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