Monday, August 24, 2015

Buy and Hold or Rent RTN

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

  1. October 3, 2011 $40.87.   
  2. May 29, 2012 $49.67.  
  3.  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.


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.