It is an unsettling time to be an investor. Cash makes nothing. We are holding onto the few bonds we have left. We are worried about capital losses in our dividend portfolio.
Maybe we should re think our strategy.
We still need current income and dividend stocks are a bargain while investment grade bonds pay a smidgen more than cash.
We still need income that will go up. Dividend growth stocks beat even the best laddered bond portfolio for income growth.
Ordinary investors are nervous; should we sell our winners? Where should we put the money? Surely not in our losers? How about discount high yield bonds? Oh how I long for the big yield bonds of the 1990’s.
I am not a market timer or a trader, but I do like to sell my winners. They are winners for a reason and that means covered calls with fat premiums are available. Full disclosure suggests I tell you that many times when I sell a stock, usually by having a called exercised, that stock continues to go up. Yet not all stocks stayed up and it is not uncommon for dividend growth to slow or stop. I believe in moving my gains to garner more income. Where should I put my money?
An example of this maneuver is Sysco, symbol SYY. I wrote about it earlier this week. I did not sell SYY but I sold a call just $2 above the current trading price. Strike price of $43 fetched $1.10 call premium. The call expires in November which means I will probably get the next quarterly dividend. The table below illustrates the benefits of this trade.
I think I have a good chance of losing SYY at $43 and I hope so. If the call expires and I still own SYY, I will hold it if I can sell another call. Selling a couple of calls a year plus the dividend create a yield closer to 6 or 7 %.
You have to work the calls and if they are not there, I will sell it straight out, before I hear the dividend is frozen or worse yet cut. I don’t think SYY will do either and I do not know if those calls will materialize but I do think I can find a better income investment in which to stash my cash.
Buy Dividend Machines
Where will I invest the proceeds of SYY should it be called away or if I sell it?
I will continue to look for stocks that meet all four of my criteria.
- Earnings per share greater than dividends per share
- Dividend of at least 3.5%
- Dividend growth rate over 5 years of 4%
- D/E ratio of 1 or less or equal to industry standard
Even in the face of a loss from a previous buy, if stocks still meets all four criteria, then add any funds you get from selling your winners into these quality stocks.
To be sure, the ordinary investor cannot help but be concerned about the weakness in dividend stocks. You may want to sell rather than add. I will use the four criteria with a little more diligence.
Look farther back in history when evaluating dividend growth. If you can pick between two stocks, pick the stock that continued dividend growth in the 2009, 2001, 1992 and 1994 or even as far back as 1987 market disruptions. My current idea, ETN has a 5 year dividend growth rate just under 4% but as you will see below the 10 year history is quite different.
Increase your Diligence
Place a little more weight on D/E ratios as that will reassure you that it is highly unlikely that the company will go bankrupt and you will lose your principle.
Look into dividend payout ratios. Stocks that pay out almost all or all of their earnings per share in dividends per share does not have any margin for error. Making twice as much in earnings per share than paid out in dividends is a good measure.
Park your cash in Eaton, ETN
I really wanted this post to say park your cash in PG, but their most recent earnings are less than the dividend paid out and this has not happened before in the 20 years I researched. The stock that passes my criteria for parking cash is Eaton, symbol ETN. As an industrial it of course has been hit. ETN’s 52 week high was about $73 with a low of about $57. Today it closed at $58.65. I use stock price only to determine if the yield is good enough. ETN’s yield of 3.75% is good enough for me to stash some cash. D/E ratio is a very solid .4862. See the table below to review ETN’s Dividend Machine bona fides.
Good Income Investing
Disclosure: SYY long with calls, ETN expect to initiate a position.