Sunday, January 5, 2014

The Money Madam’s 2014 Dividend & Income Strategy.

In  2014, I will continue to invest in dividend stocks, sell calls on them,  and buy discount bonds to create the investing income I need;  and I will continue to write about my ideas.

Covered calls and discount bonds are opportunity investments.  As the year goes on I will report on covered call opportunities on dividend stocks and when discount bond opportunities seem right, I will share my ideas. 

More routinely, I will profile stocks that I call Dividend Machines.   Any investor who takes the time and uses discipline to acquire a portfolio of income stocks can buy a portfolio of  Dividend Machines and do very well.

The stocks I profile this year will make up the 2014 Dividend Machine Portfolio.  Just as I have tracked the performance of my three previous portfolios, I will keep you up to date on the 2014 portfolio performance.  My Dividend Machine recipe is described below.

Dividend Machine Strategy:

I still love the simplicity of using only four pieces of information about a stock to decide if you should buy.    The program is working.  Yet, I want to refine those criteria to meet the income investing challenges facing us this year. 

My four Dividend Machine criteria are: 

(1) E.P.S. or earnings per share
(2) Dividend Yield
(3) Dividend Increases
(4) Debt to Equity Ratio. 

Below I describe how to use these criteria in 2014.

2014 Dividend Machine Criteria

Earnings per Share:

I always feel a company I own should earn more money per share than it pays out in dividends.  That is why EPS or earnings per share is my first stop when I am looking for a stock for income.

For the 2011 portfolio, I used the most recent quarter’s earnings; in 2012 and 2013, I required at least the most recent four quarters’ earnings to be greater than the dividend payout. 
In 2014 I will continue to expect the most recent four quarters’ of earnings to exceed the dividend paid.

Dividend Yield:

This is the most challenging of decisions because the U.S. ten year treasury is hovering around three percent.    That is really safe money.    If you are going to invest for income using stocks, you have to beat the ten year U.S. Treasury.   Therefore, this year I will select only those stocks that pay at least a 3.5% dividend yield.  This is an increase over the 2011 & 2012 criteria.  In 2013, I did not set a level but wanted something above three percent.  

Dividend Increases:

This is the most important of the decisions.   Inflation is a fact of life and it affects people living off of their investments more than investors who are still working.   Therefore, making sure your income keeps up with inflation is extremely important to income investors.

This year I will limit my Dividend Machine stock selections to those that have averaged an increase of at least four percent annually.   An increase of four percent annually will offset current inflation trends.

Debt to Equity Ratio (D/E):

You have to measure a company’s ability to manage debt to decide if you want to invest your money.   Some industries have to carry a lot of debt in order to finance their operations.   Think of Boeing (BA. \)  Those businesses have had the best opportunity ever to finance their debt at record low therefore, when I have a choice I will go with a company that has a low D/E ratio.

This is how I invest for income.  A set strategy executed with discipline.   Others have done better and others have done worse but I will take an average of 10 percent per year on these portfolios. 

Think about it!

The Money Madam