Monday, January 31, 2011

Dividend Machine Chevron, CVX

Chevron, an integrated oil and energy company, has been part of my dividend machine portfolio off and on during my entire investing career. Chevron's closing price on Friday, January 28, 2011 was $93.37. This is very close to its 52 week high. Chevron is number eleven in my list of 52 dividend machines to profile over one year.

Friday, January 28, 2011

Opportunities in a down market: try Bunge BG

Traders will not want to be long the market over the weekend with all the upheaval going on in Egypt and its neighbors. However, investors need to use these market corrections as an opportunity to invest

Wednesday, January 26, 2011

Don’t fight the tape; make money with almost dividend machines.

When the market goes up, we have to take advantage of the chance to receive capital gains.

How do you do that? One way is to set stops on the companies in which you have a big gain. But a better idea is to write calls on stocks in which you have at least a 10% gain.

Monday, January 24, 2011

Freeport McMoran FCX provides even more income.

FCX provided another chance for income today. To refresh your memory we bought FCX at $107.5 sold calls at $115 but the calls expired this weekend. This morning FCX is up and I wrote more calls, again at $115. Expiration is March 19, 2011 and my income from the call is $4.50 per share. As an income investor, you have to love this kind of trade.

Very Truly Yours,


Dividend Machine Mine Safety Appliances MSA

January 24, 2011

Mine Safety Appliances symbol MSA manufactures health appliances used around the world in the fire service, homeland security, construction, and other industries, as well as the military. MSA has been in business since 1914 but its approach to health safety is not old. MSA has generated record growth in revenue in nine of the past 10 years and they do it with very little debt. MSA is number 10 of the 52 dividend machines for your income investing portfolio I will profile over a year.

Saturday, January 22, 2011

High Risk Trade Freeport McMoran a follow up

December 2, 2010 I profiled a trade in Freeport McMoran symbol FCX. We bought at $107.50 then sold a $115 call. We hoped our option buyer would take our stock today for a swift gain. Check out the original post on FCX.

This is follow up to see how we fared.

Friday, January 21, 2011

Freeport McMoran a high risk trade January 21, 2011

January 24, 2011 profile.   FCX provided another chance for income today. To refresh your memory we bought FCX at $107.5 sold calls at $115 but the calls expired this weekend. This morning FCX is up and I wrote more calls, again at $115. Expiration is March 19, 2011 and my income from the call is $4.50 per share. As an income investor, you have to love this kind of trade.

Very Truly Yours,

Thursday, January 20, 2011

Municipal Bond treasures in the trash heap

Municipal bonds are an unloved category and justifiably since almost every government and public entity seems to be in financial trouble. Yet in every trash heap is a treasure for the patient investor.

Tuesday, January 18, 2011

Qualcomm fits into our Cash Flow Strategy

Qualcomm, symbol QCOM, is an excellent example of a stock that does not make the dividend machine cut but is a stock to consider for about a 10% gain in three months by writing a covered call, cashing the dividend and hoping someone buys it from you.

When to buy dividend machines

When and at what price to buy any investment are important variables. Traders find stock price to be the most important criteria because they want quick gains and selecting when to buy a stock is crucial. Income investors have the opportunity to reinvest dividends during periods of weakness. This provides

Qualcomm Option Income

Qualcomm was the topic of  choice on January 18, 2011 where I suggested we buy QCOM at $53.03; sell the April call for $.96; receive the dividend in March of $.19; then sell the stock at the strike price of $57.50. Calculate your income as $57.50 +$.96 +$ .19 = $58.65. Subtract your cost basis from your income and you have a gain of $5.62. Divide the gain of $5.62 by your cost basis of $53.03 and you have a 10.6% return in 3 months.

Monday, January 17, 2011

Dividend Machine Southern Companies, SO

Southern Companies, symbol SO, has been in my portfolio for a long, long time. I reinvested the dividend for years and years until I retired and then I turned on that dividend spigot. By reinvesting my dividend over so many years, I lowered my cost basis in SO to about $12 a share. Southern Companies is number nine of fifty two dividend machines I will profile for your income investment portfolio.

Sunday, January 16, 2011

Should you ever sell a dividend machine?

Deciding if you should sell a dividend machine is an interesting question; a question I faced this last week.  Today, I want to compare two dividend machines in the same industry and use them as an exercise in how to determine if you should sell a dividend machine based on bad news.

Thursday, January 13, 2011

NYB not quite a dividend machine but worth a look.

New York Community Bank symbol NYB has been a favorite of mine. It does not meet my criteria for a dividend but it barely misses. I love these types of stocks.

NYB yields 5.44%

How to write a covered call

Writing, also known as selling, a covered call is easier than you think.

A covered call trade is an option trade. All major brokers like Schwab or Fidelity can provide you with the ability to trade an option.

What is a covered call? In order to sell something you have to own it. Selling a covered call requires that you own at least 100 shares of a stock. Once you own 100 shares, you can sell to another person the option to buy your shares.

A call option is a contract that consists of:

  1. the right but not the obligation to buy your shares
  2. a strike price which is the price the buyer has to pay you for your shares if they decide to exercise their right to buy them from you, and
  3. An expiration date after which either the contract is fulfilled and they buy the stock from you or the contract is void and you retain the shares.
For instance, I own 100 shares of XYZ stock and the price per share is $10. Another person would like to buy that stock from me at $11, which is the strike price. $11 per share is a 10% gain for me. The buyer thinks the stock will go to $15 per share and $11 a share seems like a bargain.

That person pays me $.10 per share for the right to buy my stock before the option expires. I think that a 10% percent gain if I sell my stock at $11 is good. Either way, I keep the $.10 the buyer paid me for the option. If it all works out well, I get an 11% gain in 1-6 months. The worst scenario is I am stuck with the stock because the buyer does not want to pay $11 per share.

In order to make an option trade, you will have to obtain approval by your broker to trade in your account. At this point, I do not want to confuse you about why the broker will approve or disapprove your account for option trades. If you tell your broker that you want to trade covered calls, it is highly likely your broker will approve your account. 

To pace your call option trade,  bring up the option order trade screen and select "sell to open."  Next you have to determine how many contracts you want to sell.  One contract equals 100 shares.  If you want to sell calls on 1,000 shares that would be 10 contracts. Select if you want to sell at the market price or a limit price.  I always sell at a limit price because options are volatile and I want to try for a 10% gain.  Like all trades, your entry will be reviewed before you commit and click on "place or submit your order."  Check the status of your trade on the order status screen.

Do not get caught up in trying to understand all the parts of the option market.

Learn about covered calls and covered calls only. Look at every stock you own and use your broker's website or personal service to learn what someone is willing to pay you for your stock. Calculate the gain you would get by selling your stock at a price higher than you paid and the amount the call buyer pays you. Decide if you really are willing to sell the stock at the contracted price.

Readers of this blog will appreciate that as income investors, we only sell covered calls when the strike price is greater than our cost basis. We rarely sell a call with more than a 3 – 4 month expiration date. Finally, we hope that each time we sell a call on our shares our minimal gain will be 10% or we will sit with the stock. Therefore, we need to be happy owning that stock. Again, if you follow my cash flow strategy, you know that we buy stocks that pay us some income and that means we rarely mind having to continue to own the underlying stock but we really like a 10% gain so we are frequently willing to let someone else buy our shares. There is always another stock to buy.  If our call expires and we no longer like the stock, we sell it and move on but we keep that call premium and often times a dividend.


Wednesday, January 12, 2011

Almost Div Machines Make More Money!


Almost dividend machines can create more cash flow than those companies that meet our strict criteria to qualify as a true dividend machine. We hate to lose our dividend machines so we tend not to use covered calls to create more income. However, companies that are almost dividend machines can create both dividend and covered call income and the capital gain if the call buyer executes the option and buys our stock from us.

These solid companies may not qualify as dividend machine but they are close so they are pretty safe. For the purpose of this blog, we will throw out companies that miss the cut because of too much debt. If we have to hold the "B" team of dividend machines we want to make sure we hold the most solid.

Look at the companies that missed our criteria either because their dividend is less than the 3% we require or because they may not have had a dividend increase every single year.

A current event, a change in technology, a change of management are just a few examples of events that can create interest in a company and make someone buy a call from us. You receive three sources of income from one stock because we can sell calls; we receive the capital gain since the call is always above our cost basis and we receive the dividend.

See my next blog on NYB to see an example of this strategy.

Very Truly Yours,


Income Investors need personal income to replace working income

Income Investors need personal income to replace working income and that requires a strategy

Personal Income Investing Rules

TheMadam knows !
Invest in something that makes money.
Profit, another word for making money, is measurable and information on the profit generated by whatever you buy should be available or do not buy that instrument.
Income investments make more money than they pay out. If a company pays a 10% dividend but pays out more that it makes, don’t buy it. That rule applies if an investment pays our 3% but does not make money.
Pay off your house as fast as you can.

You can make a case for using leverage to create wealth and indeed it works, but you will sleep a lot better when your principal residence is owned free and clear.

Diversify your income portfolio by thinking of only two groups; (1) income instruments and (2) growth instruments.

Some think that diversification means stocks for growth and bonds for income but in many cases you may have some stocks that are core income producers and some bonds that you trade; diversify your income instruments. How much of your savings do you need for income? The rest you can use for growth.

High wealth people must invest in tax efficient instruments.

The most common tax efficient instruments are municipal bonds. Real estate and Master limited partnerships are also tax efficient instruments.

Never be afraid to take profit.

Taking profit really works with stocks. Selling covered calls at a 10% profit allows you to move into the next up and coming sector therefore you end up rotating sectors. You can find another value stock that makes money; pays a dividend and is available at a value.
You can also take profit in bonds when you buy at a discount and sell above the par or call price.

Never buy a bond at a premium.

Keep up with current affairs and you can find a company with a strong balance sheet that has trouble because of factors beyond their control. You may find their bonds a good buy at a discount. Eventually, if it is a good company, the trouble will go away and you can at least get the gain from keeping the bond until it pays at par. Sometimes you can sell at a premium.

Monday, January 10, 2011

Dividend Machine Scana Corp., SCG

Scana Corporation symbol SCG is a utility in South Carolina; I love Charleston but that is not why I like Scana. I like Scana because not only does it make a lot of money $2.87 per share but also it pays us $1.94 a share.

At the closing price on January 7, 2011 of $41.12, the yield is 4.69%. Scana is number eight of the fifty two dividend machines I will profile for your income investing portfolio.

They make a lot of money but they have enough to continue to reinvest in their business of delivering gas and electric to its customers. Scana has increased the dividend every year for at least 5 years at a 4.6% clip. Their D/E ratio is 1.35 a touch high but tolerable considering the industry. It is expensive to build and deliver energy.

As I suggested in my last post on dividend machines, you need to diversify your holdings among small companies as well as large, and among industries. Historically utilities have been an integral part of every income investor's cash flow strategy. You should not have all your money in utilities but you should have some. Consider Scana as a good dividend machine. Investigate other utilities. Later this week I will discuss some of the nuances of utilities to help you make better choices.

Create your cash flow strategy using dividend machines, bond interest, and covered calls then gradually invest to create enough income to quit working.

Very Truly Yours,


Thursday, January 6, 2011

Bond Help 2

Investing in bonds is a subject of some importance today.

Information on bonds has been difficult to find. I remember when I started investing I asked our Merrill Lynch broker to give us a list of bonds.  We wanted to buy a bond; interest rates were 18%.  Our broker provided one,  yes one and only one bond to consider.

Today you can research bonds you may want to buy.  If you want to lend your money to a company, you should select a company that is solid.  Try to find a company that meets our four criteria for investing.  Then use the Securities Industry and Financial Markets Association website to gather information on the price of corporate bonds.  Their site is called

If you want to buy municipal bonds because you want the tax advantage, you have more challenges.  Researching the credit worthiness of a State, City or County, is not easy. Use the
Municipal Securities Rule Making Board website for information on municipal bonds. This website is called

We hear about municipal bonds defaulting, we here about foreign government bonds defaulting, we know GM defaulted, we are concerned that the United States could default; bonds are on our minds.

You know already that I absolutely reject bond funds in my cash flow strategy.  Holding a well financed bond to maturity holds very little risk.  Pools of bonds carry more risk.

Someday bonds will be an attractive asset to include in your cash flow strategy and these two resources will help you select the right bond.

Very Truly Yours,

Wednesday, January 5, 2011

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,

Monday, January 3, 2011

Dividend Machine Watsco, WSO

Watsco, an HVAC (heating, ventilation & air conditioning) wholesaler, will warm your coffers with their 3.3% dividend yield that has increased every year. Watsco is number seven of the fifty two dividend machines that I will profile for your income investing portfolio.

One of the challenges of the cash flow strategy is to make sure you diversify your income investments.

Income Investing Plan Step Two

All successful people use a plan and collecting information is an important part of that procedure.  Step two is heavy on collecting information:

Expenses: Categorize your expenses into two categories:

  • Mandatory Expenses
    Mandatory expenses include housing costs such as rent (some well off retired people do rent,) mortgage, homeowners' fees, insurance,taxes, utilities. Other mandatory expenses include car payments and insurance. Some would consider health insurance a mandatory expense; others would not. Another family may own income property that has mandatory expenses and if so, those expenses also need to be included.
  • Discretionary Expenses
    Now we get to the fun of life. How much money do you want to spend to create your dream? More than basic cable would be an example. Business class instead of coach? How about gifts? Annual freshening of your decor. New machinery. I can go on forever. Look back, add up the costs of your pleasures and budget for your future.

Seriously speaking and trying to keep this simple, really think about those expenses that could be cut if you had to and you could still enjoy at least one home, have transportation, eat, and have some form of entertainment. Be honest and be careful as you gather this data.


List each source of income but divide them into two categories:
  • Income Sources not under your control, examples are:
    • Social Security
    • An already contracted annuity,
    • Uncle Henry's trust
    • A pension
  • Income Sources under your control including:
    • Stock dividends. Just add them all up even if you reinvest.
    • Bond Interest.
    • Income from selling covered calls.
    • Rent. Your income is the amount you have left after the many expenses that go along with being a landlord.

Later on you will find that you need more detail about your income sources particularly net income or tax adjusted income, but at this point keep it simple and calculate your total income as the sum of (1) income sources not under your control and (2) income sources you can control.

Portfolio Value:

Investments that you will depend on to create income are the assets you list in total portfolio value. You can fool your self and list your house, but your house is just an expense even if it is paid off.

The value of your income investments is critical. If these assets are worth $100 you have little chance of creating retirement income. $100,000 dollars can create $500 per month if done properly. You need to calculate the total value of those assets that you can control. We are not asking for net worth; we need to know total investment portfolio value.

Risk Tolerance:

Knowing your risk level is critical. I recommend using the Rutgers University quiz available on at their website, When you complete step two of your plan, you should be able to have all your data on one page.

Complete step two by writing down your mandatory and discretionary expenses, the value of your investments, your current income, and finally your risk tolerance. Remember to date it.

Very Truly Yours,