMadam


Wednesday, May 30, 2018

AMGN has me worried therefore selling calls

I have held AMGEN, the pharmaceutical company, symbol AMGN, since 2017.  I am getting a bit nervous about this dividend growth stock.  When I get nervous, but the stock is still doing well, I sell calls that are close to the current price but fetch a big premium.

  • Dividend Growth alone is not enough
  • Revenue growth has to keep up with dividend growth
  • D/E ratio is important but can be above 1 in a growth stock
  • Covered calls  reduce cost basis



Let's first look at AMGN's dividend growth stock fundamentals beginning with the dividend.  Amgen's most recent quarterly dividend (ex-dividend date was May 16, 2018) was $1.32.   On an annual basis that is $5.28 per share.  AMGN is trading at $179.23 as I write bringing the yield to 2.945%.  

You could not ask for a more robust dividend growth history.  Just over the past 3 years, AMGN has increased the dividend from $.79 in 2015 to $1.32 in 2018.  That is an average annual increase of 22.36%.   Very impressive.

A dividend growth investor has to like this story.  While the dividend yield is competitive with the 10 year U.S. Treasury, the dividend growth is compelling.

Next let's look at the other fundamental criteria I use to evaluate my dividend stocks.  This includes earnings per share (EPS) which I always require to be greater than dividend paid out.  Other criteria are revenue growth and debt to equity (D/E) ratio.  

See the table below which presents all the criteria I use.  




The issues I have with AMGN are poor revenue growth and high D/E ratio and EPS.   EPS are a little out of wack.  AMGN took a one time charge that reduced earnings well below the dividend paid out.  However, this is not a permanent situation.   Their most recent quarter shows they are back to making more in earnings than they pay out in dividends.

I am much less concerned about D/E ratio because a biotech has to spend a lot of money to create a new drug and get it to market.  However, since 2015 revenue growth has been anemic.   When revenue growth is anemic the cash needed to fund those big dividend increases can be inadequate.

We income investors are always being warned to not chase yield.  Certainly 2.945% is not a great yield and we could not be accused of chasing yield but the we could be accused of chasing dividend growth. Without revenue growth, dividend growth is in jeopardy.

I am selling calls on my AMGN and here is the call I sold today.





I was able to find a strike price that is about 10% above my basis.  The sweet spot was an expiration date of July 20, 2018 just 51 days away and the premium of $3.11 was hard to turn down.

If I get stuck with AMGN after the call expires, I am hoping I can either sell more calls, which reduces my cost basis or I can sell the stock at a profit after the next ex-dividend date.

This is how I work my portfolio.

M* MoneyMadam
Disclosure:  Long AMGN with calls




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