Sunday, April 26, 2015

Total Return on CVX a four year project



I must invest some of the cash liberated when calls expired last week.    


I usually have about 10 percent of my stocks on which I sold covered calls, called away.   

Too much cash is not wise
 
It is not wise to have too much cash around so I am looking for Dividend Machines to add to my portfolio to replace stocks like Microchip Technology, Darden restaurants, Pitney Bowes (yes I finally found a buyer for that stock.)

I found seven stocks that yield at least 3.5% with dividend growth averaging greater than four percent per year for the past five years.  Each stock has earnings greater than the dividend over the past four quarters, and each has a D/E ratio of 1 or less or equal to industry standard.

As you know for the purposes of adding to the 2015 Dividend Machine Portfolio, I use no other criteria.   For my own portfolio, however, I might not want to add more energy or more utilities or more tech.    Only you can decide if you want to use more criteria, than I use for Dividend Machines to pick a stock.

Adding the Best stock of the group

This week I am adding to the 2015 Dividend Machine Portfolio the stock that I consider to be the best stock of the seven I researched.   That stock is Chevron, symbol CVX.

Chevron has more earnings per share in relation to the dividend payout than any of the other considerations.   It is between the 52 week high of $135 and 52 week low of $100. 

Yields on the seven stocks I researched range between 3.51% at the low to 4.63% at the high.  Chevron comes in at 3.89%.   Dividend growth ranges from 4.79% to 20%. Chevron’s dividend growth rate is 11.47%.    D/E ratios range from .15 to 1.13 and CVX is the .15.

Total Return on CVX

Chevron has been a Dividend Machine in every one of my portfolios so we have quite a history for analysis.    The table below shows the dates I added CVX and the cost basis. 

You may notice that over time the gain has been minimal.   Total return could have been better had I added on dips and dips did occur, but once I pick a stock for a portfolio, I do not add during that year.   It makes data analysis easier.   Frankly, my personal holdings where I am not constrained by the rules of TheMoneyMadam, are very similar to those in this blog.

 

When you add in dividend income, total return improves to just over 10%.   The first in purchases have a much better total return than the last in purchases.  See the table at left.


Additional Income not included in Total Return

CVX is volatile because it is affected by so many major world issues not limited to oil and gas prices, regulations, political unrest in many of its locations.     As you can see from the Total Return analysis above, you could have bought at the high and lost money so CVX is not free of market valuation risk.  

However, we are income investors and the question is are we willing to risk some volatility in principle to get reliable ever growing income?    If your answer is yes, what stock is o.k. to own even though its stock price may suffer from externalities?  

One answer to this question is the opportunity for covered call income.   CVX provides very nice covered call opportunities.   If you have confidence in CVX you can add to your position every time it dips and sell calls to capture immediate income.   If your stock is called away because the stock is moving up in price, you have pocketed the income and you still own your original shares.   

The key point here is to add to your position because you trust CVX.   Maybe your stock will not be called away because the stock price sinks and you are stuck with another 100 shares of CVX at a loss?    The way I handle that situation is to wait until I find the next call and bank the ever increasing dividend.  An even better technique is to ladder your covered calls.   Look for a July $115, a September $120 etc. Laddering calls can be a lot like laddering calls.

Some are skeptical of the dividend but I am hoping for an increase at their next announcement.  Let's see.


Chevron Dividend Machine Fundamentals:

I will add Chevron as a 2015 Dividend Machine using the closing price on Monday.  CVX earned $10.14 during the past four quarters and paid out $4.28.  CVX closed at $109.87 on Friday, April 24.   CVX pays a current quarterly dividend of $1.07 for a forward yield of 3.8955%.   Dividend increases have averaged 11.47% over the past 5 years.  D/E ratio is .15.

Although the 2015 Dividend Machine Portfolio is heavy with energy stocks, Chevron is still best in breed and the best stock of the seven stocks I researched.   See the table below for a presentation of CVX Dividend Machine Fundamentals.



Consider CVX for the income producing portion of your portfolio.

TheMoneyMadam

Disclosure:  Long CVX with laddered calls