Sunday, June 30, 2013

DIVIDEND PERFORMANCE mid year results 2013

CCA stock 10 year chart

Do you know how much cash flow your income portfolio generates?

Periodic portfolio evaluation is critical to investing success.   Investors tend to look at portfolio value.  

Income investors should not start with portfolio value because the most important measure of an income portfolio is how much money did the investments actually create?  Portfolio value is second to income.


The end of June marks half way through 2013.   This is the time to check on our portfolios.   You need to find out how much cash flow your income investments create.   

The example provided below uses the various portfolios I have created over the life of this web/blog.    Look at them so you can see how to track your dividend investments.   Then, take the time to measure the cash flow your own income portfolio generates. 


Measure Portfolio Income:

Measuring your portfolio income is more important and more difficult than you may think.  You need to follow these steps to gather the necessary data.

List all your income investments.   This list will include dividend stocks, bonds, and rental properties.    If you have mutual funds and you receive income from the fund, include those under stocks.  If you have privately held REITS or individual rental properties (not traded on the stock exchange,) include those under rental properties. You can list annuities as a separate category sort of like social security or if you have control over your annuity holdings, you could put them into the bond or stockpile. 

Calculate your income portfolio’s value using 6/28/2013 values.  Do not try to update the values until you have your data put together.   You may have multiple accounts and you may not be able to use the broker’s account value because not all the investments in that account are for income. However, you should go to the effort.  You need to determine the value of your  investments that are targeted for income. 

Add up the income created year to date using your brokerage statements and those from your private rental properties. All brokers provide dividend income and interest income and that will help you track you income.  However, premiums from covered calls, which I consider an important source of income, are more difficult to add up.

You see covered call premiums are capital gains and they are lumped in with the capital gains from selling stocks or mutual funds.  Note the example I provide below measures only dividend income.  Start with dividend income before you try to add in the income created by selling covered calls.

Real estate income is probably the easiest to find, as the rents tend to go right into your checking account.  Do not muck up your work by adjusting for tax effects at this time.


I apply the same measurements to my personal portfolio as I do to the theoretical portfolios profiled in this web/blog.  In this blog, I track three dividend portfolios.   I have not added in bonds or covered calls.   You can review my 2011, 2012, and year to date 2013 portfolios in the pages at the top of this blog post.

Review the three tables below; they present both the income and capital gains from these three theoretical dividend stocks portfolios.   You can do the same tracking on your portfolios and I strongly encourage you to begin tracking your income.

2011 DIVIDEND MACHINES Bought 100 Shares of 52 companies over 52 weeks


 $  207,336

Current Dividend Income
 $  8,999

 $  253,585

Yield on Basis
$ Gain

 $    46,249

Yield on Current Value
% Gain


Prices as of 6/28/2013 

The 2011 portfolio was complete in December 2011.   Since then, every stock has paid income.  Currently the portfolio pays almost $9,000 per year.    Both dividend income and portfolio value have increase.  Income has increased but not as much as stock value.

2012 DIVIDEND MACHINES  Bought 100 shares of 48 companies over 52 weeks


 $  208,821

Current Dividend Income
 $  8,110

 $  242,595

Yield on Basis
$ Gain

 $    33,774

Yield on Current Value
% Gain


 Prices as of 6/28/2013

The 2012 portfolio includes 48 stocks picked over the calendar year 2012.  Again both income and value have increased, yet the portfolio provides only a little over $8,110 a year.   This is $1,000 less per year than provided by the 2011 portfolio.  The portfolio gain over the 6 months since the portfolio was complete, is a hefty 16%.   Impressive, but our goal is income and I think 2012 is not as good a portfolio as 2011.

As time goes by, we will compare the results.

2013 DIVIDEND MACHINES Bought 100 Shares of 13 companies to date


 $      55,939

Current Dividend Income
  $   2,476

 $      58,253

Yield on Basis
$ Gain

 $        2,314

Yield on Current Value
% Gain


 Prices as of 6/28/2013

The 2013 portfolio is a work in progress.    The goal was to improve on 2012 and the yield has improved.    Capital gains are modest.   I think this portfolio is better than either the 2012 or the 2011 portfolios because it creates more income.   

Income is what it’s all about!


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Monday, June 24, 2013

BONDS; Alcoa bond for your retirement

Alcoa (Photo credit: Wikipedia)

You know I never advocate bond funds, yet, often times individual bonds fit nicely into an income investor’s diversified portfolio.   In this post, I profile a bond I bought yesterday. 

I want to remind you that I like bonds with short maturities, that cost less than par, have an interest rate that is better than a dividend, and whose underlying company has a good interest coverage ratio.  

Bonds with short maturities:

When you buy bonds, your goal is to build a portfolio of bonds with varying maturities.  Long bonds, those that mature in more than ten years, cost too much and do not pay enough income to make such a commitment.  You tie up your principle for too long a time. 

Short maturities, those between three and then years, are the sweet spot of bond investing today.  Everyone is worried that interest rates will explode over the next few years.   If that comes true, the value of bonds that you buy with coupon yields that are less than government treasuries will go down.   You will not want to sell your bond at a discount so you should hold it to maturity when you will get back your principle.   You can then reinvest your principle in another bond with a higher coupon yield.    If you keep the maturities short, you tie up your principle for less time and you can take advantage of rising interest rates.

Bonds priced at less than par:

Most investors are familiar with the concept of total return when we talk about buying stocks.  You expect dividend income but you also hope your principle will increase over time.   When you buy a bond at par and hold it to maturity, you will get back par.   Your total return is only the value of the interest payments.   

If you buy a bond that costs more than par and hold it to maturity, your return is even less than the value of the interest payments because you will get back only par which would be less than you paid.    You can see why I never buy bonds at a price greater than par.

If you buy a bond at a discount and hold it to maturity, your return is a combination of the interest payments and the increased value of your principle.  You get the capital gain difference between the discounted price you paid and par.   Sometimes, (and this happens more than you may think) the value of your bond increases enough that you can sell it at greater than par.  In circumstances of that type, your return includes the interest received while you held the bond and the capital gain.

Interest coverage ratio:

If you have not yet familiarized yourself with “interest rate coverage ratio,” you should do so now.   Interest coverage ratio is simple to find.   I use MSN Money to find this the interest coverage ratio of the company that has issued the bond.  Interest coverage ratio is a measure of how well a company can pay its interest payments.    Later in this post, I have provided a link to the MSN site.

Alcoa Aluminum Company – April 15, 2021 bond

Alcoa, symbol AA, is a dividend stock but their bonds are a more compelling investment.  AA issues bonds periodically and the bond I bought today (June 24, 2013) matures on April 15, 2021; this is just under eight years until maturity. 

This bond pays a coupon yield of 5.4%.  It sells at a discount; I paid $96.291.  At this price, the yield is about 6%.   In addition, if I hold the bond to maturity I will get back my principle plus $3.709.   

This bond is rated BBB-.   I put very little faith in the rating agencies; I do my own homework and I like to use the interest coverage ratio of the underlying company to determine if that company will be able to pay the interest and return to me the principle.   In the case of this bond, the interest coverage ratio of AA is 36.59.  This means the company has a good chance of paying interest to the tune of 36.59  times what they need to cover the interest payout.  This is an excellent margin for this company and makes the bond compelling to me.   If you want to see the data on MSN click here for the link.

AA 4/15/2021 5.4%
CUSIP 013817AV3
               $    100.000
               $      96.291
Coupon Yield
Yield to Maturity
AA D/E ratio
AA Interest Coverage Ratio

You need to know the CUSIP of the bond in order to buy it.   Many brokers, I use Schwab, will have these bonds in their inventory.   If you do not see this bond on your broker’s website, call their bond desk and ask for a price using the CUSIP.   See the table at right for this bond’s details.


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