Wednesday, November 15, 2017


I will be on vacation until the week after Thanksgiving.  

I will update then. 

Thanks for reading.  M* MoneyMadam

Tuesday, November 14, 2017

Dividend Machine Fundamentals applied to CAT

Caterpillar, symbol CAT,  is in recovery mode after quite a fall from grace.  Below I apply my dividend screening criteria to CAT to see if I should add it to the 2017 Portfolio.

Earnings per share greater than dividend paid out:

Caterpillar's latest two quarters illustrate the value of their management expertise.  EPS finally exceed the dividend paid out.  Creating more EPS than dividend paid out is a fundamental that I cannot breach. 

I went back to 2013 to take a look at how their EPS and Dividend payout looked.  You can see in the table below that CAT was a cash cow.

Does their recent performance suggest CAT has turned the corner. The proof that CAT has turned it around will be in their fourth quarter earnings.  The fourth quarter has been their weakest quarter over the past three years.

Dividend growth of at least 4% to beat inflation:

Dividend growth in the past was robust until they hit trouble.   As recently as 2015 the dividend increase was 10% and then held steady for eight quarters until a recent 1.29% meager increase.

Dividend yield of 2.75% or greater than 10 year U.S. Treasury.

Today the 10 year U.S. Treasury yield is 2.4%.   Cat's simple yield is only 2.29% which is below my threshold of 2.75% and below the 10 year U.S. Treasury.  However, when covered call options can make up the difference, I can buy a stock with that low a dividend.

Covered calls on CAT are trading but none are enticing.  I need to be sure I have at least an 8% gain on price basis and a 1% yield from the premium.   This translates to at least a $148 strike price.  The premium would need to be $1.37 and the expiration out far enough that I would get the dividend during the time between selling the call and the expiration date.  For CAT the expiration date needs to be after about January 20, 2018 which is the expected next ex-dividend date.

Debt to Equity Ratio 1 or less or equal to industry standard

CAT sports a debt to equity ratio (D/E) of 2.299 well above my limit of 1.   However, Caterpillar is in a n industry that requires a lot of capital.  Therefore, I looked at Deere, symbol DE, which is an industry peer to see how CAT compares.  Indeed, DE's debt to equity ratio is over 4 which makes CAT's balance appear to be within industry standard.

I think we still need to wait for CAT before it again appears as a Dividend Machine stock.   I use these four criteria for my initial screen for dividend stocks.  I don't stop there.  All investors have their own screening criteria any some of the more useful are data such as free cash flow, return on assets, even P/E ratio.   P/E ratio of CAT is over 95 and that is way too high for me.

Patience is a virtue and I will watch CAT.  I may miss the opportunity if the stock price continues to soar as fundamentals improve, but I will take that risk.

I still hold a little bit of CAT.  I sold calls on most of my holdings and these shares were assigned most recently at $100.   I still have shares from dividend reinvestment so I am hoping the CAT turn around is real.

Good income investing comes from executing a tested strategy with discipline and this is an example of that discipline.

M* MoneyMadam

Friday, November 10, 2017

Kohl's or Target which call is better for income investors

I invest for income.  I need a dividend; I need a dividend that grows; I like low risk of bankruptcy and I love covered calls.   Not a unique strategy.   Many successful investors who live off of their portfolio income invest with a similar strategy.

In the retail space, we find low valuations and quite a bit of volatility.  Everybody has an opinion and it can change on a dime.  I named Kohl's, symbol KSS, as my first Dividend Machine pick for 2017 and it has been up and down.  Most significantly, though, is the cash it spins off to me through the dividend and through calls.

Target is a similar story.   In the charts below, you can see that Kohl's has a better call than Target.

Moreover, Kohl's has a higher dividend than Target:  KSS = 5.39%  yield TGT = 4.25% yield.
Kohl's most recent dividend increase is better:  KSS = 10% dividend increase TGT = 3.33% dividend increase.
Kohl's is a bit cheaper using P/E ratio:  KSS = 11.3 P/E ratio TGT = 12.26 P/E ratio.
Percent of earnings paid out in dividends is again won by KSS:  KSS 50% payout ratio TGT = 61.2% payout ratio.
Lastly, KSS beats TGT on D/E (debt to equity ratio):  KSS = .5561 D/E ratio TGT = 1.103 D/E ratio.

Put it all together and KSS is a nice stock in a volatile space that will reward the income investor with high dividend yield, robust dividend growth, and covered call option opportunity.

M* MoneyMadam
Disclosure:  long KSS with calls long TGT

Monday, November 6, 2017

Broadcom bid for QCOM provides for big call

On Friday, news of the potential buyout of Qualcomm by Broadcom broke.  I noticed a January 19, 2018 call that intrigued me.

I own quite a bit of QCOM mostly for the dividend and for the calls.  I have written many posts about QCOM calls.  I am an experienced seller of covered calls but here is one that really surprised me.

After hours, QCOM was trading between $61 and $64.  I saw a call with a $65 strike and the call premium was $4.00.

I put in an order for today, Monday November 6 to sell this call.  I actually did not think it would execute but it did.  At this point (11:00 AM Eastern time) that very call is trading at $1.80.

This experience is a first for me.  I rarely put in orders for the next trading day, but this time it worked out well.  Instead of $1.80 I received $4.00.

Notice the call expiration is after the next ex-dividend date of November 28 and based on the trading price of $62.92, I just may keep this lot through the ex-dividend date.  The table below shows the details of this trade.

The lot I used for this call, I bought a year ago September.  September 2016 QCOM post I have sold several calls on this lot as I suffered through stock price declines slipping into the high $40's.  I do love the dividend yield but I am willing to lose this lot should my stock be called away.

M* MoneyMadam
Disclosure:  Long QCOM with Calls

Sunday, October 29, 2017

2015 Portfolio disappoints on dividend increases

Invest with income that grows is the overall purpose of my investing strategy.   2015 is still quite a good portfolio when measuring capital gain and total return.  Stocks in this portfolio beat the performance of similar investments in SDY and VIG.  The only weakness of significance is dividend growth.

During 2015, I used the same four screening criteria as I used 2014.  In 2014, I changed the dividend yield hurdle to 3.5% from 3.0% in 2014 and continued to require 3.5% in 2015.  Other than that increase required yield, all other criteria remained the same. 

Also presented is a comparison of two ETFs that specialize in dividend stocks, SDY and VIG, and my holdings.

VIG is lagging this portfolio.  Notice that I do not use the SEC (securities and exchange commission) measure of performance for VIG or SDY.  Investors do not buy their shares on the first day of the year, they buy as the year goes on.  Sometimes investors use dollar cost averaging and sometimes they buy when money is available to invest.

As with all my portfolios, when I buy a stock, I record the number of shares of VIG and SDY that investment would buy.  Then I track how the sum of my stocks performed as compared with the sum of the VIG and SDY shares purchased. 

For an income investor the two stocks that are most disappointing are Conoco Phillips (COP) and Waddell and Reed (WDR) because they reduced their dividends.   Based on 100 shares COP reduced the dividend from $292 to $106 and WDR reduced their dividend from $172 to $100.

Income investors invest both for income and income growth.  We know that about every 20 years our non discretionary expenses double.  This means our income needs to double as well.  That translates to requiring about an average annual increase of 3%.   The lesson here is not the two stocks that reduced dividends but to make sure you have enough stocks in a diversified portfolio to weather those failures.   This portfolio's dividend income has increased 3.41%.   

SDY one of the benchmarks I use has a much better dividend history.  Only 3 dividends have been declared by SDY in 2017.  I compared those three dividends with the first three dividends in 2015 and the result is a dividend increase of 5.6%.   While total return of SDY lags total return of my portfolio and actual yield is lower but yield growth is higher.

The question of whether you should buy a high dividend yield versus higher dividend growth is very individual.  Life expectancy as well as cash flow requirements determine which is best.  Individual stocks in this portfolio yield more than either of the two ETF's.   As measure by yield on current value,  M* Portfolio yields 3.12%, VIG is next at 2.71% followed by SDY at 2.63%.  Note that I use the most recent quarterly dividend multiplied by 4 then divided by current value.  

VIG, oddly, remains a laggard as compared with SDY and my stocks (remember I buy shares in VIG at the same time I buy a stock in my portfolio so this will vary from what is reported officially) on dividend increase.  The oddity is that VIG is designed to include stocks with dividend increases.   Again when you compare the first three dividend payments of 2015 with the first three dividend payments of 2017, VIG income increases are 2.16%.  

Another peculiarity of this portfolio versus earlier M* portfolios is I bought two lots of only one stock and that was Caterpillar (CAT.)   This was not popular early in 2015 because CAT's stock price deteriorated.  However, CAT has dug out of the slump and roared back to be one of the best performers in this portfolio.

See the results of the 2015 M* Dividend Machine Portfolio and the benchmarks SDY and VIG below.



In your own portfolio, you can get rid of those stocks that no longer meet your criteria.  In these published portfolios, I am long only.  Buy and hold is a great strategy but getting rid of your losers is a good strategy as well.   


M* MoneyMadam
 Disclosure:  Long CAT, COP, CVX, EMR, LHO, QCOM, WHG