Thursday, July 27, 2017

Short Term Cash Management

Last week was options expiration and several of my positions were assigned.  I have a lot of cash around.  I can't stand this business of getting nothing from a money market.  Using 3-4 months U.S. Treasuries and CD's to put some of this cash to work.  Here are the investments I made today.






Not a lot of income but remember that when you watch your pennies, the dollars will take care of themselves.


M* MoneyMadam

Tuesday, July 25, 2017

Income Investors should consider KSS Kohl's

I was recently watching Jim Cramer's show on CNBC when he discussed differences between investing and trading.   Since investing is a long term project, when investing, he said, you want the price of the stock to initially go down so you can buy more.  Trading is a short term project.  When trading you want the stock price to go up so you can sell and move on.

When I write about a stock in this blog it is strictly from an investor's viewpoint.  Moreover, I invest for income as do my readers.   If you take Cramer's advice KSS, Kohl's is a stock to consider.


  • Income investors do not sell shares to pay their bills, they use stock dividends to provide cash flow.
  • Dividend growth investors expect their stocks to increase their income over time.
  • Dividend investors are willing to add to positions when stock prices sink below their basis.
  • Income investors also use covered calls to boost their cash flow.

Kohl's was my first Dividend Machine in 2017 and boy have I gotten a lot of bad mail about that one.  I am used to that and I have no choice but to hold KSS because I do not trade, buy or sell, any holdings in the portfolios I publish.   As an income investment KSS has been a good one.  And for investors, KSS also provides the very opportunity Cramer presented   The stock price has gone down.

DIVIDEND INCOME FROM KSS


I have posted several blogs about Kohls, symbol, KSS.  I like it for income.  Once source of income  has been the dividend.   KSS pays a dividend of $2.20 annually for a yield of 5.4%.  Income from dividends since establishing a long position in KSS on January 17, 2017 @ $41.88 has been $1.10.  It is significant to note that Kohl's most recent dividend increase was 10%.







Dividend income from KSS on the first 100 shares held since January 17, 2017 was $110.00.   

CALL INCOME FROM KSS


At the same time I wrote about adding KSS in January, I sold (also known as write) a call.  I picked an April $47.50 strike price and received $1.25 per share in call premium or $125 for the 100 shares.  I liked the expiration date because it was after the first dividend opportunity in March providing another $55 of income.

This April $47.50 call expired.  On the expiration date KSS closed at $40.07. Upon expiration, I held. In May I received an alert that calls were selling well.  On May 10, 2017, I sold another call.  This time I selected a July $45 strike and received $1.00.  Again, I selected a strike date after the next dividend which was in March so that I could book both the call premium and hopefully get the dividend.   KSS was trading at $40.34 at the time.

 This $45.00 call also expired and I continued to hold.  On Monday, July 24, 2017 I sold another call.  I selected an October $45 strike and received $.90.  By now you see how these rolling calls work.  I should get the September dividend since the call expiration date is after the next expected ex-dividend date.

On Monday, KSS was trading at $39.36.   Here is where I employed Cramer's advice and added to my position @ $39.36.

The table below illustrates the call income received.  Note that the first two calls were one contract each.  One contract is equal to 100 shares.  The final call was on two contracts or 200 shares.



Rolling calls every 90 days is an excellent tool for income investors.  Not all stocks provide this opportunity.  KSS and a few others do.  

SUMMARY


If you calculate this income experiment using only the original 100 shares bought in January, total income on those shares is as follows:



Any investment that you hold for just over 6 months that earns you 10% in income is a good investment for income investors.

KSS is in a difficult industry, brick and mortar retail.  It is not a growth stock.  KSS has decent fundamentals.  With a D/E ratio (debt to equity ratio) around .53, their balance sheet is solid.  Revenues have slowed but remain solid.

When I sold the July call in May, I used another of Cramer's words of wisdom for guidance.  Basically he opined that you need not give up on retail.  He specifically discussed KSS.  You can hear that broadcast on this link.   http://www.cnbc.com/video/2017/05/10/cramers-stop-trading-kss.html

In a recent interview, KSS's president suggested they are optimistic.  His plan is to steal share from struggling competitors.   See this video on CNBC.  http://www.cnbc.com/2017/07/18/kohls-ceo-is-out-to-steal-customers-from-its-struggling-rivals.html

For income investors, KSS is a good investment right now.  The retail space is challenging without a doubt.  Yet, KSS seems to have the fundamentals needed to support the dividend and the strategy to provide speculation on potential which leads to covered call income.

M* MoneyMadam
Disclosure:  Long KSS with calls


Monday's Call:


Wednesday, July 19, 2017

Adding INTC in 2017


This post is about adding an old stalwart to the 2017 Portfolio.  Intel, INTC, meets all my Dividend Machine criteria.  It is not a growth juggernaut like Nvidia.  However, it is a solid company.  While there are challenges in their space to be sure, as chip manufacturers are plentiful from Samsung to Advanced Micro Devices.  Yet for the income investor, Intel, is the preferred choice.


  • Chip manufacturers are challenging Intel’s dominance
  • Intel meets all Dividend Machine criteria
  • INTC is the best choice in this space for Income Investors


Without a doubt, Intel is not the only game in town anymore.  Samsung is on track to overtake Intel as the biggest chip maker by revenue, a position that Intel has held since 1991. Nvidia, symbol NVDA, is the growth juggernaut for chips used for artificial intelligence such as self driving cars.  Even google is getting in on the act of making chips.  

I am not a chip analyst, I am an income investor, but I do not think these competitors will put Intel out of business.  Intel is not perfect.  They have tried to expand into other types of chips and not been particularly savvy.  Yet, they have big boots and as you will see below, INTC is still a very good, solid company.

I have been writing about income investing for six years.  I use a simple strategy that I employ with great discipline.  I track my work and report on it in this blog regularly.   My strategy is not perfect, yet as compared with benchmark ETF’s that also concentrate on dividend stocks, my strategy wins.

INTEL DIVIDEND MACHINE FUNDAMENTALS:


In the first table, you can see the Dividend Machine bona fides of INTC followed by a discussion of the criteria.




Earnings per Share (EPS)

Intel fits my Dividend Machine strategy.    Earnings per share (EPS) are greater than dividends paid out.  Some people prefer to use free cash flow and I have no complaint about using that metric.  I start with EPS and if I think earnings need more analysis I move to free cash flow. According to Ycharts, INTC’s most recent quarterly free cash flow is $1.831 billion.   I looked back at my failed Dividend Machine picks and did not find that free cash flow was any better a predictor of that failure than EPS and I think EPS is easier for ordinary investors to find.


Dividend yield and growth

Dividend yield is 3.16% well above the 2.75% hurdle I am using for 2017.  Moreover, INTC’s dividend growth rate over the past 3 years is 7.04%.  I know my expenses will double in twenty years and I need my income to do the same.   If INTC continues their dividend growth history, income from INTC will double in 10 years.  

What if we have another major disruption in the stock market like we had in 2008/2009?   I was managing my money as well as that of other people during that time and it was rough.  Most of my clients, including me, could not afford to sell our holdings.  We needed the income from those investments and thank goodness, we did not.   INTC never stopped paying us.   They did not increase the dividend however.   They held their dividend steady between May 2008 until resuming dividend increases again in February 2010.   So, if history repeats, I hope that I again have the same discipline to hold good Dividend Machines.  


Debt to Equity Ratio (D/E)

The last criteria I use is a solid balance sheet.   You don’t want the stock you invest in to go belly up.  The measure for this criteria that I use is D/E ratio (debt to equity ratio.)   Generally speaking a D/E ratio of less than 1 is considered good.  In some industries, a D/E ratio of more than 1 is o.k. because they are very capital intensive, but INTC is not in that category.   Currently Intel’s D/E ratio is .3852 (source Ycharts.)  This is very respectable although it is above their annual average of about .20.   Intel has been adding debt and that can be a good thing provided it is not excessive.  They need to invest for the future and debt is cheap.   


Now that we have established that INTC fulfills all criteria to be considered a Dividend Machine, let’s look at why I think it is the best choice in this space for income investors.

INTC BEST PICK IN THE SPACE FOR INCOME INVESTORS:


Ease of buying the shares.   Samsung is an incredible competitor and their corporate reports suggest this will continue.  To buy Samsung you need access to the Korean stock exchange or the London or Luxembourg exchanges.  My broker is Schwab and they have a global desk that will get this done for you but the trades are very expensive and not nearly as liquid as a U.S. stock.

Income from dividends and calls

Absolute income is very important for we income investors.  For each dollar invested you get the best bang for the buck with INTC.  I looked at five stocks in this space: Broadcom (AVGO), Nvidia (NVDA), Texas Instruments (TXN), Applied Materials (AMAT), and Advanced Micro Devices (AMD) for comparisons.  In the table below you can see a comparison of dividend income and yield among these stocks.

 

The juicy $4.08 dividend delivered by Broadcom may be tempting, but it is important to note that Broadcom has negative earnings.  How long can they keep up that dividend?


Potential for covered call income.  This is icing on the cake for income investors.  If you don’t know how to sell covered calls, I would recommend you learn how.   Nvidia is a better stock for covered call income but INTC has some calls available.  A call for each of these companies is presented below and you can see that you can duplicate INTC’s dividend income with covered call income on NVDA.  However, if you are an income investor, you are probably a very conservative investor and INTC is a much safer bet than NVDA as far as consistent income is concerned.  With INTC, I don’t want to lose it to the call buyer and when I do sell calls, I never sell them on all my position. 

 


Performance in the face of formidable competition.  


As noted above, INTC has some serious competition.  Will this competition put Intel out of business?  I don’t think so.  My supporting evidence is revenues.  If the competition is cleaning INTC’s clock, you would see declines in revenue like you are seeing in retail where Amazon is cleaning their clocks.  But that is not the cast for Intel.  Look at the table below and you can see a steady improvement in revenues even in the face of increased competition.


 

SUMMARY:


Intel is a true Dividend Machine by every metric I use.  While competition is fierce and growing, INTC has the capacity to keep up. For each dollar you spend investing in this space, you will have more income and more income growth with Intel than any of the other stocks in the space.  For these reasons, I think INTC is the best stock in this space for income investors.

M* MoneyMadam
Disclosure:  Long INTC