Wednesday, October 16, 2013

Dividends and Income - Ariad Pharmaceuticals could it be a home run?

Bar graph chart

My blog is dedicated to income investing using dividends, covered calls, and interest.   Rarely do I write about high risk growth stocks.   However, I learned a lot from an experiment with Ariad Pharmaceuticals and I share that story with you below.   

 First:  A Few Rules

  1. Income investors should not use high risk stocks in their income portfolios
  2. Buy and hold has no place with experimental stocks
  3. When covered calls are available, these stocks can actually produce income
  4. Never be so in love with an idea that you waste precious resources (there are only two; time and money.)
  5. Know when to fold ‘em.

The Story:

Alfred Ferol is my friend and mentor.   We invest together sometimes.   He is the growth investor in our group.  He knows about biotech so that is where he invests.

All the stuff he likes is experimental and thereby never pays income but has enormous potential and as I always remind him, enormous risk.   We work together on these ideas and when we find one that in his eye has potential and  my work suggests covered call opportunities, we work the position.

An investment, by definition, is expected to produce income or capital gain.  What a delight to make an investment that produces both income and capital gain.  This is a story about Ariad Pharmaceuticals, (ARIA.)

Ariad Pharmaceuticals 

ARIAD Pharmaceuticals
ARIAD Pharmaceuticals (Photo credit: Wikipedia)

Aria Pharmaceuticals got killed this week, falling from over $20 to under $5 when the FDA made them revise an experiment due to patient complications.   The drug works but the side effects are troublesome.   Yet, the experiment could work well enough with the changes suggested that the drug may be a good treatment.  This could make you want to keep a stock that could go back to $20.  Maybe you should “double down” and buy low?

History is a good teacher.   Let’s look at our ARIA experience as a guide to investing for both growth and income using a high risk stock.

The table below provides buy and sell information as well as the covered calls that produced a 108 percent capital gain and a 39% income yield over eight years.  The gain was 13.5% per year and the income was 4.875% per year.   

We thought that we had a loser when ARIA tanked, but we analyzed our history and decided that when the call expires this weekend, we will get rid of it and consider it a home run.

The Money Madam

Enhanced by Zemanta