Income investors are rational people.
We don’t
expect home runs; we expect to grow our income and hope our principle keeps up
with inflation.
Yet everyone wants to evaluate the risks of their
strategy. With that in mind, this post
concentrates on stocks selected with my Dividend Machine Strategy that have not met my expectations. This analysis also reveals which stocks we should sell, hold, or buy.
DIVIDEND
MACHINE PERFORMANCE
We have nearly three years of experience with
dividend machines. These three
portfolios have done well as you can see in this table.
Let’s look at the losers. This will help to determine the risk of
using this strategy.
DIVIDEND
MACHINE FAILURES
What is a Dividend Machine Loser? I would consider an investment a failure in
this order of events.
- Worst Event - Company goes out of business
- Next - Company cuts the dividend
- Next - Company does not increase the dividend
- Finally - Company continues to pay but stock price sinks for capital loss.
Not one stock in any of these three portfolios has
gone out of business. One company,
Pitney Bowes (PBI) cut the dividend in half and the stock suffered
mightily. This was the worst performing
stock selected using my Dividend Machine Strategy. PBI’s loss is 10%.
Three companies have not increased the dividend in
at least five quarters. Every company is
expected to increase the dividend at least every four quarter. These three
stocks are Landauer (LDR); Communication Systems (JCS); and Intel (INTC.)
These three companies have one thing in common;
their earnings are stalled. Beyond that
each story is different.
- LDR has decreasing earnings and increasing debt and I would sell it now at a profit of 9.25%.
- JCS is not demonstrating the ability grow but their over 5% dividend yield and virtually no debt could make an income investor stick with them for a while, however, their earnings are very weak.
- INTC sports a 3.76% yield. Some think INTC will grow again and will stick with them; others may find another investment that pays more income. I am sticking with INTC because it also provides covered call income opportunities and I will add on dips.
Note that Watsco (WSO) may look as if the dividend
was cut, but it paid two years of dividends early. Abbott (ABT) provided the ABBV spin off and
may look on the portfolio as a dividend cut.
This is also true of Conoco Phillips (COP) which provided the PSX spin
off.
DIVIDEND
MACHINE CAPITAL LOSES:
Twelve stocks have capital losses. These companies are listed in this table.
Should we
buy, sell or hold?
Are any of them still
dividend machines?
SELL:
- Pitney Bowes (PBI), any company that cuts the dividend is out of our realm.
- Diebold (DBD), Communications Systems (JCS) and Williams Partners (WPZ) are companies where earnings are less than dividends and no income investor should be in a stock like that.
HOLD:
- Intel (INTC) trades with enough volatility and the company has enough potential to hold it because you can sell covered calls to boost your income.
- Southern Company (SO) is a hold. Their strategy is rocky but their earnings keep up with the dividend.
- AstraZeneca (AZN) and BCE (BCE) are foreign companies and the dividends are a little erratic. They have consistently increased the dividend and if that continues, I will hold unless something fundamental changes.
- Sysco (SYY) remains a dividend machine but I am watching to make sure they increase the dividend the next quarter.
BUY:
Three companies are still Dividend Machines as
measured by my four criteria and I would by definition add to them. They are:
- New Jersey Resources (NJR) current yield 3.73%;
- Consolidated Edison (ED) current yield 4.33%; and
- Darden Restaurants (DRI.) current yield 4.23%.
Regarding DRI, the covered call opportunities on DRI
are frequent. I like to buy DRI less
than $50 then sell calls. However, even
at Friday’s closing price of $52 it is a solid Dividend Machine.
These are the Dividend Machine Stocks I will add to
over the next few days because they are cheap.
CONCLUSION:
The Dividend Machine Strategy produced one major
loser and twelve disappointments that continue to pay income. Only you can decide if this level of risk is
worth taking on when you use this type of strategy.
The
Money Madam
