http://blogs.barrons.com/focusonfunds/2014/10/10/semiconductor-etfs-crash-after-microchip-warning/
Microchip's P/E soared over the past few years and this was during a time when MCHP was absorbing an acquisition. I was tempted to sell it because the yield on this inflated stock price was well below what I could get from another stock. On the other hand, my cost basis of $33.69 is well below the current price. http://www.themoneymadam.com/2010/11/microchip-technology-dividend-machine.html
During these times when traders buy stocks that are rumored to be have a lot of growth, MCHP had good rumors and a high stock price and a high P/E. Covered calls are the obvious strategy to improve income but you can only sell a call when someone else wants to buy it from you. For quite a while, MCHP had no calls. Lately calls have been better and I have one half of my position on call (October $50.) That means I could not sell those shares if I wanted to until the calls expire.
Does a lower P/E mean I should buy?
I will likely hold onto the other shares as this stock is still a strong income producer. Unless covered call income is compelling, which to me is a call premium yield of at least 2% or about $.80 per contract, I will not add to my position.
Even if the stock price erodes enough that MCHP's dividend yield is more than 3.5% and the P/E is less, I will not add. My reason is I need dividend growth and while MCHP has consistently increased the dividend, the increases have been meager. But then I get the capital gain if the call buyer takes part of my position and that makes up for the meager dividend increases. But I really doubt that my stock will be called away. Therefore, I will look for new calls and hold.
A stock with a 3.1% dividend yield, low debt, a history of increasing dividends, and earnings that exceed the dividend payment, and has occaisional covered call income, is not a bad stock to hold.
TheMoneyMadam
