Raytheon,
symbol RTN a study of Buy, hold, and rent.
I did not follow my advice immediately regarding
Raytheon. But I finally did get on board
and bought 100 shares in December, 2012 and another 100 shares in March,
2013. My personal basis is higher than
it would have been had I followed my own advice immediately.
Dividend Machine History
- October 3, 2011 $40.87.
- May 29, 2012 $49.67.
- March 22, 2013 $57.50.
This last Friday, August 21, 2015, my final shares of RTN
were assigned. All shares in the model
portfolio stay as my rules are to simply follow how well a buy and hold
strategy performs. In my personal
portfolio, I am very happy with the performance of this position.
In this post I analyze and present the difference between a
strategy of buying and holding RTN and a strategy of buying and renting RTN
with an option. I always think of
covered calls as rent.
I used two measures for this analysis; one is total gain and
the other is income.
Raytheon, RTN as a long term hold
If I had held my shares I would have a gain of 83%. This is not bad for a 2.5 year position. I am using the closing price on Friday,
August 21, 2015. My total income would
have been $920 which is a total yield on my basis of 8.49%. See the Table
below.
Raytheon, RTN as a buy and rent
By using covered calls to boost my income, I essentially
rented my shares to the call buyer who had the option to buy at a set
price. I sold three calls during the
past 2.5 years. Two of these calls were
assigned and one expired. My gain was
88% which is a bit better than the 83% I would have had by holding.
Since I am an income investor, the more important measure to
me is my income which was $1,402 quite a bit better than the $920 for a simple
buy and hold. $1,402 is a yield of
12.24% over three years. My income goals
are 3.5% per year or 10.5% over three years.
The buy, hold and rent strategy got me an extra 2% of income and 5% of
capital gains which can pay off over time.
See the table below
Where to put the profit?
Lucky for income investors, dividend stocks are on sale
today. I am looking for a stock that has the change to perform as well as RTN and by that I mean it has to have a dividend yield of
at least 3.5% as well as a history of increasing the dividend about 7% per
year. Can I find a stock that also will
double in price? That is the bigger
question. It is easy to look at current
yield and find historical dividend increases. To match RTN we need to look at growth
plus income.
When I bought RTN it met all required Dividend Machine
criteria. Today, RTN no longer meets
all the criteria because the yield is only 2.55%. Covered calls today are not fetching enough
to make up the difference.
I have two ideas.
Neither of these is a perfect Dividend Machine.
One is Seagate technology. I
have enough tech so I have to really like a stock in this space. Seagate, symbol STX has a lot going for it
but it did not pay a dividend in 2010.
Prior to and after that the dividend growth is impressive. A person with a higher risk tolerance than I
have might consider STX.
National Oilwell Varco, symbol NOV is another consideration. The dividend yield of 4.94% is compelling. D/E is a very safe .22. Earnings exceed dividends by quite a bit;
$4.51 per share of earnings with $1.84 in dividends. Technically the dividend has grown from $.10
to $.46 or 7.2% per year on average. Yet
the $.46 dividend has been flat for 6 quarters. Will energy drilling be a growth industry
again in the next three years like RTN was?
Who knows? One would not have
expected RTN to do so well during a time when defense spending was under
pressure.
NOV’s Dividend Machine Fundamentals are presented in the
table below.
If I move my $21,500 from RTN into NOV I could buy 573
shares at $37.50. Using the current annual
dividend of $1.84 my income will be $1,054 per year. Compare that with holding my 200 shares of
RTN which would provide only $536 per year.
How many years of dividend increases from RTN will it take to get to
$1,054? It will take a lot of increases.
This analysis is another example that working a dividend
income portfolio with covered calls can produce both improved income and
capital gains.
TheMoneyMadam
Disclosure: No
positions in RTN, NOV or STX
May take a position in NOV but I will use a low limit order until this very volatile market works its way through the turmoil.
