Tuesday, June 11, 2019

Another CAT call worth consideration

Yes, I still own some Caterpillar symbol CAT.  It has been an interesting ride on this big yellow money machine. 

Revenues peaked in 2012 then precipitously fell in response to global slowing.  My readers know I like stocks that fill the funnel with revenues which leads to earnings and dividend payouts  Therefore, it is odd when I add a stock with a suspect revenue history.

My theory is that CAT is more facile with its business operations than the average investor thinks.  They have been able to raise dividends because they manage their earnings well.  Lay that management execution over the improvement in business activity and we have the foundations for continued dividend payouts and dividend growth.

CAT has a rather large debt to equity ratio (D/E) at just over 2 but that is within industry standard.

Caterpillar's fundamentals are listed below.  Note the revenue trend has reversed and is growing.  Their 2019 first quarter revenue was an increase of  4.7% over first quarter revenue in 2018.  This is good news.







Yet, I am not so enamored with CAT that I am not willing to lose the shares I just added.   With that in mind, I sold an immediate call on CAT.   The table below presents the details of the covered call.  





I added CAT at $128 today.  I immediately sold a $140 August 16, 2019 call receiving a $1.55 call premium.  The expiration date is after the next ex-dividend date of July 19, 2019 which means I should also bank the quarterly dividend.   Add it all up and if they take my new shares at $140 my return is 11.34% on those shares in less than 2 months.

If I end up keeping CAT, I just added the premium of $1.55 to CAT's income.  With a full year of dividends and this one call, income from CAT adds up to $5.67 ($4.12 dividend + $1.55 call premium.)   That folks is an income yield of 4.42%.   Anything over 4% meets my target income goal.

The fact that I write a lot about CAT and execute these calls is evidence that CAT is a good stock to hold over time and work it for income.

M* MoneyMadam
Disclosure:  Long CAT with calls


Wednesday, May 29, 2019

Two calls in a down market while I nibble

One problem of selling calls on quality stocks is that when they are called away at your strike price, quite often their stock prices continues to go up and you lose that opportunity.

The other problem with selling calls on even quality stocks is that you are stuck with the stock until the expiration even if the stock price is sinking.

Our current market makes clear the second risk preempts the first.  Readers know I work my portfolio with calls.  Often times I am in and out of stocks once of two a year.  I am unafraid of each risk noted above because I try to pick quality stocks.   

I added a small amount of two quality stocks today and immediately sold calls on them.  One stock carries a low dividend yield but all other Dividend Machine fundamentals are in order.  The other stock carries a high dividend yield and has a little more debt than I like, but I believe it is a quality stock that will continue to pay their big yield.

I like to get a minimum of 10% total return; capital gain, call premium, and dividend; when I buy a few more shares and sell a call for no other reason than to reap income.  Here are my two trades today.

Microsoft, symbol MSFT

























Dividend fundamentals include earnings of $4.50 are greater than dividend of $1.84 and debt to equity ratio of .77.  Negative is low yield of  1.47%


IBM, symbol IBM


























Dividend fundamentals include earnings of $9.50 are greater than dividend of $6.48.  Debt to equity ratio is 3.03 and that is a negative but it is offset by a dividend yield of 5.01% with plenty of cash flow to pay it. 


Nibbling for income.   Disclosure:  Long MSFT and IBM with calls

M* MoneyMadam

Wednesday, May 15, 2019

Macy's big dividend and a catalyst for growth


This is the first new name I have added to my portfolio of income stocks this year.  My motivation is strictly to move some more money into income from a high yielding dividend stock.  I always hope for capital appreciation and I am always nervous about stock price deterioration, but when I find a stock with a low P/E and a high yield, I look further.

  • Robust 6.7% Dividend Yield
  • Price Earnings ration less than 7
  • Strategic moves to take on head winds
  • Call Option support


Stocks are cheap for a reason and Macy’s has every reason to be cheap.  Macy’s, symbol M, is in the retail sector.  All the oxygen in this space is being consumed by Amazon.  Macy’s has the scale needed to compete in their narrow range of retail.  Macy’s has good cash management suggesting it will continue to pay the dividend.  Macy’s is very near the 52 week low with a very low price earnings ratio known as P/E ratio.



Macy’s Dividend Machine Fundamentals:

The table below presents the criteria I use to pick dividend stocks.   Earnings must exceed dividends paid out; dividend must beat any U.S. Treasury, dividend should grow, and D/E (debt to equity ratio) should be 1 or less or within industry standard.  
5/15/2019
M E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$21.94 $3.56 $1.51 6.88% 0.00% 0.74



Macy’s fails on recent dividend growth but meets all the other hurdles. If you go back five years, the dividend has increased 20.45% or 4.13% per year.   We do not know the direction the dividend will take but we have some factors that are positive.





Dividend History is important.  They have managed to pay a dividend through several periods of disruption.  This is comforting as I am hoping to cash these dividends for 10 – 20 years. 

I also like to see growing revenue because that fuels earnings which fuels dividends.  One of the reasons M is cheap is that future growth of revenues is speculative.  





This is not an encouraging pattern as you can see.  And, that is why M is selling with a P/E under 7.  I am hoping for no less than stable revenue to drive the current dividend.  But I really do think the catalyst for future revenue growth and future potential dividend growth lies in the strategic changes Macy is making right now.



I think Macy’s is on the right track.  Read this link on how they are transforming their effort to include more digital sales.  https://www.businessinsider.com/macys-digital-transformation-continues-to-fuel-profit-2019-5 Based on the earnings reported today, they feel they are making distinct progress. 

Regarding Dividend Machine fundamentals.  I consider Macy’s a good risk at this point.  

Is a non dividend growth stock worth the effort?

If you buy a stock with dividend yield of 2.5% but with dividend growth of 10% would that be a better investment for income investors than a stock like Macy’s which pays a 6.4% yield with no dividend growth.   I used a $20,000 investment in each stock in this scenario.

It would take 11 years of dividend growth to achieve the same income from the higher yielding stock.  Young wealth builders with long time horizons should do a different analysis that includes dividend reinvestment and potential stock price appreciation. 

This analysis is for investors who rely on income and have a diversified portfolio.  Over 6% dividend yield is hard to find especially at such a cheap price.








Adding Macy’s with implied support from call option buyers



I added Macy’s today with a cost basis of about $22.00.   I see some positive support from calls.  I prefer to keep my call expirations under 90 days.  The call presented below has an expiration date of 8/16/2019.  I will cash the dividend along with the premium if I took this call.  I probably will not sell the call on the position I am building.  However, if the calls stay this robust, I just might take a larger position than usual and sell calls on some of it.




















Macy’s is good stock for income investors to consider for their portfolios.  M has good Dividend Machine fundamentals except for dividend growth, and it has a catalyst that just might make it a home run.



M* MoneyMadam

Long M
May 15, 2019 First Quarter Earnings Report

Wednesday, May 8, 2019

Invest for Income - Ignore the price of stuff around you - guildelines

I ran into Alfred Ferol playing golf in Palm Beach, though not at Mar-a-Lago*.   He said to me, "did you notice all the real estate for sale?  A property I think should be priced at $1.5 million is now $15 million. "  Yet here I live, quite well, on the income I create without owning a palace in Palm Beach.

The point Alfred was making, is to not measure investments by their price but by the income.  All retired people who live off the income from their investments have to focus on income.

Income is expensive these days.  


When I got to know Alfred, he bought a Certificate of Deposit (CD) earning 18% for 2 years.   Let's put this in perspective: $10,000 @ 18% provides $1,800 simple interest.  Today, you would have to invest $75,000 in a two year CD to get the same $1,800 simple interest income.  Two year CD's pay only 2.4 - 2.5%.   Does that nail the point that income is expensive.

Trade issues are affecting income.


Investors here and abroad are nervous about trade issues and international affairs in general.  The U.S. is the safe haven.  The nervous Nellies are all buying our U.S. backed fixed income which renders it very expensive and low yielding.



 

Alfred re-assured me to not be nervous about trade issues.  Trade is not a problem, it is an opportunity.  Industrial production is much more facile and mobile than in the past.  Capitalism has invaded many continents and the human predilection to do what we have to to eat has provided a very large labor pool.  Today, moving production from China to Vietnam for instance is easier than in the past. 



He admits the trade issues affect stock prices which is why he sees opportunity.  But, you have to find stocks with good fundamentals that are cheap.  Find a stock that is cheap for a reason that will not negatively affect your income. 

A stock that pays a good dividend but is cheap because survival of the company is in question; think Gamestop (GME) or Pitney Bowes (PBI) or even General Electric (GE) is not your target.

Is the stock cheap because upside stock price potential is less than say Chipotle?  But for you it is an opportunity because it produces dividend income and dividend income that grows.  Your first objective in this exercise of picking stocks is income not growth. 

It is all about income.  Income is dividends. Dividends come from earnings and earnings are driven by revenue growth.   Put all that together with a solid balance sheet and you can find stocks with dividends that beat that 2.5% CD.


Guideline for Picking Dividend Stocks.


  • Earnings per share, EPS must exceed dividends paid out.  Otherwise, don't take the risk
  • Dividend yield has to exceed 2 year U.S. Treasury.  Otherwise, don't take the risk
  • Dividend growth has to keep up with inflation
  • Debt to equity ratio has to be 1 or less or within industry standard.  Otherwise don't take the risk. 

Industries with low P/E stocks.


Industries with stocks that pay dividends but have low P/E price earnings ratios include:

  •  Regional and Commercial Banks, 
  • Refiners, 
  • Steel, 
  • Materials, 
  • Auto and Tires in the consumer discretionary area. 
  • Grocery stores in retail and finally 
  • Railroads.   

There are the industries I will search and these are the criteria I will measure. As I identify stocks I like and that I buy, I will write up their fundamentals and post my trade.   Here is an interesting link to a list of stocks for consideration.   https://www.theonlineinvestor.com/top_25_low_pe_ratios/

Good Income Investing

M* MoneyMadam

* Mar-a-Lago does not have a golf course.  Trump International Golf course is in West Palm Beach


Friday, April 26, 2019

SWKS and NVDA taking advantage of chip weakness

My weakness is chips; potato chips.  I also like the chip space but I hate overpaying.  While Skyworks is not exactly a dividend machine because the yield is low, it has beta (volatility) which means I can take a chance with a covered call and if my new shares are not called away by the call buyer, I am getting paid nearly 2% to wait.  And this stock has no debt.

Take a look at a transaction I made today.  I added to SWKS and immediately sold this call.









Price on Open
Call Expiration


swks
$86.82
6/21/2019


Cost Basis: 
Price on Option Contract Open
$86.82


Strike Price:

$92.50


Call Premium:

$2.20


Dividend
Ex Div Expected mid May
$0.380






Call Yield on Basis

2.53%


Call + Dividend Yield on Basis

2.97%


$ Gain if Assigned

$8.26


Max Return  if Assigned

9.51%







I like a greater than 1% yield from the call premium and this call meets that hurdle.  Moreover, if my shares are called away, I get a total return of over 9% in a very short time period.

Now here is another call I sold today.   For the higher risk investor but in the same industry.


























My kind of income investing.

M* MoneyMadam
Disclosure:  Long SWKS and NVDA  with calls

Thursday, April 18, 2019

Leggett and Platt a Dividend Machine for 2019

How often does one stock go down or up based on news from a stock in the same industry.  Sleep number stock is under pressure (you can read the article here https://seekingalpha.com/news/3451714-sleep-number-shares-sink-q1-sales-margin-disappoint?app=1#email_link   I was hoping Leggett and Platt would go down in sympathy.  Here is why.


  • LEG meets all Dividend Machine Fundamentals
  • Dividend yield is greater than 2 year U.S. Treasury
  • Dividend growth beats inflation
  • History suggests the dividend is safe in difficult times
  • Valuation is acceptable


Leggett and Platt is a very diversified company that supplies among many other items, bedding.  I was hoping Leggett and Platt, symbol LEG, might have a similar down turn as Sleep Number, symbol SNBR, down $7 or 15% as of this writing.  But LEG is holding up.

I like Leggett and Platt, symbol LEG; three portfolios hold LEG, 2011, 2013 and 2014.  Click on the year to read the original post.  It's not an exciting stock.  Not a stock with a lot of call option excitement.   But as you can see with the history in this blog that it is a steady source of income for we income investors.  If I were constructing another income portfolio, I would add LEG to it.


FUNDAMENTALS




LEG meets most of the hurdles I use to pick an income stock.  It pays a dividend that is much bigger than I can get from a 2 year U.S. Treasury.   To take the risk embedded in any stock, you have to beat the safest investment such as a U.S. Treasury note or bond.  LEG has earnings that far exceed the dividend paid out making that dividend more safe.  Dividend increases, and D/E (debt to equity ratio) are all within the range I look for (http://www.themoneymadam.com/p/dividend-stock-criteria.html.)


DIVIDEND MACHINE

To be a "Dividend Machine" a stock has to have a history of increasing the dividend over time.  LEG fits that bill.   Inflation, not the CPI number or the one used by the "Fed" but the inflation I measure, is about 3.8%.  I would like to see my income go up by 3.8%.  I can stomach ups and downs in the value of the investment if it is basically safe and continues to raise my pay.   You can see in the table under FUNDAMENTALS,  the last three year dividend increases have averaged over 6%.  Take a look at the longer term dividend history and you can see even during the very difficult period of 2008/2009, LEG delivered safe and increasing income.

Dividend Chart
From Leggett and Platt Website

















 VALUE INVESTMENT

Leggett and Platt Historical P/E Ratio from Macro Trends.net

LEG is trading well above my basis of $28 and change.  Today LEG is trading at $43.35.  Is that too expensive?  Looking at the historical P/E of LEG, I think it is not too expensive.  LEG's current P/E (price earnings ratio) is right around 19 while not cheap this is a very reasonable valuation particularly when you look at the P/E history

While, the vast diversification of this company may be a good thing or a bad thing, I can only go on past performance and the data available. One of part of LEG management I like is the stated goal of increasing total share holder value through, growth as well as returning money to shareholders through dividends and stock buybacks.  For an income investor, those are very nice goals.

April options expire today and I will have some money to invest.  I am going to add LEG and hope the bed bugs don't bite.

M* MoneyMadam


Disclosure:  Long LEG