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.


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,


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.

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,

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,


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,


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,


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,


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,

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,

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,