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.  




KMB - DIVIDEND MACHINE FUNDAMENTALS:


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.




KMB - COVERED CALL OPPORTUNITY


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.  



THE MONEY MADAM