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. Look for a stock in your portfolio that is not quite a dividend machine but meets our cash flow strategy criteria (makes money, pays you a dividend that is less than they make, and has a solid balance sheet.) You do not mind losing a company that is almost a dividend machine when you get a 10% capital gain plus a dividend plus the income from selling the covered call.

Be prepared to gloat. If you picked the right stock, you will get all of the above sources of income and you can gloat. Be prepared to kick yourself because often times these companies will continue to go up. You have to be agnostic about a specific company; you cannot get emotional about a company. You buy a company to share in the profit and to sell to someone else that same opportunity; you just want to sell it at more than you paid.

What about risk? Your risk is that the market crashes (in my personal memory we have 1987, 1992, 1994, 2001, 2008;) you end up with a company that is solid and pays a dividend and may actually become a dividend machine because the price is so much lower than you paid. At that point, you either add to your position or just reinvest the dividends to dollar cost average your cost basis. Use the cash flow strategy criteria and you reduce your risk.

More important be prepared to buy another "almost dividend machine" because you may have to employ those profits to create income. As you do your research on "dividend machines", those companies that pay our monthly bills, keep an eye on a solid company than just misses our criteria but has active call option opportunities.

Do you think I should start to publish a list of almost dividend machines?

Check out my most recent almost dividend machine in the covered call box to your right.

Very Truly Yours,