Sunday, March 31, 2013

Dividend Stock Correction?

Are you worried about a market correction in dividend stocks?   Should you be a buy and hold investor and try not to feel awful when a stock you hold hits highs and then retreats?   Look at Apple, people are kicking themselves for being greedy.  If you don’t hold, which companies should you sell and why?  Below is an outline of the strategy I use.

My decisions about how to handle dividend stocks at their high are driven by the concept of increasing the “yield on my available capital.”    If I invested $10,000 in a stock with a dividend yield of greater than 3% and now due to the stock price going up, my $10,000 is worth $20,000 but the yield on that $20,000 is less than 3%, I want to make a change.    I want to make sure that my “available capital” of $20,000 generates more income. 

You are the manager of your resources.  Good managers use their resources wisely; in our case using your resources wisely means getting more income from your available capital.    My approach is outlined below.

Stock Price
5 year high
Dividend Yield
Less than 3%
Dividend Growth
More than 7%
Covered Calls
More than 1%
Stock price and current yield of dividend stocks.

Dividend stocks are at their highs and it is appropriate to have a strategy.   If you own dividend machines that are at or near their five year high and have a current dividend yield of less than three percent, target them for further evaluation.

Dividend growth rate.

Look at the growth rate of the dividend.    How much did they pay per share 5 years ago and how much do they pay today.   With only those two pieces of information you can calculate how much the dividend has grown.  If the dividend growth rate is seven percent or more per year, then you may want to keep the stock and add to it if there is a market correction.  A seven percent increase every year for 10 years means your income will have doubled in 10 years.    

Let's use Chevron, CVX, as an example.   On Thursday, March 28, 2013, CVX closed at            $118.82 which is just below the multi year high of  $121.56.  At $118.82 the yield is 3.02%.   Chevron has a stellar history of dividend increases.   March 10, 2008 the quarterly dividend was $.58 per share and this year on March 11, the quarterly dividend was $.90.   That represents a $.32 increase.  Over the past 5 five years the dividend growth rate was 12.8% per year. 

Will CVX's stock price continue to slip?  It may.   The 52 week low is $95.73.   Your dividend yield at that price would be 3.76%.    

This is an example of a stock that I will add to on dips.

Can covered calls add enough to yield more than 3%?

If the dividend increase is less than 7%,   consider boosting your income by selling covered calls on the stock.   You risk losing the stock but that may be alright if the stock is at a 5 year high.  You, of course, have to be prepared to find another investment that yields more than 3%.

Conagra Foods, CAG, is a good example.  CAG closed at $35.81 on Thursday.  CAG's dividend yield at that price is just over 3%.   CAG's 5 year stock price high is $35.91.  CAG has increased the dividend every year but the rate hikes equal only 6%.    Can I create more income by selling a covered call with a strike price that is greater than the 5 year high?  

I found a June, 2013 call with a strike price of $37 or one point above the high.  The premium from the call is $.45 which boosts my annual income from $1.00 to $1.45 for a yield of 4%.  If I lose the stock, I will have a significant gain.   All good news.

If you can create an extra one or two percent income by selling  covered calls on a stock to equal a yield greater than three percent, then keep the stock and search for covered calls where the premium is equal to one percent.

If you cannot create the extra income with covered calls, then sell it and move it to an investment that pays more than 3%.   You can sell the stock quickly and wait to find another investment, or you can set a sell stop just in case the stock price goes down in your absence.  Another technique is called buying a put but I do not cover that technique in this blog.

Buy and Hold?

Try not to use emotion to decide if you are a buy and hold investor.  Buy and hold as a strategy, versus actively manipulating a stock portfolio, is favored by conservative investors.  Yet, even the strongest willed investor hates to see a stock that was at a high go down.   Therefore, I use this dynamic buy and hold strategy.   My goal is always to increase my income.  Once you target a dividend stock as one you might want to sell, considered the guidelines discussed in this post.


Thursday, March 28, 2013


This bond is not for the risk averse income investor; they call them junk bonds for a reason.   AK Steel, AKS, is in the steel business and they also work in the iron ore and coal area.   This post profiles a high yield bond that you may want to consider.

AK Steel (AKS) Bond Cusip # 001546AL4

Technically, this bond is not a junk bond.  Junk bonds are rated in the C categories.  Bonds rated AAA are the safest, AA and A slightly less safe, then come those rated B.   This bond is rated B- by S&P and B3 by Moody’s.

In my portfolio, I consider this bond a junk bond because the company has experienced trouble from lower steel demand and high costs.   The interest coverage ratio is -1.5 but that has improved from -4.  AK Steel’s 4th quarter update, according to Zacks, predicts a loss but less of a loss than in the past.

Bond Specifics

AKS bond Cusip is 001546AL4.  The bond will mature May 15, 2020.  The bond coupon is 7.63%. It is trading around $88.50 with a yield to maturity of 9.3%.  The bond is callable May 15, of this year and they can pay you back with some stock so you may want to wait until after that call date to make your decision.  As of May 15, 2015, the bond is callable at a price of $103.81.  

My Take

I will add this bond to my portfolio but I will watch it carefully.  Bonds of this type are for investors with some appetite for risk.


Sunday, March 24, 2013

Dividend Companies for growth.

Stocks for dividend and growth .. a few examples.

           Dividend investing is considered boring by many advisers and many investors.   I believe investing for dividend income is a dynamic strategy and far from boring.  Mine is a buy and hold strategy.  I am not so rigid personally but this blog reports on two dividend portfolios and those portfolios are strictly buy and hold. This article reports on the events that have occurred so far with the stocks in the 2011 Dividend Machine Portfolio.  This is a report on events such as splits, mergers, buyouts and extra dividends.  Spits, mergers, buyouts etc. are often associated with growth stocks.   Read on to see how even dividend companies can provide growth.

Bought Out
ABBV Spinoff
PSX Spinoff
Bought PGN
Extra Dividend
Extra Dividend
Extra Dividend

The 2011 dividend machine portfolio included 100 shares of 52 companies that I picked between November, 2010 and November, 2011.  

This portfolio is quite diversified both by industry and by market capitalization.   I do not make any trades.  I only hold.  However, several events have occurred since I created this portfolio; these include one company being bought for cash, two companies spinning off subsidiaries, one company buying and merging with another and three companies that paid extra dividends. These events are described below.

HGIC - Cash Buyout:

Harleysville Group, symbol HGIC, was a small cap. insurance company.  HGIC was added to the portfolio on May 23, 2011 for $31.27.  Two dividends were paid and then in September, 2011 Nationwide bought the company for $60.00 per share.  Including the dividend that gain was more than 94 percent.

ABT & COP Subsidiary Spinoff:

I picked Abbott Laboratories, ABT, on December 20, 2010 and paid $48.40 per share.  On January 1, 2013 ABT executed a spinoff of Abbvie, ABBV; the portfolio received 1 share of ABBV for every ABT share.  The portfolio now holds 100 shares each of ABT and ABBV.

Abbott’s quarterly dividend before the spinoff was $.51 per share.  After the spinoff, ABT dropped the dividend to $.14 per share.  ABBV pays a quarterly dividend of $.40.   Combined income of ABT and ABBV is $.54 or a gain of $.03 per share per quarter in income; a modest increase.

We invested $4,840 in 100 shares of ABT.   On Friday, March 22, 2013 the 100 shares of ABT were worth $3,369 and the 100 shares of ABBV were worth $3,897.   The gain on our original investment is a little over 50 percent.

Conoco Phillips, COP was added to the portfolio on May 16, 2011 at a cost of $71.43.  COP did a spinoff of Phillips Petroleum, PSX on April 30, 2012.  We received 1 share of PSX for every 2 shares of COP owned.  The portfolio holds 100 shares of COP and 50 shares of PSX

Dividend income from COP prior to the spin off was $.66 per share per quarter.  After the spinoff, COP continued the $.66 quarterly dividend and PSX commenced a $.20 dividend which has been increased each quarter and is now $.3125 per share per quarter. The combined increase is a nice increase.

Our original investment in 100 shares of COP was $7,143.  Current value of our 100 shares of COP is $6,076 and our 50 shares of PSX are worth $6,755.  The gain is over 79%.

DUK merge with PGN:

Duke Energy, DUK, was added to the portfolio on July 3, 2011 at a cost of $19.07.   Duke bought Progress Energy, PGN, and merged their operations on July 2, 2012.   We received 1 share of the new company, still called Duke Energy, for every three original shares.   The portfolio now holds 33 shares of DUK.

DUK paid a quarterly dividend of $.25 per share before the merger and now pays $.765.  We started with 100 shares so our quarterly income was $25.  We now own 33 shares so our quarterly income is $25.245 a modest increase.

We invested $1,907 in 100 shares of DUK.  As of last Friday, our 33 shares of DUK are worth $70.61 per share or $2,330.  The gain is a little over 22 percent.

WSO, NHI, ESP extra dividends:

Watsco, WSO, paid two years of dividends early in October 2013 for a total income of $5.00 per share.  WSO  then started a new quarterly dividend of $.25 in 2013.
National Health Investors, NHI,  paid an extra dividend of $.22 in January 2012 and again in January 2013
Espey Manufacturing, ESP,  paid an extra dividend of $1.00 in December, 2011 and again in December, 2012


All seven stocks reviewed in this post provided growth of our principle.  I believe in a dividend income strategy and these are examples of how your dividend portfolio can growth.  Not all companies in the 2011 Dividend Machine portfolio performed this well.   I will write about those in the future.  However, every single company continues to pay a dividend with forty eight of fifty two having increased the dividend.  The portfolio gain is well north of 25 percent. I will continue to investment the funds I need to live on using this dividend machine strategy.