Monday, September 28, 2015

Waddell and Reed, WDR newest 2015 Dividend Machine

Today I am profiling a new addition to the 2015 Dividend Machine Portfolio.

2015 Four Dividend Machine Criteria

In 2015 I am adding stocks that pay at least a 3.5% dividend yield.   Last four quarter earnings per share must be greater than the last four quarter dividends per share.  Dividend increases must have averaged 4% or more per year over the past 5 years.   The last of my four criteria is D/E ratio; this is debt to equity ratio which is one measure of financial health.

So far this year, each time I sit down to find a new stock pick for the 2015 model portfolio, the stocks that pass these four hurdles have been mostly in the energy sector.     My 2015 Dividend Machine project uses no other criteria than the four outlined above which is why this portfolio is energy heavy.

Not Looking for Diversification

Diversify, diversify, diversify is what I was taught and what I practice in real life.  The purpose of the model portfolio work I do, however, is to use only my four criteria to pick a stock and see how we do.

In 2011 and 2012, the portfolios are quite impressive.   But who hasn’t made money in stocks since then.     

Notice in 2015 the portfolio has good dividend yield and dividend growth but capital losses are conspicuous.

I am adding to the 2015 portfolio and I did not pick the Dividend Machine I am profiling today based on trying to find more diversification; I used only the four criteria defined above and the first stock I found that met all of these is Waddell and Reed, a mutual fund company, symbol WDR.

Notice that I am not recommending investing in a mutual fund.   Rather I am adding the stock of the mutual fund management company to the 2015 Dividend Machine Portfolio.

Waddell and Reed, WDR Dividend Machine Fundamentals are discussed below.

EPS greater than Dividends per Share

My very first investment was in a Waddell and Reed mutual fund.  My college roommate’s father sold these and I invested $25 per month.     This was many, many years ago.   Waddell and Reed has been a consistent stock.   WDR earnings per share have been positive for many quarters.  Over the past four quarters, EPS have been $3.46.     WDR is also a consistent payer of dividends.   Over the past four quarters, dividends have been $1.72.

Today, September 28, 2015 WDR is trading at about $34.00   Their forward dividend yield at that price is 5.05%.

Dividend Increases

September 29, 2010 WDR paid a quarterly dividend of $.19.   WDR will be ex-dividend on October 7, 2015 and will pay a quarterly dividend of $.43.   This folks, is an average annual dividend increase of 25% over the past five years.    History is not always a perfect predictor of the future but it is a good guide.  I use the website for EPS and dividend data.   You can always go to the company’s website and find the data there.

Financial Health

As you know, I use D/E ratio which is debt to equity ratio.   D/E ratio is calculated by dividing total liabilities by shareholder equity.  You can find the D/E ratio already calculated for you at YCharts or MSN Money.    WDR’s D/E ratio is .35.   By any measure this is a solid number.  I look for stocks with a D/E of 1 or less or within industry standard.   WDR’s industry standard is higher at about .43. 

See the table below to examine WDR’s Dividend Machine bona fides. 


Consider Waddell and Reed, symbol WDR for the income producing portion of your portfolio.


Disclosure:  No position in WDR but may initiate soon.

Thursday, September 24, 2015

I am trying to sell ABBV

I am trying to sell ABBV.   I describe why and how and discuss the risks of my strategy in this post. 

When the market swoons, I tend to ignore it unless I have a ton of cash around that needs investing.   I always have two years of routine expenses in cash, but I don’t have a “ton” of cash around right now.   Therefore, I am not a very active investor as the market dips.

I suggested to Alfred Ferol that the market, in its infinite over reactions, could drop to 10,000 and he asked me when I am going to sell.    

If I didn’t sell in 2008/2009, I certainly am not going to sell now.    This is the sixth time I have been through times like this:  1987, 1992, 1994, 2001, 2009, and now in 2015.    Income investors should never be in a situation where you have to sell something to pay your bills.    You need to structure your portfolio to provide enough income to supplement social security, pension, rental income and the like to meet your monthly expenses.   However, you can work your portfolio to create more income.

ABBV’s dividend better than parent ABT’s dividend.

While I am not a vigorous investor this week, I look for weaknesses in my portfolio to see if I should take action.   AbbVie, symbol ABBV, was a spin off from Abbott Labs, symbol ABT.   I sold ABT through covered calls quite a while ago because as a result of the split, ABBV retained the big cash flow and was paying about 4% whereas ABT was paying barely over 1%.   It made sense for an income investor to keep the higher cash flow.

ABBV’s D/E ratio is too high.

Today I looked at ABBV with the eye of a risk taker.   I measure risk by D/E ratio.   Any stock with a D/E ratio above 1 or above industry standard makes me nervous.   ABBV has been worth the risk because of the ample dividend and because it is volatile enough to command extra covered call income.  Plus even income investors appreciate a capital gain.

My gain in ABBV is about 119% even with the recent price decline from a high of $71.80.  ABBV’s yield is down to 3.55%.   The trigger is their D/E ratio which is 4.93.   This is way too high for me.   So I want to sell ABBV.   I am a little greedy have decided to sell a November covered call with a strike price very close to the trading price.  Strike prices that are close to the trading price, provide juicy income.  Plus, I should receive their October dividend, and the call premium.   Now I have to hope the call buyer will call away my stock.

ABBV Covered Call with Strike Price close to trading price.

The risk is I could be stuck with ABBV if the call buyer does not take my stock.   The risk is not huge as they continue to pay the dividend but the D/E ratio still makes me nervous.  If the stock is not called away, I will probably sell it out right.  However, the price could be lower than it is now.   The covered call table above presents the income opportunity from selling ABBV with a covered call strike price close to its trading price.

Work that portfolio.


Disclosure:  Long ABBV with calls