Thursday, December 30, 2010

Almost a dividend machine

Not all stocks that pay greater than a 3% dividend yield qualify to be a dividend machine.

I would love to own Clorox symbol CLX. It earns $4.67 per share and pays you $2.70 per share. Moreover, the dividend has increased 2.7% every year. So what is the rub? The debt to equity ratio is the rub. Clorox has too much debt. Money Central marks their D/E ratio at 10.5. Let us keep an eye on CLX for the future but for now we just cannot include it in our dividend machine list.

Royal Bank of Canada Montreal is another stock I would love to include as a dividend machine. Royal Bank of Canada Montreal symbol RY pays a 3.84% dividend yield. RY has increased the dividend most years but not in the last couple of years. I may buy it anyway as it meets the other key criteria (makes money, pays me some of what they make but not too much and has a decent D/E ratio) but it is not a dividend machine unless it increases the dividend every year.

Keep looking for dividend machine #7 which I will reveal on Monday 1/3/2011

Have a happy New Year,

I am looking forward to the market returning to normal with decent volume and reasonable trades once the big money gets back from the snowstorm and the holidays.

Happy, healthy and prosperous New Year to all.

TheMoneyMadam

Tuesday, December 28, 2010

Lock in profit

Two ways to lock in profit!

Investing for income can be a passive activity.  Buy stock in companies that make money, companies that share it with you in a dividend, have a strong balance, and periodically raise the dividend and you can sit back and spend your dividend income, cash your bond coupons, and build your cash through covered calls.

However, investors that are more active tend to enjoy locking in profit when they have a stock that has substantially increased in price since they bought it.  It makes sense to take profit.  You can always buy another stock or buy back the one you sold if it goes down to a lower price.


How do you protect profit? 


Let me count the ways and two come to mind.  One is to use an option strategy called buying a "put."  You already know one option strategy and that is to sell a call.  Selling a call is a strategy to increase income.  Buying a put is a strategy to lock in profit.  

We income investors use covered calls all the time to maximize our income.  To refresh your memory, selling a call on a stock that you own conveys the right to another person to buy your stock at a predetermined strike price over a defined period of time.   The other person pays you money for that right.  

A put, on the other hand is an absolute obligation.  A person must buy your stock from you at a predetermined price, again over a defined period of time, if you demand it.  In the case of a put, you pay someone money to be able to demand they buy your stock.

I rarely use put options because as an income investor, I do not like to payout money; I like to make income.  So how do I protect profit and not have to  pay out money.

I protect profit by placing a sell stop order.  I tend to use stops on stocks where I have at least a 20% gain.  I try to lock in a price that is about of 10% from the high as long as that price is greater than the price I paid for the stock.  I lock in some profit and do not have to pay for the put protection.

I tend to comb through my holdings for stocks that are at a high and set stops for safety or buy a put to lock in my gain.


Yes, income investing can be a passive sport but for those of you who are active investors, consider employing one of these two techniques to lock in profit.

Very Truly Yours,


TheMoneyMadam

Monday, December 27, 2010

DIVIDEND MACHINE - RPM International, Inc, RPM

RPM International Incorporated, symbol RPM is a specialty building materials and chemical company whose dividend will fill your coffers nicely. Sporting a 3.76% dividend yield based on the closing price of $21.97 on Thursday, December 23 that dividend increases about 3.6% every year, this small company just keeps on giving. RPM is number six of fifty two dividend machines that I will profile for your income investing portfolio.

Tuesday, December 21, 2010

Income Investing Plan Step One

The New Year is upon us and now is the time to set your 2011 goals.

STEP ONE
Define your income investing goal.
 
Your best investment intentions cannot make up for a precise definition of your investment goal. Without a clear idea of where you are going, you will be throwing darts at investment ideas rather than attaining your investment goals.

Select one of these goals and use it as a guide to create your own precise goal. It matters not whether you self direct your investments or use a professional, you must define your income goal.

I want my investments to generate cash flow:
    • equal to my expenses
    • greater than my total expenses
    • It's okay if it is less than my total expenses
Now that you have determined your cash flow goal, think about what you want to happen to your principle.  Select the scenario that best describes how you want to disburse your savings when you mature (in philanthropy words that means when you die.)

When I mature I want my original principal to:
    • Equal the original amount
    • Have a greater value than when I retired
    • It's okay if it decreases

This is not an estate planning website. I am here to help you invest the portion of your savings you have set aside to create the income you need for a wonderful retirement.

Complete Step one of your retirement income plan by writing down your goal and dating your work.

Very Truly Yours,
TheMoneyMadam
 

Monday, December 20, 2010

Should you buy gold?

Should you use some of your income investments to buy gold?

I would like to cede the platform to my guest contributor Mr. Alfred Ferol. He considers himself an average investor, yet as his former financial adviser, I must tell you I learned as much from him as he did from me.

I asked Mr. Ferol to share some of his wisdom with us in regards to buying gold.

Mr. Ferol writes that it depends on the scenario you foresee. He reminded me that gold has few industrial uses. Gold is used mostly for jewelry, to protect against the eroding value of the dollar and for some to use in case of a doomsday scenario.

He then refreshed my perspective of the doomsday scenario. The doomsday scenario has existed historically many times over he said. During times like the holocaust, people used gold, diamonds, and other rare items to barter for food and even lives. In this case, gold was more valuable than cash or real estate or a stock in any company. Yet, he cautioned, you must realize that even in this scenario your gold is not valuable if your counter party (buyer) is as hungry as you are.

If you want to own gold today to hedge against the declining value of the dollar and you do not believe in the doomsday scenario, then as an income-investing student you look for a stock that meets all TheMoneyMadam's criteria.

Yikes? That means I am looking for jewelry.

How do I buy jewelry that makes me money?

Yes, Mr. Ferol said you can make income from gold. He suggested we buy Tiffany (TIF).


Tiffany (1) makes money, (2) shares earnings with you in a dividend, (3) has a strong balance sheet, and (4) periodically increases the divided and basically sells gold etc.

However, Tiffany is expensive, almost at its high.

Reduce your cost basis. Buy it today and write a call for January that will reduce your basis. You receive the dividend and the money from the option and if we are right and gold in the form of jewelry continues to increase you will benefit from a quick 10%gain.

TheMoneyMadam thanks you Mr. Alfred Ferol for your contribution.

Sunday, December 19, 2010

Dividend Machine Abbott Laboratories, ABT

Abbott Laboratories, symbol ABT, announced its 344th consecutive dividend this week. Abbott, a global, diversified drug manufacturer, has increased its dividend for 37 years straight. Like many of the large drug manufacturers, ABT has not been burning up the streets with increased stock prices. Yet at Friday's close of $48.40, it pays out 3.65%. ABT is number five of the fifty two dividend machines that I will profile for your income investing portfolio.

Wednesday, December 15, 2010

Bond Funds

Bond funds are mutual funds that lend their money to corporations or governments. Lately everyone seems to be buying bonds funds. Because you need less money to begin investing in bond funds than you do to buy an individual bond, a bond mutual fund may seem to be a good choice.

I cannot state strongly enough how much I do not like bond funds in this economic environment.

First, mutual funds are not my first choice for investing; although, I have to admit that I too have invested in mutual funds when it is not feasible for me to invest directly. Of all mutual funds, I dislike bond funds the most because you are never sure when or even if you will get your principal returned. More of your invested money goes to expenses than with an individual bond, and you lose all control over when to sell.

You see bond funds hold groups of bonds and they buy and sell them based on changing economic conditions. Memorize this principle: when interest rates go up the value of bonds goes down. No exceptions exist. Since interest rates right now are about as low as they can get, bond funds are very expensive and pay relatively little for the risk you take. It is true that the price of an individual bond will fluctuate as economic conditions change; however, a well-selected bond will pay back your principal upon maturity. With a bond mutual fund, you have no such expectation.

I fear for those who have poured their money into bond funds for safety or fixed income. This is no way to invest. The economy may be in deflation, interest rates will stay low, and the bond fund holders will not lose any money. However, I have been in this business too long to accept the premise that interest rates are going to stay low forever. When they do go up, this will be the next bubble to burst. Why take that risk when as an investor you can very easily buy one or more quality bonds for a relatively small amount of money.

Once you have saved about $2,000, you can buy a bond. Use my five step-planning guide to help you develop a comprehensive investment plan. Figure out how much money you want in bonds, stocks, or real estate. If you decide lending your money is a good investment for you, then please buy individual bonds rather than bond mutual funds.

Periodically, I review bonds that I think are good buys. Read my blog often to help you decide which bonds to buy.

Very Truly Yours,

TheMoneyMadam

Sunday, December 12, 2010

Dividend Machine Sysco Corp., SYY

Put Sysco Corporation's dividend (symbol SYY) on your table and watch your income grow over 11 percent in 5 years. Can you think of another income source that has grown over 11 percent in the past 5 years?Sysco is number five of the fifty two dividend machines that I will profile for your income investing portfolio.

Saturday, December 11, 2010

Bonds for Cash Flow

Bonds are an important part of the income investors' strategy. However, today taxable bonds are very expensive. Tax-free bond income for highly taxed families who have savings in non-retirement accounts are not as expensive and the reason is they are risky.  Tax-free bonds are municipal bonds and many municipalities are broke so the guarantor or your money is fragile.

However, when you buy individual bonds you create cash flow.  We take what we can get and we always try to buy individual bonds at par which is the price they will pay you back when the bond matures, or at a discount.  Bonds sell at discounts for many reason which I cover in future posts. 

For income investors who want to create cash flow, bonds serve two duties.  First, well selected bonds almost always pay back your principal.  Note that over my 35 years I have had only 1 bond default and that is a GM (General Motors bond.)   Second, you accumulate cash from your bond income and that cash allows you to  buy more bonds, or add income-producing stocks.

I have never invested in a bond fund nor could I ever recommend it to my clients when I was in that business.  Bond funds provide you with no control.  You never know if you can hold a bond to maturity.  You have enormous risk if interest rates rise since the value of the pool of bonds you own in a fund or ETF reduces in value when interest rates go up.  Whereas, if you own an individual bond, the value may vary but if you hold it to maturity, you will, in most cases, get back your money.  As a matter of fact, if you own a bond fund or ETF, please sell it and sell it now!

Think about the definition of an income investor. Contemplate a move in that direction and take the money to the bank.

Remember to lend your money to a company that makes money, shares that money with you in the form of a dividend, increases that dividend periodically, and has a strong balance sheet. If you lend your money to a government, make sure they are highly likely to pay you back.

Bonds should be part of your income investment portfolio, but be patient and buy bonds at par or at a discount. Buy bonds from good companies or good governments.

Keep reading this blog and when bond opportunities are available to the average investor like you and me, I will alert you.

Right now, dividend producing stocks I call dividend machines are the choice investment for cash flow.  Every Monday, I provide a new idea.  Check in often.


Very Truly Yours,

TheMoneyMadam

Thursday, December 9, 2010

Money at Work vs. Minute Work

During my college days, a student friend was selling insurance to make additional income. Although I never bought insurance from him he taught me the concept of minute work versus money at work. Simply stated, when you save and invest your hard earned money, the money itself can create income. For most of us honest working folks, the ordinary investor, hourly work has limits, but money at work has no limits.

Remember that you would never work for free and you should never let your money work for free. In other words, your money at work has to create income. This income investing rule seems simple but so few people employ it when they invest.

It is very tempting to invest your money into something that is supposed to go up 1000% because some guru says it is guaranteed. It is so enticing. We are all prone to want a quick gain. Who needs 4% every year when you can get 1000% gain right now?

You know the answer already. You want to be a savvy investor. You do not want to waste your savings. But, I ask you, do you have your money invested to create income?

Deciding to put your money into an investment that creates 4% annual income may not be as exciting as hoping for a huge gain, but this is the very first step to creating money at work. This blog will teach you how a series of investments that create income will add up to create retirement income based not on hours worked but based on money at work.

Very Truly Yours,

TheMoneyMadam

Don't forget on Monday I will profile another dividend machine idea!




 

Tuesday, December 7, 2010

Dividend Machines and Diversification

Diversification is one of the most important aspects of investing.

I try to profile companies that meet all our criteria as a dividend machine and also provide diversification. Never own just one company. One hundred companies are too many to own. Know your companies, what they do as well as their fundamentals.

Diversification is not just measured by how much cash you have versus the percent invested in bonds and stocks. Diversification can be measured in many ways. Let's look at the companies I have profiled over the last 4 weeks as an illustration of how to diversify with dividend machines.

11/14/2010 – MCHP Microchip Technology a smaller electronics company that makes microprocessors and receives about three quarters of its income from outside the U.S.

11/21/2010 – JNJ Johnson & Johnson a very large multinational company that is a big pharma, biotech, and band aid company. You get a lot of diversification in just one company.

11/28/2010 – GPC Genuine Auto Parts is both a producer of auto parts and a retailer with most of its business in the United States.

12/06/2010 – KMB Kimberly Clark a very large multinational company concentrating on consumer staples like tissue and diapers with sales in both the U.S. and abroad.

Look for companies that meet our criteria and that also provide diversification and sit back and watch your income grow.

Very Truly Yours,

TheMoneyMadam

Thursday, December 2, 2010

High Risk Income Play FCX


Freeport McMoran, symbol FCX, is a very volatile stock that has provided me and in the past my clients with a lot of income. Admittedly we got lucky and did not own it during 2009 when it did not pay a dividend. 

Currently FCX pays $1.20 per share which is a yield of 1.14%. Earnings are $8.18 and the debt to equity ratio D/E ratio is a mere .41. So on fundamentals, this company does not meet our criteria as a dividend machine but it does meet my criteria for call income. 

Today I bought FCX at a lofty price of $107.50. I then sold a call with a strike price of $115 which expires in January, 2011 and received $3.50 per share. This means someone thinks FCX which mines, smelts, and refines copper, gold and molybdenum will command a price greater than $115. 

My experience with FCX is that it goes up quick and down quick so I did not want to take a call very far out which is why I picked a January call instead of February which would have paid me $5.15. Note that for those of you who can handle more risk than I can, if you sold the February call you will also get the $.60 per share dividend in February. 


I want them to take my shares. FCX is not a dividend machine so it is okay with me that the buyer of this call takes my shares. These two trades provide an immediate $7.50 on the capital gain plus the call income of $3.50 for a total gain of $11.00 on an investment of $107.50 for a 10.23% gain in just 51 days. Hopefully, the value of hard assets will continue to be strong and I can put that money in the bank. 


Very Truly Yours,
TheMoneyMadam

Wednesday, December 1, 2010

The Point is not all up markets make call income


Earlier today I commented on the market being up 200 points. It ended up another 25% I
I did not recommend selling. If you think highs are in the air then puts and stops are appropriate. 

However, my point is that today gave me little opportunity to write calls but I looked anyway and so should you. 

I want to help you learn about stocks on which to write calls and we are just beginning.
First you always want to buy a company that makes money and share it with you in a dividend and has a solid balance sheet. 

The differences between stocks on which you write calls and stocks that qualify as dividend machines are:
  1. Stocks on which you write calls have a dividend but do not have to pay out a minimum of 3%; the payout can be 1%.
  2. Stocks on which you write calls should have a beta above 1.
Beta measures volatility which provides the opportunity for another person to think the stock will go a whole bunch higher. This is your chance to sell that trader a call. A nice piece of this picture is that many more stocks qualify as covered call stocks than qualify as dividend machines so never be afraid of losing a stock to a call. Another stock is always available to buy. Losing a dividend machine is more painful. 

Each week I profile a company you can consider as a dividend machine. 

As the market provides, I will from now on provide ideas on stocks that are good companies, that pay a dividend, and that provide opportunities for covered call income. 


Very Truly Yours,
TheMoneyMadam

Up 200 points – a time for covered calls?


A 10% annual income stream from covered calls should be one of your goals and one would think a market that is up 200 points provides that opportunity. I have profiled the potential for 10% income with stocks like IBM and other stocks. 

Today's market action compels me to look for covered calls. (Read about covered calls in my resources section if you are unfamiliar with this concept.) As a matter of fact anytime the market is up by a couple of percentage points I look for calls. 

Here's the problem with today's market, it is trading on news and not on fundamentals. The last few trading days the market was down on news and I have bought some stocks. Today the market is trading up on news and not fundamentals and I want to sell some calls. 

When a company's fundamentals improve significantly such as a new technological breakthrough, or improved efficiencies that yield to more profit or they paid down debt and are more solid the price will go up. This price increase is looking to the future. The folks who buy the stock expect it to go even high and that is your chance to write a call for increased income. 

Today's trading action seems to be in response to news about unemployment or the China PMI and a bunch of other factors that we "the ordinary investor" have no control over and barely understand. I can tell this because as I go through my portfolio and I look at the stocks with the biggest daily gain in percentage and I look for calls. I found basically none. I am not willing to risk losing my stocks for the paltry amount someone will pay me for a covered call. I'll wait. When I look for calls and find several that will pay me 2% in call premiums, I know that the buyers have conviction that these stocks will go up. 

For instance if your bought a company at $45 and today it is $48 and you can sell a call for $1.00 for the right to buy your stock for $50 within 90 days that is a good deal. You will get more than 2% in the $1.00 premium and if they take your stock you get a 10% capital gain. Plus, if you picked your stock using our guidelines, you will also get a dividend during those 90 days. 

When you look for calls and the premiums are measly, no conviction exists and you should pass just like I did today. 

Do not be discouraged. Each time the market is up, look for calls on your stocks. Learn as much as you can about covered calls as this is one of the key components of the income investors' tool kit. I write often about covered calls. 

Very Truly Yours,
TheMoneyMadam

Tuesday, November 30, 2010

Global Bonds & The Income Investor

Global Bonds are enticing because Income investors must chase yield to survive. Low risk income does not exist today and one can understand the allure of global bonds. However, we income investors, with few rich cash flow opportunities must be careful to evaluate the risk of our loaning our money.

My job is to teach you about income investing and bonds should play a role. Global bonds with their high yields are indeed enticing. We know that US bonds are way too expensive. Quality corporate bonds are also expensive. One could argue that municipal bonds are on sale but only if you are sure the taxpayer will pay that bill.

Global bonds need to be evaluated with the same prism for all bonds. All bonds have at least two risks. One risk is will the issuer pay back your principal. For instance, I loaned money to GM General Motors and with all my experience, I was very sure that even in a bankruptcy situation, some of my principal would be return but that is not to be. You must answer this question. Do you think a foreign backed bond with a higher yield than you can get in the U.S. will pay back your principal?

Another risk is ability to pay the interest. Interest coverage ratio is a very transparent measure to determine if a corporation has enough income to pay the interest on their debt. Global bonds have the same responsibility but less transparency. Basically the question is, do you think Global bond issuers which may be governments or companies will create enough income to pay you interest on the money you loaned them.

A third risk exists for global bonds and that is currency risk. You do not have to be a global economist to understand the value of the dollar varies in relation to the Euro and other currencies. Do you lend them dollars in exchange for Euros or other currency?

Simple investing means you reduce your risk to the fewest number of issues and for my money global bonds have one more risk than I need to take.

I always recommend going with what you know. If you know currency exchanges and foreign companies and governments and you do your research and then find a bond you love, go for it.

For me, I will wait until bonds provide a better value. In the mean time it is dividend machines and covered calls for my income portfolio.


Very Truly Yours,


TheMoneyMadam


 

Sunday, November 28, 2010

Dividend Machine Genuine Auto Parts, GPC

Dividend machine, Genuine Parts Company symbol GPC is an excellent example of a company that performs on all cylinders for the income investor. GPC is number three of the fifty two dividend machines that I will profile for your income investing portfolio.

Let's deconstruct this company from an income investor's viewpoint. GPC makes a lot of money. Current earnings are $2.87 per share. Remember one of our 4 rules is that if we invest in a company it has to make money and GPC delivers on that front.

Wednesday, November 24, 2010

Municipal Bonds & The Income Investor

The long held practice of using municipal bonds to create tax advantaged income is coming under scrutiny.

As we have previously discussed, municipal bonds have been excellent investments for money held in taxable accounts. They are not appropriate for tax deferred accounts like 401K's, IRA's, or other retirement accounts. However, many people have money in taxable accounts and to maximize their net income and reduce their taxes on income, they use municipal bonds.

In my career, I have been through at least one very well known municipal bond crisis and that was the bankruptcy of Orange County, California in 1993. In spite of this crisis, interest and principal on these bonds was paid. This is a confidence builder. But, does that confidence exist today? Will holders of bonds from Harrisburg, PA fare as well?

Lending your money to a municipality is a dicier venture today than even in 1993. We are in an illiquid and inefficient market. A few states such as Indiana have made progress toward balancing their budget and therefore a state like Indiana can provide tax advantaged income that is relatively safe. The BAB, build America bonds, which are taxable and not guaranteed by the U.S. Government complicate the issue even more.

Overall, the supply and demand of municipal securities is out of balance and this means you must settle for a little less income in exchange for safety. When possible, purchase bonds that are insured and those backed by the taxing authority of the state rather than the source of income coming from bridge tolls or hospital revenues or sports arenas.

I like simple investments and municipal bonds are not simple. However, using the SIFMA site investinginbonds.com, you can learn a lot about the bonds by simply entering the CUSIP number. In addition, your brokerage will be able to provide you with even more information.

I remind you to never buy bonds funds when the risk of rising interest exists and it exists today.

So tread carefully and know everything you can about the State, County, or City to whom you are lending your hard earned money.

Happy Thanksgiving & Very Truly Yours,

TheMoneyMadam

Next week another dividend machine idea!

Sunday, November 21, 2010

Dividend Machine Johnson and Johnson, JNJ

Over my many years of investing I have owned Johnson & Johnson, symbol JNJ, many times and always sold it at a gain. I have again added JNJ to my portfolio as a dividend machine and I want to share my thinking with you to help you learn how to pick dividend machines for your portfolio. JNJ is the second of fifty two dividend machines I will profile for your income investing portfolio.

Friday, November 19, 2010

Income investing in volatile markets

How should an income investor invest when the markets are all over the place as we have seen recently?

Three strategies: (1) have your wish list ready, (2) know which stocks are at highs and consider stops or write calls, (3) for sophisticated investors you could consider buying put options to protect your downside.

When the market corrects you should be ready to buy stock. Do your research ahead of time. I keep a list of about 30 stocks that  meet all my criteria but may be a little more expensive than I want to pay. Sometimes, they go down with a general market correction. Check the news on these companies to make sure no major issues like the BP oil well fiasco is the reason your stock is on sale. If you are still happy with your selection, buying when the market is down is a good idea.

When the market is at its high, know which of your holdings are at all time highs. Some stocks will continue to go higher but you may feel you want to lock in the gains. How often have I heard an investor wish they had taken profit? I do not recommend a lot of trading as you know, but I am also not afraid to set a stop which means I tell the broker to sell the stock if it goes down by 10%. This move has protected me on several, but not all occasions.

Another technique when the market is high or when you have an individual stock that is at the high is to write covered calls. If the stock is high, someone out there will think it is going higher and will pay you money in a covered call. You obviously already have a gain in the stock so creating additional income by selling a covered call is a good move. If you lose the stock to the option buyer that is o.k. you have the gain and the covered call income, plus if you selected wisely, you probably also have at least one dividend.

The last technique for the more sophisticated investor is to buy a put option. You pay someone to buy the stock from you at a price of lets say 10% below the high. If you do not want to sell it you do not have to, but if the stock is volatile and you are afraid it may weaken a lot, then buying a put means another person has to buy it from you at the strike price. This is referred to as "putting it to them."

Very Truly Yours,

TheMoneyMadam

Simple Investing to create investment income.


Simple Investing has its advantages. 

How much time do you have to manage your investments? If you are like most people, you probably barely have enough time to even know what you own.

How much time do you think your broker or adviser spends on your account? If you are like most people, you probably have an adviser that either invests your money in investments that are similar to his/her investments or in groups of investments like mutual funds or ETF's. 

If you stick with a simple strategy, you really do have enough time to manage your own investments. Furthermore, if you stick with a simple investment strategy you can evaluate if your adviser has you positioned in investments matched with your investment goals. 

Learn only 3 investment tools which are dividends, interest, and covered calls. 

Stick with these 3 investments and use the structured approach I use to select investments. 

We use 4 criteria to screen stocks; does the company make money, does it share with you in a dividend, does the dividend go up periodically, and is the company of solid financial footing.
Simple investing will give you the chance to create income streams to fund your retirement. 


Very Truly Yours,
TheMoneyMadam

Tuesday, November 16, 2010

Covered Calls for more cash!


Dividend Machine, Microchip Technology has been a good company to create a little extra income in addition to its ever increasing dividend. 

Using covered calls to add income from your investments is one of the techniques, TheMoneyMadam, and all good income investors employ. 

To remind you about covered calls; when you own at least 100 shares of a company you can sell to another person the option to buy your shares at a set price (the strike price) within a set period of time. 

The other person obviously thinks the stock is going to increase in value and they are willing to pay you money to reserve the right to buy it at the strike price which almost certainly is below where they think the stock price will be in the future. 

This is a call option. The option gives the buyer the right but not the obligation. Therefore, if the stock does not perform as well as the buyer expected, they do not have to buy it from you and you pocket the cash from their buying the option. You risk being stuck with the company until the option expires if its stock price goes down. 

This risk is why I always recommend you buy stocks with dividend yields that are solid, and balance sheets that are solid. If you are stuck with the stock you liked it in the beginning and unless some huge fundamental factor has changed, you can sit with it cashing your dividends. 

Companies that have stock prices that move more than the over market can be identified by looking at their beta. Beta is a measure of price volatility. 

Microchip technology has a beta of about 1.13. A beta of 1 means the stock price moves just about in line with the overall market. A beta of 1.13 means MCHP is a little more volatile than the overall market. 

This situation provides the opportunity for selling covered calls. 

If you sell the right to buy MCHP to another person at a strike price at 10% above your cost basis and they exercise the right within 90 days you get the 10% gain, the cash from the covered call and probably the cash from the dividend. 

Another stock is always out there to buy, so do not be afraid to risk losing your stock at a 10% gain. Plus, with some volatility, you may have a chance to buy your stock again and repeat the whole procedure over and over. 

MCHP is a good example of this technique because I held this stock through the major downturn of 2008. I bought MCHP in October, 2007 at $36.50. I sold a call one year later at a strike price of $40.00 and received $1.60 per share for the call plus I had collected the dividend during that year. The market crashed, the call expired and I was stuck with the stock, but it is a stock I liked so I added to my position. I bought more at $31.87. 

I then wrote a call on those shares with a strike price of $35 and received $1.45 per share. I still held the stock because the market continued to deteriorate. When the market hit its low I added even more shares at $20.75. 

I continued to like the company and they continued to increase the dividend and I continued to cash that dividend. Finally I wrote a call for $1.05 with a strike price of $22.50. The market recovered and I lost the shares I bought for $20.75 at $22.50. I still own the other shares. 

I have not seen calls recently that I want to sell on MCHP but this exercise clearly illustrates how you can get 10% per year or more using covered calls on dividend producing stocks to create income.


Very Truly Yours,
TheMoneyMadam 

Another Dividend Machine idea next week

Sunday, November 14, 2010

List of TheMoneyMadam's Dividend Machines

Listed below, in chronological order are the dividend machines profiled so far.  Consider these companies for the income producing portion of your investment portfolio.

  1. Microchip Technologies, symbol MCHP:  See Original Post on Nov. 14, 2010
  2. Johnson & Johnson, symbol JNJ: See Original Post on Nov. 21, 2010
  3. Genuine Auto Parts, symbol GPC: See Original Post on Nov. 28, 2010
  4. Sysco Corp., symbol SYY: See Original Post on Dec. 13, 2011 *
  5. Abbott Labs., symbol ABT: See Original Post on Dec. 20, 2011
  6. RPM Incorporated, symbol RPM: See Original Post on Dec. 27, 2010
  7. Watsco Incorporated, symbol WSO: See Original Post on Jan. 3, 2011
  8. Scana Corp. symbol SCG: See Original Post on Jan. 10, 2011  
  9. Southern Companies, symbol SO: See Original Post on Jan. 17, 2011
  10. Mine Safety Appliances, symbol MSA:See Original Post on Jan. 24, 2011
  11. Chevron Company, symbol CVX: See Original Post on Jan. 31, 2011
  12. Lockheed Martin, symbol LMT: See Original Post on Feb. 7, 2011
  13. Kimberly Clark, symbol KMB: See Original Post on Feb. 14, 2011
  14. ATT Company, symbol T: See Original Post on Feb. 21, 2011
  15. Utah Medical Corp. symbol UTMH: See Original Post on Feb. 28, 2011
  16. BCE Company, symbol BCE: See Original Post on Mar. 7, 2011
  17. Universal Tobacco, symbol UVV: See Original Post on Mar. 14,, 2011
  18. Intel Corp., symbol INTC: See Original Post on Mar. 21, 2011
  19. General Mills Corp., symbol GIS: See Original Post Mar. 28, 2011
  20. Williams Partners, symbol WPZ: See Original Post on Apr. 4, 2011
  21. Atmos Energy Company, symbol ATO: See Original Post on Apr. 11, 2011
  22. ConAgra Company, symbol CAG: See Original Post on Apr. 18, 2011
  23. Sonoco Products, symbol SON See Original Post on April 25, 2011
  24. Westwood Holdings, symbol WGH See Original Post on May 2, 2011
  25. The York Water Co, symbol YORW See Original Post on May 9, 2011
  26. Conoco Philips, symbol COP See Original Post on May 16, 2011
  27. Harleysville Group, symobl HGIC See Original Post on May 30, 2011
  28. Leggett & Platt, symbol LEG See Original Post on May 30, 2011
  29. National Health Investors, symbol NHI See Original Post on June 6, 2011
  30. Xcel Energy Inc., symbol XEL See Original Post on 6/13/2011
  31. Molex, symbol MOLX, See Original Post on June 20, 2011
  32. McGrath, symbol MGRC See Original Post on June 27, 2011
  33. Duke Energy, symbol DUK See Original Post July 4, 2011
  34. Espey manufacturing & electronics, symbol ESP See Original Post on July 11, 2011
  35. Pitney Bowes, symbol  PBI See Original Post on July 18, 2011
  36. New Jersey Resources, symbol  NJR See Original Post on July 25, 2011
  37. Northrop Grumman, symbol NOC See Original Post on August 1, 2011
  38. Consolidated Edison, symbol ED See Original Post, August 8, 2011
  39. Cullen and Frost Bankers, symbol CFR See Original Post August 15, 2011 
  40. Telus Company, symbol TU See Original Post August 22, 2011
  41. Travelers, symbol TRV

Dividend Machine Microchip Technology, MCHP

As promised, I will help you learn how to invest for income using dividend machines and I will do that by analyzing one company a week. My intent is not to recommend a stock but to teach you how to analyze a potential dividend machine by reviewing one per week. MCHP is the first of fifty two dividend machines I will profile for your income investing portfolio.


Well defined research


A little well defined research eliminates 90% of the bad companies. Know what you want to know. Keep it simple. Spend a minimum of time with this very simple first screen.


  1. EPS – Earnings per share has to be a positive number because this is how to measure if a company makes money.
  2. Dividend – The amount paid out has to be less than the EPS or earnings per share.
  3. Dividend growth – The most recent dividend should be greater than it was a year ago.
  4. D/E ratio - Debt to equity ratio is one measure of financial stability. The less the debt, the less the risk and the D/E ratio should be low.

MCHP Dividend Machine Fundamentals



MCHP Microchip technology is a smallish company, it has some 5,000 employees. It has been a dividend machine and as a matter of fact it has also provided covered call income potential. Let us deconstruct MCHP using the four measurements I described above.

EPS: Using the most recent quarter's earnings are $.577 per share

Dividend to be paid on December 2 $.344 per share

Dividend growth rate has been 3.5% per year and this year if you own the shares by November 15 you will receive the quarterly dividend of $3.44 plus if you continue to own it on December 12, you will receive an additional dividend of $.345. So nice to see a company share the good times with it's owners.  Based on last Friday's closing price of $33.55 the dividend yield is 4.1%.

D/E ratio. This company has debt to equity ratio of .21 well below the industry average of .89.

A little well defined research does not take that much time. Learn about one company a week from me and use it as a model to help you find a company that is a dividend machine and add it to your income producing portfolio.

Young people are wise to adopt the technique early. Steady growth with reinvested dividends will set you up to create an income stream when you are done working.

More on how this company is good study on using covered calls to create additional income later this week.

Very Truly Yours,

TheMoneyMadam

Dividend Machines Definition

During the first year of this website/blog, I am committed to profiling one company per week that qualifies as a dividend machine. To be included in my dividend machine list, a company must satisfy the following four criteria:
  1. Each company must pay at  least a 3 % dividend yield.
  2. They must make money as measured by EPS (earnings per share.)
  3. Their EPS must be greater than the dividend payment per share.
  4. Each company should be in good financial shape measured as debt to equity ratio within the industry average.

I am trying to keep the list diversified among many industries, company sizes, and geographic influence.

Thursday, November 11, 2010

Dividend Machines, Taxes, & Roth IRA

Taxes always reduce the amount of income you take home. This applies to salary, bonuses, and yes investment income. This blog is not a discussion on the wisdom or value of taxation. This blog is to help you learn how to invest for income and income has tax implications.

If your investments are not in qualified retirement accounts but are in taxable accounts, you will pay tax on the dividend income.

Municipal bonds are the most common investment to use in taxable accounts as their income is usually tax free. Some municipal bonds like the newer Build America Bonds are not tax free but for the ordinary investor, municipal bonds are the most common non taxable income investment tool.

I have worked with some very smart and very rich people who are close to 100% invested in municipal bonds. This strategy I cannot agree with. I think everybody has to be diversified. Therefore, even these people need to consider another income investment and stock dividends are appropriate.

Dividends are taxed, at 15% today but that could change in 2011.

You always have to be concerned about taxes and that is why you may want to hold your dividend machines in a Roth IRA. Dividends, interest and for that matter capital gains in Roth IRA's are not taxed. You can have those dividends deposited into your personal checking account with no tax consequence. Or, you can allow those dividends to accumulate and when you need the money, distribute it tax free.

Dividends held in traditional IRA's are also not taxed but when you distribute that income you are taxed at ordinary income rates.

Dividend machines have a place in every income investor's portfolio, especially now with bond interest rates so low, but the most tax efficient account to hold your dividend machines is a Roth IRA.

Very Truly Yours,

TheMoneyMadam

Next week another dividend machine idea for you to consider.

Monday, November 8, 2010

Are you worried about inflation?

 

One of the benefits of being 63 years old is that I have lived through not just inflation, but hyper inflation and I lived to tell about it.

My husband continues to convince me that as much of a thief inflation is, "they" know to kill it. And, he tells me that he put bought an 18 month C.D. (FDIC insured certificate of deposit) that paid 20% in 1981. He still wishes he put all his money in that C.D.

Income investors, would you not like that kind of income.

Scared of inflation? We income investors are already experiencing the inflation not measured by the CPI (consumer price index). My sewer, water and utility bills are up. Ground chuck was $1.99 a pound just 6 months ago and now it's $3.29 a pound. All home maintenance costs are up. This is inflation but we are not getting the commensurate increase in our fixed income investments. Social security recipient have not enjoyed an increase for 2 years but their home owner's fees increased.

I am looking for what I hope is a short term opportunity to put a bunch of my money into laddered certificates of deposit and pray that my husband is right and "they" know how to kill it.

If you are interested in pursuing the intellectual pursuit of determining for yourself a bout of hyperinflation can be controlled, study Paul Volker's leadership of The Federal Reserve in the from 1979 to 1987.

You can devote a lot of time to learning about this subject or you can hope history repeats itself. Stock prices were very volatile during that period of time but my money and I are here to tell you about it. You know what I mean. During that time frame I bought my first house and sold my first house. We had the crash of 1987 and we were emerging from the bear market of the mid 70's.

Go ahead and worry. But your more important move as an income investor is to seize the opportunities the income market gives you. Someday, you will be able to buy debt cheap but right now it is expensive and you still have to invest in dividend machines while you wait for the inflation opportunity and hope "they" can kill it again.

Very Truly Yours,

TheMoneyMadam

Sunday, November 7, 2010

Dividend Machines that pay in November

Sticking with the theme of dividend machines, I want to explore with you the idea of creating a portfolio of dividend machines that consistently pay dividends and increase them every year.

If you are planning to retire, now is the time to start accumulating a group of stocks that will pay you every quarter. If you are already retired, consider using these ideas as part of your income investing strategy. 


These stocks pay every quarter. That means if a stock pays a dividend in January, it will also pay a dividend in April, July and October. If it pays in February, it will also pay in May, August, and November. March payers also distribute the dividend in June, September, and December. Therefore, you need 3 groups of stocks that pay every quarter to construct an income stream every moth.
An example is the best teaching tool.


Let's assume you would like to create about $1,000 per month of income. Moreover, you want to sleep at night with the understanding that these companies have strong balance sheets. You want to know they are solid. Last month, we worked on learning how to find out if your company makes money and is solid so I will not go over that at this time.


Rather, let's concentrate on the quality of the dividend. You want companies that make more money than they pay out. Even more important you want to invest in companies that give you a raise every year. Finally, you want to be able to afford to buy the company.


Between November 1, 2010 and November 15, 2010 at least 5 companies will pay a dividend greater than 3%, will have increased that dividend every year over the past 4 – 5 years, and have a solid balance sheet. These are dividend machines with quality dividends. 


These five companies are AT&T symbol T; Abbott Laboratories symbol ABT; Federated Investors symbol FII; Paychex symbol PAYX; and National Health Investors symbol NHI.


To create $1,000 of income in November from these 5 companies requires 500 shares of T with an income of $210; 400 shares of ABT with an income of $176; 800 shares of FII with an income of $192; 700 shares of PAYX for an income of $217 and 400 shares of NHI with an income of $242. Total cost of these shares if you bought on Friday at the close is $94.347. 


This is a well diversified portfolio of only 5 stocks that pay 4.4%. Where are you going to get 4.4% income that increases every year?


Start accumulating your dividend machines. Use these ideas or research other stocks. Plan, learn, and then invest.



Very Truly Yours,
TheMoneyMadam


 

Friday, November 5, 2010

Dividend Machines

I like to lump my dividend producing stocks into two categories. One category, my growth and income category, contains companies that meet all my criteria (1) makes money (2) pays a dividend (3) increases the dividend and (4) has a strong balance sheet. These companies have lower yields than the second category but higher growth rates. Hence I use this first category to create capital gains from price gains and/or writing covered calls. See previous blogs on learning about covered calls.

I call the second category of dividend producing stocks my dividend machines. These companies all pay at least 3% and I prefer 4%. Of course they make money as measured by earnings per share (EPS) and pay out less than they make. Moreover, each of these companies has increased their dividend every year for at least 5 years.

Now think back over the past 5 years and you know the stock price of these companies has been volatile just like all the markets. You must be very patient during these times of poor stock performance knowing that you buy a dividend machine to get ever increasing dividend payments. You have comfort in the fact that your companies are financially strong. Actually, some investors who pay a little more attention will turn on dividend reinvestment during times of poor stock price performance and buy additional shares low.

Periodically I provide a list of dividend machine stocks. I love cash flow. I love to see those payments show up in my checking account. You will love it too.

Even with the market surging this week, I have 5 stocks listed on this site that you should consider as dividend machines.

Very Truly Yours,

TheMoneyMadam

I will have more insights next week on income investing strategy lessons and ideas. For now, good luck to those who are betting on The Breeder's Cup. Our favorite female athlete is running Sat. Go Zenyatta!

Wednesday, November 3, 2010

Does your company make money?

 

I have always believed that investing for income is not that hard. I think most people are totally capable of investing the portion of their savings that is used to create income. Most people also say they just do not have the time. Then, learn the simple principles behind my income investing strategy and make sure you work with your adviser or broker to create the results you want.

A friend of mine who has not had such good luck with her broker suggested that I make sound simple. How does she start?

Simple investing comes from using simple principles. For instance you should invest in companies that make money and share it with you. This is a pretty simple concept. Yet how often have investors not followed that principle. The limited partnership mania of the 1980's where investors put their money into investments that had guaranteed loses so the investor had a tax advantage. The dot.com mania of the late 1990's when investors put their money into companies that made only promises to make money. The real estate mania of the 2000's when investors put their money into another house they were sure they could flip in 6 months. None of these ideas is appropriate for an income investor.

Find a company that makes money. How do you measure making money? Begin with finding out if the company you are considering has revenue. Simply look at the financial results and you will see if they have sales and revenue.

Next we need to find out if after the company pays its interest and taxes, and all the operating expenses, it has money left at the end of the day. This left over money is called profit.

The accounting industry spends a lot of time measuring profit and I cannot expect you to become an accountant overnight so let us keep it simple and look for the easiest way to measure profit.

Profit is called the bottom line, or net income or net earnings. Some very sophisticated measures such as free cash flow will increase your understanding of how a company works but the easiest measure of profit for you, as the average investor, is to find out the company's earnings per share (EPS.) EPS is available on all the financial sites.

Income investors who keep it simple will benefit from time efficiency. This is one of the first of my four criteria to determine if you should invest in a company. Eliminate all companies that do not have sales, all companies that do not have earnings.

Only companies that make money have the option of paying out some money to you and for income investor's income is everything.

Later this week I will discuss looking at a company's ability to pay interest on their bonds.

Tuesday's election results are all the talk right now and I have waited to the end of this post to comment. Income investors are always looking for opportunities to buy a stock cheap. If you can figure out how the election results will create a cheap investment then you should pay attention. However, for most income investors, you need to be agnostic on the election results and stick with our principles of how to invest for income.

By the way, I think eventually you will be able to buy bonds cheaper and cheaper because eventually inflation will rear its ugly head. This is why you need to start now to understand how to determine if a company can meet its interest payments.

Very Truly Yours,

TheMoneyMadam

Thursday, October 28, 2010

IBM Growth and Income Machine

Selling Covered Calls - an illustration for income investors.

TheMadam has always considered the income from writing covered calls a gift.   But there are criteria that should be employed when using this strategy to supplement your income.

One of my rules, as you may recall from my website, is to always invest your money in an instrument that pays you something while you hold it.   For both my income portfolio and my growth portfolio, I always try to employ that rule.

Covered calls are no exception.  When you write or sell (these terms are interchangeable) a covered call you covey the right to buy your stock to another person at a certain strike price and within a certain time frame.  You must remember that the person who buys your call does not have to buy your stock from you.  The option is totally the buyer’s.  Therefore, you always want your underlying stock to be a good one.  The stock should make money, have no more debt than other companies in its industry and pay you a dividend.

In October of 2008, I decided I wanted to own IBM.  At the time IBM paid a dividend of $2 per share per year and at the price I paid (100 shares at $81.60 and 100 shares at $77) the dividend yield was about 2.5%.   Now 2.5% is only ½ of the yield that I count on for my income portfolio so I need to make more money on either call premiums or capital gains from selling the stock to meet my goals.   But IBM has a history of increasing its dividend over time so that fact was a positive.  And its debt to equity ratio was within the range of comfort.  Further more, if the market tanked again like it did in March of ’03 I was pretty sure IBM would not go out of business.  You always want to be comfortable with the underlying stock in case you are stuck with it for a while.

IBM also seemed to be a good pick for my growth portfolio.     I have bought and sold IBM several times over my investing career and I was ready to buy again.  I decided not to reinvest the dividend because I needed the income to live on and I decided to write calls on it at ever increasing strike prices.   I was confident that the dividend, plus the call premium would more than meet my 5% income goal and I was also confident that if the purchaser of my call wanted IBM at the strike price that I would receive enough capital gain to meet my growth goal of 7%. 

Listed below are the actual transactions over the past 14 months on those two IBM buys.  So this is not just an illustration, is it actual history.

     10-27-2008  Buy 100 Shares net cost                       $8,258.95
     11-19-2008  Buy 100 Shares net cost                       $7,708.95

     Total amount invested                                              $15,867.90

    Income from dividends
        3-10-2009    $ 50.00
        6-10-2009    $100.00
        9-10-2009    $  55.00
      12-10-2009           $  55.00

    Total income from dividends $260.00

    Income from writing calls
        10-27-2008    $390.29  strike price  $85
        11-19-2008    $290.29    strike price   $85
        11-24-2008    $265.29  strike price  $90
        01-26-2009    $135.29  strike price $100
        01-28-2009    $150.29  strike price $100
        03-23-2009    $100.29  strike price $110
        04-02-2009    $  80.29  strike price $115
        07-13-2009    $ 95.29   strike price $110
        07-27-2009    $100.29  strike price $125
        10-12-2009    $ 95.29   strike price $130
        11-04-2009    $ 96.29   strike price $130
        12-21-2009   $139.29  strike price $130

    Total income from calls     $1,938.48

Capital gains from sale of first 100 shares when the buyer of the call exercised their right buy at $110.

Total gain from sale           $2,831.81

My income yield over this 14 months has been 13.85 % well exceeding my 5% goal and the capital gain of the most expensive 100 shares was 17.85% again well above my growth goal.

Moral of this story is covered calls are an excellent strategy for income investors provided you invest in an underlying stock with great fundamentals.  Please note,  this is not a recommendation to buy IBM stock especially since it is selling at just about it’s all time high.  If my last 100 shares gets taken, I would be thrilled because there always another stock to invest in and write calls.
Very Truly Yours,
TheMoneyMadam

TheMoneyMadam is on vacation

Dear Students of income investing.

I will be on vacation until Thursday November 4, 2010.

Our subjects to study regarding income investing will be learning how to measure if companies make money and learning how to determine if they can pay interest on their debt.

More next week.

Very Truly Yours,

TheMoneyMadam

Tuesday, October 26, 2010

More Balance Sheet Issues to Consider.

This post is a continuation of your studies into the balance sheet of your stocks.

You are investing for both current and future income; right? So you selected companies that pay you dividends or bought a bond to pay you interest. As you watch the markets gyrate up, down, and sideways, you are concerned that, at this point in your life, you cannot afford to have your investments go belly up.

Your safest move is to make sure you invest in companies or lend your money to companies with a solid balance sheet. Companies with a solid balance sheet have the reserves to pay their dividends when times get tough and enough cash flow to cover their interest payments.

For instance: could diaper rash cause your investment to lose value? Yes. Look at the woes of Proctor & Gamble (PG.) Could Europe's troubles affect the value of your holdings in Coca Cola (KO?) Yes. Look at the slide of the Euro dollar and find that KO may suffer from that occurrence. 

Each of these companies is a hold because they have strong balance sheets and constantly increasing dividends.

I am not asking you to be an economist. The point of this post is; if you invest your money in a company that pays a good dividend and increases that dividend over time and has a cash reserve to get through tough times, your income is most likely safe even though the stock price moves up and down. Plus it is highly unlikely that your investment will go "belly up."

Your  job as a worried income investor and as a student of income investing is to determine the balance sheet strength of your investments by learning the D/E ratio of each of your investments.
Read my previous post on learning how to determine the debt to equity ratio (D/E ratio) of your investments.

Very Truly Yours,

TheMoneyMadam

Monday, October 25, 2010

Learn about Debt to Equity ratios to screen for stocks.

Let's determine if you selected income producing investments with a good balance sheet.




What does that mean? 

How do you determine if your investments have a good balance sheet?

I use many sources to help me determine how to invest. I am trying to narrow my work for you and I recommend that the quickest way for you to get an overall view of your investments' balance sheet strength is to determine the debt to equity ratio (D/E ratio.) 

Go to any financial information site such as your brokerage site maybe at Schwab or Fidelity or use Daily Finance or MoneyCentral.  Type in the symbol of the company in which you have an investment.

Now look under the category Fundamentals or Financial Results. Every site has information on the stock's financial results.  Look through this area and you will find a number called the debt to equity ratio D/E ratio.


Debt is measured just like your personal debt.  How much money does the company owe.  Equity is the value of each share.  Therefore if the debt to equity ratio is 1, the company has a dollar of debt for every dollar of equity.  


Generally speaking, I prefer companies with a D/E ratio less than 1.  However, some companies need to carry a lot of debt to fund major equipment purchases.   If you have a company with a D/E ratio greater than 1 but like all the other aspects of the company, your next assignment is to compare this company with a similar company and to learn about the industry average D/E ratio.   


A good example of this research is to compare Caterpillar (CAT) and Deere (DE).  Each company carries a lot of debt because their equipment is so expensive they cannot pay cash.  CAT has D/E ratio of 2.91 but DE has a D/E ratio of 3.9 and the industry average is 2.2.  So I would pick CAT rather than DE.

I want to emphasize, again, our rules for income investing.  Buy a company that makes money, shares it with you in a dividend, increases the dividend over time and has a strong balance sheet or a low D/E ratio.

Review every stock you own and decide if you have solid companies.  You'll be happy you did your homework.

Very Truly Yours,

TheMoneyMadam

Sunday, October 24, 2010

Helen asks; what is a covered call?

Options are difficult. Unless you are studying to pass the series 7 securities license, do not bother to learn all the permutations of options.  If you are interested in creating additional capital gain income from owning stock in a company, then you should learn about covered calls.
An example may be the best way to start.
If you own 100 shares of a company let us use Caterpillar symbol CAT and you bought it today at $65.50 you will own a company that pays $1.70 per share this year in dividends alone.  In addition, you should be aware that the dividend has consistently increased over time. So your stock is one that meets all of TheMoneyMadam’s four criteria for buying a stock.

To increase your income from CAT, you can sell a call to another person which gives them the right to buy your CAT stock. This is a covered call.  Yes, someone will pay you money for the right to buy your stock at more than you paid for it.  
Today I bought CAT for $65.50.  I sold a covered call for $1.57 per share.  Someone paid me $1.57 for the right to buy my CAT stock for $72.50 between now and November 20, 2010.  I hope they do.  I get $1.57 per share from the covered call.  I get $.44 a share in the dividend to be paid in August, and I get $7.00 per share of profit (the difference between what I paid for CAT $65.50 and what the buyer of my stock will pay me $72.50.)  In 4 months, I will have made 13.8%.  

A covered call is an option contract and it means that the other person will pay you in this case about $1.50 per share so that is $150 for 100 shares for the option to buy  CAT at $72.50 before the end of November. They pay you right away.  However, they are not obligated to buy the shares so you could end up owning the stock if it is at or less than $72.50 in November. 
You, the seller of the call, are obligated to sell your shares at $72.50 if the buyer wants them.  Of course, the buyer will not buy your shares unless the stock is greater than $72.50.  Who cares? You will receive the $1.50per share plus any dividend that is paid between now and November and you get the gain between buying the stock at 65.50 and selling it at 72.50.  If you are stuck with CAT, you get a great company with a good dividend and little debt for that kind of company.
Helen, do you understand it?
Yours Truly, TheMoneyMadam

Four Criteria for Buying an Income Stock

When an income stock is so good that I want to own it, I call it a Dividend Machine.  Below is a description of my approach to finding Dividend Machines.


Which stock should I buy? Use these four criteria.

  1. Select a company that makes money; measured as EPS(earnings per share.)  
  2. Select one that pays a 3 percent dividend but never greater than EPS
  3. Pick a company that has increased the dividend year year for at least five years. 
  4. Always select a fundamentally sound company D/E 1 or less.

Rationale:
               So many investment opportunities promise to make you money and can be very tempting but investing is risky business and you need to invest in a company that already makes money in order to reduce your investment risk.   When the investment currently makes money,you have a very good chance of getting your money back and an even better chance of reaping a gain.

               It is common sense that getting income from your investments will help your investment grow.  Just reinvesting dividends over time in the right company yields compound growth.  Young investors tend to want quick gains but you do not have to give up income to get growth or give up growth to get income. 

               Strong,consistent companies do not pay out more money in dividends than they make in earnings.  

               Growth and income are nice but you also want a company that is not going to go bankrupt.  Just like individual people,and governments, a lot of debt on the balance sheet is risky.  Balance sheets with a typical amount of debt for that industry are good.  And, sometimes you can find a company with no debt and a lot of cash and assets.

               When possible, you want to make back your investment plus your dividend income plus some kind of growth.   Growth is what makes capital gains.   You can sell covered calls against your holdings for capital gain or you can sell at a profit.
Implementation:

               You have to come up with a stock idea.  Watch the TV business shows, read the Wall Street Journal and Barrons.  Barrons lists stocks that are about to pay a dividend.  Pick one of those stocks and look at the stock quote page in Barrons. On the right side of the table, you will see estimates of future earnings.  Choose companies with increasing earnings expectations. 

           Once you select a stock in which you have an interest, use stock screening tools provided by your broker, or free sites like dividendinvestor.com or nasdaq.com or money central.msn.com or daily finance.com to find out about your company.  Dividend per share, earnings per share and growth rates are very easy to find. Although debt to equity ratio is easy to obtain, you should visit the fundamentals section to learn more about the balance sheet, dividend history, and growth history.  
 Decide what you are going to pay for the company or companies you have selected. This action is the most painful. Pay too much and you may take a while to get a capital gain.  Paying too little and maybe information about the company has not yet become public and the low stock price might suggest it is going lower.  Using the growth/income strategy you can offset this risk by earning income while you wait for the trouble to pass.   
 Charting is helpful when deciding at what price to pay for your stock.  Look at the highs and the lows and determine when to buy.

I invite you to contact me at TheMadam@themoneymadam.com if you need some help. 

Now start implementing your plan.
Very Truly Yours,

TheMoneyMadam