Sunday, March 29, 2015

Why POT and VZ are not Dividend Machines

I am not enamored with the market and I cannot put my finger on it.   Alfred Ferol tells me it is time for a pause.   Lots of things are influencing the market including people’s moods.  You don’t have to invest every day, he points out.

Are we scared of a 25 basis point increase in rates?  Maybe it is the unrest in the Middle East that is to blame for the malaise and the fear.  Or perhaps the strong dollar with its negative impact on earnings has the market feeling gloomy.

In that frame of mind, I looked at ten stocks that I might consider as a 2015 Dividend Machine stock.  Several calls were taken last week and I have money to invest.  I looked at these ten stocks not just as potential Dividend Machines but also as possible investments that might not quite make the Dividend Machine grade but are worthy of investment.  I decided to profile two stocks with the view of “why I don’t want to invest in either one.”

Dividend Machine Fundamentals of VZ and POT

Of these ten stocks, the two stocks that even come close enough to consider my investment are Potash symbol POT and Verizon symbol VZ.

Both of these stocks make more money in EPS than they pay out in dividends and their yields are around 4.5%.   Let’s look at these stocks further.

Verizon has a solid 5 year dividend history.  They have increased the dividend an average of 3.16% per year.   This is not quite enough to make VZ a Dividend Machine as we require at least a 4% average increase per year over the past five years.

Potash has a really robust dividend increase history.   If you look at the past three years, the dividend has increased from $.14 to $.38 per quarter.  That is an average annual increase of 56%.   But, POT has a history of cutting the dividend.   They clearly have tried to maintain a payout during difficult times but they will reduce the dividend if needed to maintain the integrity of their balance sheet.

POT has a D/E ratio of only .37.   VZ has a D/E ratio of 8.99. 

The Tables below show the Dividend Machine fundamentals of these two stocks.

My Take:

I value balance sheet integrity a great deal and feel that I would rather pick a stock with a D/E ratio of less than one rather a stock with a D/E as high as VZ’s.  However, I am worried about these value stocks like POT that deliver a nice dividend now but if things get worse, they may not deliver the same income as I expect.

I will pass on both of these stocks for now.

Disclosure:  Long POT with Calls
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Thursday, March 26, 2015

DRI on a tear

Nice news for an under appreciated Dividend Machine.  MM

Zacks' Bull Of The Day: Darden Restaurants $DRI

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Tuesday, March 24, 2015

FCX Dividend cut

Disappointing but not surprising. MM

Freeport-McMoRan declares $0.05 dividend $FCX

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Tuesday, March 17, 2015

FCX Dividend concerns

Although Freeport-McMoran has never been a Dividend Machine, it is a high yielding dividend stock.  As such, many income portfolios hold FCX.

During the 2008 crisis, FCX did cut the dividend.  If you are an FCX investor,  read this fine article to help you determine if you should buy sell or hold.

I am in the hold category.

Freeport-McMoran: Separating The Noise From The Necessity $FCX, $NEM

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Monday, March 16, 2015

Federal Reserve effects on income investors

I can hear investor hand wringing from here.   They are a nervous wreck over how the Federal Reserve Bank’s actions may affect interest rates and subsequently stock prices


Every day the market moves in relation to what it thinks “The Fed.” Is going to do.  The Fed., of course, is the Federal Reserve Bank.  Janet Yellen, its president, will be speaking this week about how the Federal Reserve Bank will manage its assets and the effect that will have on interest rates.  Very smart and very rich investors are very nervous that the higher interest rates will negatively affect stock prices.

Even Alfred Ferol called me to discuss how we should position his portfolio.   Should you sell your winners?  Should you sell everything?  Is there anything you should buy?  

Here is my take.   Market timing is a fool’s errand.   For every report you read about stock prices going down in an environment of increasing interest rates, you can find a report that shows just the opposite.  This dichotomy of opinion is not new to investors.    What you need to do first is decide if you are really an income investor.

If you are an income investor, you only care about your interest, dividend, and covered call income. 

Interest Income

Interest comes from those bonds you bought at a discount to par.   The price of these bonds will go down if interest rates go up.   But the par value of the bonds stays the same and provided that you hold to maturity and the underlying company is solid, you interest income is probably safe. 

Hopefully, even if your bond maturities are laddered, your max duration is between 5 and 7 years.  If interest rates truly are in a period of consistent increases, you will be able to get more income from the next bond you buy in 5 or 7 years.

Dividend Machines

Some of your dividend stock prices may suffer.   Particularly those stocks that are dependent on European business.   During periods where US interest rates go up, the US dollar increases against the Euro making these multinational stocks go down.  A weak Euro means revenues, when measured by the US dollar, are less than when the Euro is strong.    But, a well selected multinational stock like Kimberly Clark, or Coca Cola, or Johnson and Johnson will still pay your dividend.  Moreover, it is highly likely they will continue to increase your dividend.

Many of these multinational companies were on quite a road up as far as stock price goes making their dividend yields look anemic (less than 3%.)   I usually try to sell calls on these stocks to get more yield and if my stock is taken away, I move the cash into a higher yielding stock.  But some stocks like JNJ do not have very good calls.   So when the price goes down, I either ignore it or I add to my position.

Covered Calls

Covered calls are the most variable of the three income streams I use.   You cannot count on selling calls on every stock every ninety days or so.   You have to work your portfolio constantly.   One of the good things about uncertainly is it leads to volatility.   Volatility is a covered call seller’s friend.   You only need one call buyer that thinks a stock is undervalued and has potential to go up to fill your cash coffers with covered call premiums.

In summary, be not a market timer.   I stick with my three primary sources of income, interest from discount bonds, dividends from Dividend Machines, and covered calls on Dividend stocks and then I go out to dinner.

Good Income Investing.

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