Sunday, June 24, 2018

2018 Call Portfolio


In 2018 I am tracking a portfolio that is designed to deliver income mostly through call options.

It is a limited portfolio with a basis of just over $68,000.

This $68,000 has already created over $4,000 of income.   I like this kind of income.




This is not a growth portfolio and the stock price of the stocks is almost irrelevant.  I made a big mistake buying RIOT.  I have been able to sell a couple of calls on it.  I don't sell holdings in this portfolio especially at such a loss so I am holding my mistake RIOT.

GILD is underwater but I am collecting a nice dividend and have sold one call.  I look everyday for the next call.  My strike price on GILD will not be lower than my basis.

Today I sold calls on the 200 shares of QCOM.  I need to keep working this limited portfolio and I will post my trades as they are executed.


2018 CALL PORTFOLIO TABLE







I always tell people, you can really only expect to generate about 5% pure income for spending on a retirement portfolio.   However, if you can master using covered calls, this portfolio proves that more income is possible.  Over 7% in yield so far.


M* MoneyMadam
Disclosure:  Long all positions with the calls noted

Thursday, June 21, 2018

Three calls three different reasons

Calls are the oddest things.  Sometimes you need an up market to get good premiums.  Other times, like this week, you can get good premiums during a down trend.    You should not sell calls on your coveted income stock willy nilly.  You need a reason.

  • Sell calls on stocks when fundamentals such as D/E (debt to equity ratio) change.
  • Sell calls on stocks when EPS (earnings per share) are less than the dividend even when the dividend increases are substantial.
  • Sell calls on stocks that pay yield less than you can get from a 10 year U.S. Treasury.

Below are three calls I sold today.  Each one for a different reason.

Home Depot (HD) - high debt


I think Home Depot is a much better product than Lowes.   However, Home Depot carries a high debt load.  The balance sheet hawks will argue that HD has the cash flow to service the debt and they are correct. HD has an interest coverage ratio of 13.51 according to MSN Money and verified by Gurufocus.  

For those of you new to terms like interest coverage ratio, see the link below which explains it well.

https://www.investopedia.com/terms/i/interestcoverageratio.asp
The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.

My readers know, I just don't like stocks with big debt.   All you need a precipitous drop in free cash flow to render the company a troubled asset.    I am cautiously holding HD.  I have no reason to think they will suffer a major disruption of business that would make them lose significant value or even go belly up.

With a yield of only 2.07% and a P/E (price earnings) ratio over 25, I am not afraid of losing HD.  I see selling a call on this stock an opportunity to boost my income.   This is not a risk free move.  I am contractually obligated to hold the shares on which I sell a call.   I could get stuck with a stock that goes down, but again, I do not expect this to happen during the 57 days before the call expires.




In summary, I am selling calls on HD hoping the call buyer will take my shares.  I will have booked good income from the call, the dividends, and then I can reinvest the capital into a higher yielding stock with better fundamentals.

Amgen (AMGN) - Low earnings


Amgen is another stock with a D/E ratio (debt to equity) the is a bit high at 2.27.  However, it is not uncommon for a bio tech stock to carry high debt.  It costs a lot to develop new drugs.

Amgen's yield is almost 3%.   That is marginal.  Yet they increase the dividend vigorously.   Too vigorously for my taste.  Over the past three years dividend increases have averaged over 22%.  The problem is earnings.



Again my readers know I need a stock to create more earnings per share than they pay out in dividends.    Is AMGN using their debt to increase the dividend or to develop drugs?   Earnings are $3.03 with dividends paid out $5.28.

I am not afraid of losing AMGN.   I have a solid gain and have booked the dividends and multiple call premiums.  I would like the call buyer to take my shares.  Look at the price chart, AMGN could very well go above my strike price and the call buyer may take it.  I hope so.

Source:  Schwab, Inc


Apple (AAPL) - Low yield


Apple is a very good company.  It does not have any of the trouble noted above with HD or AMGN.  Apple is stuck in a trading range that has not broken above $200 at least during the last 5 years.  See the price chart.

Source:  Schwab, Inc



I am selling calls on AAPL because I own a lot of apple and the yield is low.  I need to get 5% or more of income on my invested capital.   Calls provide that income.  If I lose these shares, I have more in my pocket.



Basically, I am selling calls on Apple because I can.

Folks, this is good income investing.

M* MoneyMadam
Disclosure:  Long HD, AMGN, AAPL with calls

Tuesday, June 19, 2018

Down market Tuesday 6/19/18

Remember that your dividend stocks with great balance sheets are still a strong hold.

Do not be scared.  If your good stocks drop a lot add to them.

If a good stock with a solid balance sheet that you have always wanted to own over shoots on the down side, buy it.

This is what I am doing.

M* MoneyMadam

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