Thursday, August 29, 2013

Dividends and Income VODAFONE what should an income investor do?

Vodafone (VOD)  - A 28.82% return

Telecoms pay very good dividends and are always being considered for investors interested in dividends and income.   

However, these companies rarely make the grade to be included as dividend machines.  Telephone (T) and Verizon (VZ) do not make as much money as they payout.     BCE makes the cut.   CHL and CHT are good income producers but not as solid as a dividend machine investor would like.

Vodafone (VOD) what to do?

I do not just invest in dividend machines.  Vodafone (VOD) is a good example.   Instead of buying Verizon, I bought VOD.    My basis is $25.75.   They have paid dividends each of the two years I have owned VOD but the dividends vary a lot.   I have been waiting for Verizon to make their move and buy VOD while I cash those dividend checks.  

Verizon has made a few feeble efforts.   Today's news seems to suggest they are really serious.    I would not buy VZ on this news as they are adding debt to an already big balance sheet to finance the buyout and I would not add to VOD because they have negative earnings.

Vodafone (VOD)  three choices:

I have three choices on VOD.  (1)  I could sell it right now, and that is not a bad idea, although I may miss upside potential; (2) I could set a stop at say $30 and lock in that gain if the deal falls apart and VOD slips back into the $20's; (3) I could sell a call at close to today's price which would provide income and the potential for capital gains but if the deal falls apart, I again would be stuck with VOD.

My take is that the deal will go through because VZ needs what VOD has.   Since my major priority is income, I am going to sell the call.    This table illustrates the gain from this transaction.

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Tuesday, August 27, 2013

Dividends and Income –Breaking News - Kimberly Clark has covered call options

How often am I asked “what is my entry point” on any given stock?   My answer is always the same; I use my four dividend machine criteria to guide me.     

When a company meets all four of the criteria I use to define a dividend machine (EPS greater than the dividend; dividend of greater than three percent; dividend increases every year for a minimum of seven years and D/E ratio of one or less or equal to industry standards), I almost always begin a position in that stock or I add to it, if I already own it.

My newest 2013 stock to qualify as a dividend machine is Kimberly Clark, symbol KMB.   In February of 2011, KMB also was a dividend machine. Click here for a link to that post.  In 2011 the stock price was $65.06 and the dividend yield was 4.8 percent.   In 2012, KMB stock price appreciated quite a bit and I did not include it in that portfolio.

I held KMB until it reached a high of $106 in early 2013.   The current dividend yield at that price had slipped to barely three percent and I locked in a big gain by setting a stop at $103.  My stop was hit and I moved that money into another stock that paid more than three percent.

Today, I am again interested in KMB.   Not only does this fine company qualify as a dividend machine, it has an interesting covered call that is fit for an income investor.  Let’s take a look at the dividend machine fundamentals of KMB and then at the covered call.  


This table presents KMB’s dividend machine fundamentals.   At the close on Monday, August 26, 2013, KMB traded at $94.53 nearly a ten percent correction from where I sold it.   Earnings are $4.51 per share with dividends at $2.64 the yield is 3.38%.  Debt to equity is 1.53 which is pretty typical for KMB and less than other companies in this space.  

I do not use sentiment or trends to guide me to buy a stock.  I use these dividend machine criteria and that strategy has worked out very well.  Just on the dividend machine fundamentals, I am interested in adding KMB for income.  But the covered call opportunity is what sends this stock to the stop of my list for tomorrow, Tuesday August 27.


I am partial to companies that provide more than just dividend income; I like stocks with both dividend and covered call income.   Covered call income is usually associated with growth stocks rather than a stogy company like KMB.

The call I have in mind is a January $100 for a premium of $1.53 per share.   It is rare to find that kind of income on a stock like KMB.   Furthermore, going out to January means that if I hold the stock until expiration, I will also receive two dividends.   This table shows the gain from this covered call.   

If I lose KMB again at $100, it will be my pleasure to pocket the more than 9 percent gain.   If KMB just hangs around in the mid $90’s and I still own it, I have the pleasure of at least a 3.38% dividend yield on a stock that has increased the dividend for 41 consecutive years.   Moreover, I always get to keep the call premium which in and of itself is a yield of 1.62 percent.

A Money Madam’s dividend and income strategy for conservative income investors.