All Money in Dividend Machines
I don’t invest all my money in Dividend Machines. When I deviate from that path, I use my four
dividend machine criteria to guide me in my stock selection process.
This post outlines the process I use to select
a stock for investment. Merck, (MRK) and
Bristol-Myers, (BMY) are two stocks I will evaluate.
Each one of these companies is involved in developing a
medical treatment for advanced, malignant skin cancer. The point of this post is not to determine
which company has the best treatment.
The point of this post is to determine which company is the better buy
using my Dividend Machine fundamental analysis.
Merck – MRK
Merck’s dividend yield is 3.22%. That is very close to the minimal yield of
3.5% that I require for a stock to be considered a Dividend Machine. Moreover, Merck has increased the dividend
5.2.6% per year over the last three years.
I like dividends to increase at least four percent per year. Merck’s
dividend increase history looks good.
Merck earned $1.46 during the past four quarters and paid
out $1.76 in dividends during the same time period. This is not good. I dug a little deeper; in 2011 and 2012 MRK
earned more than it paid out in dividends.
However, in 2010 it did not.
We don’t have a dividend machine but we might have a good
income stock if it is financially solid.
My measure of financial safety is debt to equity ratio, D/E. MRK sports a very reasonable D/E of .5036.
Merck’s fundamentals are presented in the table below.
Merck (MRK)
|
3/24/2014
|
Price when profiled
|
$53.78
|
Last 4 Qtrs Earnings
|
$1.46
|
Last 4 Qtrs Dividend
|
$1.76
|
Current Dividend Yld
|
3.27%
|
Yrly Div Inc. last 3 yrs.*
|
5.26%
|
Debt/Equity ratio
|
0.5036
|
* Dividends held steady from 2004
- 2011
|
Bristol-Myers – BMY
Bristol-Myers' dividend yield is only 2.77% and the
dividend increases over the past five years have been only .08%. Less yield and less yield growth might make
you want to give up and buy MRK but let’s have a closer look.
BMY earns $1.56 and pays out $1.44. This is good. Although in 2009 BMY also paid
out more than it earned but that was the only year in the last 6. Debt
to equity ratio is .5503.
Bristol-Myers' fundamentals are presented in the table
below.
Bristol Myers (BMY)
|
3/24/2014
|
Price when profiled
|
$51.04
|
Last 4 Qtrs Earnings
|
$1.56
|
Last 4 Qtrs Dividend
|
$1.44
|
Current Dividend Yld
|
2.82%
|
Div. Inc. last 5 years*
|
0.08%
|
Debt/Equity ratio
|
55.03%
|
*
Dividends held steady for 8 quarters in 2008/2009
|
|
Covered Calls
Both stocks had covered calls available on Monday. June calls are 89 days out. I like 89 days because you get both the call
premium and the next dividend. The
tables below present the income and gain potential for each stock. MRK is first then BMY.
Merck (MRK)
|
June $57.50
|
Cost Basis
|
$53.78
|
Strike Price
|
$57.50
|
Call Premium
|
$0.74
|
Call Yield
|
1.38%
|
Gain in $ if assigned
|
$4.90
|
Percent Capital Gain
|
9.11%
|
Quarterly Dividend
|
$0.44
|
Percent Total Return if assigned
|
11.31%
|
Bristol-Myers (BMY)
|
June $55
|
Cost Basis
|
$51.04
|
Strike Price
|
$55.00
|
Call Premium
|
$1.25
|
Call Yield
|
2.45%
|
Gain in $ if assigned
|
$5.57
|
Percent Capital Gain
|
10.91%
|
Quarterly Dividend
|
$0.36
|
Percent Total Return if assigned
|
14.07%
|
My decision is to buy both of these stocks. I will buy more BMY than MRK. I will sell calls on one half of my BMY
position.
I will let you know how we do.
TheMoneyMadam
