Sunday, April 30, 2017

Is an 8.5% Return an improbable expectation?

Jason Zweig's column "Intelligent Investor" in the Wall Street Journal on Saturday April 29, 2017 targeted investors who believe in miracles like expecting to earn 8.5% on average annually after inflation.   He writes that individuals are not alone in believing in the improbable.  He notes that institutional investors have similar expectations.

The article is well written and timely as many investors have moved from actively managed portfolios to passive portfolios.   It seems that the expensive active managers have not delivered better gains than passive portfolios.

I buy into some of that as few working people have the time or take the time to invest their own portfolios.  Some do and most of those that I know do better than either passive portfolios or hedge funds when measuring return over time.

I have one portfolio that has 5.25 years of history.  I finished building the 2011 portfolio in November 2011.  That portfolio is now into the first quarter of the 6th year for a holding period of 5.25 years.   The only expense paid out was the initial commission when the stocks were bought.  This is $8.95 per stock and the portfolio holds 52 stocks.  Another portfolio, the 2012 group, has 48 stocks and similarly the only expense was the $8.95 commission paid to buy each stock.  The 2012 portfolio is 4.25 years old.  2013 holds 20 stocks with a holding period of 3.25 years. In 2014 the portfolio bought 17 stocks and it is 2.25 years old.  2015 bought 18 stocks and is 1.25 years old.

I did not sell or buy any holdings.  Some stocks merged or had spin offs or were bought out.  Any cash proceeds are sitting there. The cash has to hold back returns but in order to keep the data pure, I did not make any active adjustments to the portfolio holdings.

You can review the individual holdings by clicking on the "Model Portfolios" page and selecting an individual portfolio from the drop down menu.

The point of this post is to see if Jason is correct.  Is expecting an average annual return of 8.5% after inflation unrealistic?

I am using inflation of 2% per year.  The results are summarized in the table below.



Passive investing options for ordinary dividend investors include buying ETF's that concentrate their holdings on dividend and dividend growth stocks.  I chose the two ETF's known as SDY or the Spyder ETF that concentrates on solid dividend stocks and VIG the Vanguard ETF that concentrates on stocks that grow their dividends.  The table below illustrates how the same amount of money I invested in my hand picked stocks  performed had it been invested in the shares of SDY and VIG.

My worst portfolio is 2014 even that one returned just over 8.5%.   In the two ETF portfolios the VIG 2014 and 2015 portfolios beat the 8.5% threshold but barely.  All other years easily exceed the 8.5% threshold.

In the words of Frank Wilczek (another WSJ contributing author) in his article "The Ancient Question of Time", measurement is a disruptive process.  I like that thought which is why I measure my work.

Fear not the process of investing your own money in dividend stocks.  I used just 4 very simple  metrics to pick the stocks in these portfolios.  Some argue for more sophisticated measures and by all means add those to the metrics you use.  However, measuring the result achieved in these portfolios allows me to report that a disciplined, simple approach supports the right to expect miracles or more than an 8.5% adjusted annual return.

M* MoneyMadam

Friday, April 28, 2017

CVS at $82

I hate to chase a stock.  I am chasing CVS.  You may recall that I decided to add it to the 2017 portfolio but I have not yet pulled the trigger.

This is where I was better at buying for my clients than for me.   When a client decided to buy a stock, the first thing I did after the meeting or phone call was to place that order.  You have discretion as an adviser but that can cause nothing but trouble.   For my own money, I can prevaricate hoping to get my stock at a lower cost.

Buying at the right price is important and $82 is max for me for CVS because that translates to a yield under 2.5%.    Since I have committed this stock to the portfolio, Monday, I will put in an order for CVS at $82.  I will let you know how it goes.  I would prefer $80 as this is a 2.5% yield.  For the portfolio, I will pull the trigger tomorrow one way or the other.

M* MoneyMadam

Disclosure:  Will add within 72 hours.



The risks of buying before earnings. CVS down a bit today. So I personally sold $82.50 May 19 calls on my $82.50 buy and put in a buy at $79.90. Working the portfolio. In the 2017 Portfolio, I have to stick with the buy. M*


Placed a buy on open order for CVS which filled at $82.04. Updated 2017 portfolio is displayed below.


Tuesday, April 25, 2017


Hasbro, symbol HAS, is eating Mattel's lunch (MAT.)  Trading today at $102 HAS investors are mildly bullish on their future if you look at calls.  HAS has a July, 21 $110 call for $1.15 but the volume is low with only 6 contracts traded.  HAS is just off its multi year high of $104.14 hit yesterday.

MAT at $21.79 is just above its 3 years low of $19.45 hit in September of 2015.  Talk about dead money. Yet, the July 21, $24 contract is trading at $.45; also with low volume; only 5 contracts traded.

I no longer own either stock.  HAS is in 2 of my target/model portfolios that I publish, follow, and report on in this blog.   HAS is in the 2011 portfolio.  Bought on October 24, 2011 for $35.09.  I bought it again for the 2012 portfolio at a lower price $33.25.  At that time it was not such a good holding.   Since then, it has been quite a nice holding. 

Will MAT fail?  I don't know.  Will MAT be acquired, perhaps.  HAS is a good holding and with a dividend yield of only 2.12, I won't be buying it soon but it sure is worth watching.

Good Income Investing,

M* MoneyMadam


Sunday, April 23, 2017

Covered calls a 2 edged sword GILD, KSS, MSFT, LLY

Selling covered calls is a frequently used technique to boost income.  I am not talking about trading options.  Trading options is a totally different animal.  Selling covered calls delivers additional income.  When you use them on stocks that already pay a dividend, your income can benefit from both dividends and call premiums.  However, no strategy is perfect including selling covered calls on dividend stocks.  In this post I review 4 calls that just expired (4/21/2017) and review how these can be a two edged sword

  • Selling covered calls on dividend stocks can boost your income.
  • Calls that are assigned (called away) where the call buyer executes their option to buy your stock can rob you of upside potential.  - Lost Opportunity
  • Calls with expiration dates after bad news can saddle you with a stock whose price is deteriorating and you are stuck with it. - Downside Risk

The four calls I am writing about today are Microsoft, MSFT, $65, Eli Lilly, LLY, $80, Kohl's, KSS, $47.50, and Gilead, GILD, $77.50.  All expiration dates were 4/21/2017. 
MSFT and LLY calls were assigned.   The KSS and GILD calls expired.  Let's see how we did.

Microsoft $65 4/21/2017 - An example of how calls should work

I am using one lot of MSFT for this explanation.  I bought this 100 shares on February 23, 2016 at $51.25.  The next day I sold a May 20, 2016 $55 call for a premium of $1.00.   Microsoft is tricky because their ex-dividend date tends to fall on the day before some call expiration dates.  I have had MSFT called early by a very savvy call buyer and I assume they wanted the dividend.

In the case of the May 20, 2016 call , the ex-dividend date was May 17, 2016.  I was in no danger of losing MSFT to the call buyer because it was trading around $51.75 and the buyer would need to pay me $55.

I collected the May dividend and July 20, 2016 I sold another call on these shares.  The strike price this time was $60 and the premium I received was $.85 the expiration date was 10/21/2016.   I always like the premium to be no less than 1% of the strike price.  I love being able to raise the strike price on a stock as my gain increases should the stock be called away. 

Again this call expired as MSFT was trading right at $60 and apparently the call buyer did not want to take the risk to go long.  During the waiting time, I collected another dividend.  After the call expired, I waited for the next opportunity and collected yet another dividend.

Finally on March 2, 2017, I sold one more call on this 100 shares of MSFT.  I was able to move up the strike price to $65 and received a premium of $1.06.  The call expiration was 4/21/2017.  This call was assigned.  Microsoft closed at $66.40 on April 21 so the call buyer paid me $65 for my stock plus the $1.06 to buy the call.  His/her basis is $66.06.  They made a whopping $.34 so far.  See the table below

For me this is the perfect use of covered calls on a dividend stock.  MSFT may move up a lot more and I have more shares in my stable.  As a matter of fact I sold additional calls of $67.50 and $70.

The point of going through the detail of this trade is to show how well covered calls on dividend stocks can work to your benefit.   Now let's look at Lilly

Eli Lilly $80 4/21/2017 - An example of lost opportunity

LLY is a very interesting case.  The only thing Lilly and Microsoft have in common is they are both dividend stocks. MSFT yields 2.4% and LLY yields 2.57%.  Both are a bit pricey when you look at P/E ratios (price to earnings ratio.)  MSFT carries 31 P/E with a forward P/E of 20.5 and LLY 31.74 with a forward P/E estimate of 19.94 earnings growth is expected at both companies.

When I bought LLY,  November 1, 2016  at $73.30 I did it because the calls were so lucrative.  I immediately sold an $80 call with an expiration date of 1/20/2017 for $2.43. This call expired without action.  During the waiting period I collected the November dividend.

LLY's stock price languished in the  $75 to $77 range.  Not long after the above call expired, I sold another call ; a 4/21/2017 with a strike price of $80.  I was not so sure how LLY was going to perform and I was willing to let someone take it.   In this post I am only covering this 100 shares but I will tell you on a later date I received $3.94 for an $85 call.  Calls were robust but once I sold the 4/21 $80, I was stuck with having to sell if the call buyer exercised their option to buy my shares.

That is indeed what happened and Lilly scooted up to $86.34.  I was sure my $80 was gone.  LLY then backed up and closed at $81.89 and that was good enough for the call buyer; they took my shares.  The table below shows the details.

This trade illustrates the lost opportunity of having to hold a stock because it is on call and not being able to sell it when it surges.  The next two calls show how you can get stuck with a looser using covered calls.

Kohl's $47.50 4/21/2017 - A wash

I bought Kolh's, symbol KSS, on January 6, 2017 at $41.50 and I immediately sold a $47.50 April 21, 2017 call and received a premium of $2.01.  This call expired this last Friday and I received the March dividend during the waiting period.

You will see in the table below that KSS has not been an awful trade.  It closed at $40.07 on Friday so the call buyer did not take these shares at $47.50.  I am hoping to sell more calls as I would like to keep the stock in view of their robust dividend; yield is 5.62%.  With the income from the dividend and call, I technically have a wash.  But it is a loss on my basis and that is always worrisome in an industry like retail.  

Gilead $77.50 4/21/2017 - Stuck with a loser

Gilead, GILD, is a real stinker.  I wrote up an article about why I like GILD even though it is hanging around the 52 week low.  This is one cheap stock with a pretty good balance sheet.  I don't know how long it will take to turn it around but with a yield of 3.1% and still good earnings, I am suffering with this holding.  

I bought this lot of GILD on August 16, 2016 at $79.59.   I immediately sold an $85 10/21/2016 for $1.10.  Again during the waiting period, I received the dividend but the stock price was gradually sliding to around $75.   That call expired and January 30, 2017, I sold another $85 call.  This one had an expiration date of 4/21/2017 and I received a premium of $.90.   The table below has all information.

Since I sold the April call, the stock price has eroded.  It closed at $65.93 on Friday.  I don't like having an investment with a 17% loss and this illustrates the perils of using covered calls.  It I may be too late to sell.  Covered calls barely help soothe the pain.

Covered calls are a two edged sword even when employed on dividend stocks.  When I look at all 9 calls I had working, 2 were assigned and 7 expired.  GILD is really the only stinker. 

Qualcomm, QCOM, and National Health Investors, NHI,  like KSS are weak.  Eaton, ETN, and International Paper, IP, are winners like MSFT.

I will still use covered calls on dividend stocks as it has been a winner but you should be aware of the risks and I hope this post helps you.

M* MoneyMadam

Disclosure: Long MSFT, LLY, KSS, GILD, QCOM with calls.  Long ETN, IP, and NHI.