Sunday, June 24, 2018

2018 Call Portfolio

In 2018 I am tracking a portfolio that is designed to deliver income mostly through call options.

It is a limited portfolio with a basis of just over $68,000.

This $68,000 has already created over $4,000 of income.   I like this kind of income.

This is not a growth portfolio and the stock price of the stocks is almost irrelevant.  I made a big mistake buying RIOT.  I have been able to sell a couple of calls on it.  I don't sell holdings in this portfolio especially at such a loss so I am holding my mistake RIOT.

GILD is underwater but I am collecting a nice dividend and have sold one call.  I look everyday for the next call.  My strike price on GILD will not be lower than my basis.

Today I sold calls on the 200 shares of QCOM.  I need to keep working this limited portfolio and I will post my trades as they are executed.


I always tell people, you can really only expect to generate about 5% pure income for spending on a retirement portfolio.   However, if you can master using covered calls, this portfolio proves that more income is possible.  Over 7% in yield so far.

M* MoneyMadam
Disclosure:  Long all positions with the calls noted

Thursday, June 21, 2018

Three calls three different reasons

Calls are the oddest things.  Sometimes you need an up market to get good premiums.  Other times, like this week, you can get good premiums during a down trend.    You should not sell calls on your coveted income stock willy nilly.  You need a reason.

  • Sell calls on stocks when fundamentals such as D/E (debt to equity ratio) change.
  • Sell calls on stocks when EPS (earnings per share) are less than the dividend even when the dividend increases are substantial.
  • Sell calls on stocks that pay yield less than you can get from a 10 year U.S. Treasury.

Below are three calls I sold today.  Each one for a different reason.

Home Depot (HD) - high debt

I think Home Depot is a much better product than Lowes.   However, Home Depot carries a high debt load.  The balance sheet hawks will argue that HD has the cash flow to service the debt and they are correct. HD has an interest coverage ratio of 13.51 according to MSN Money and verified by Gurufocus.  

For those of you new to terms like interest coverage ratio, see the link below which explains it well.
The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.

My readers know, I just don't like stocks with big debt.   All you need a precipitous drop in free cash flow to render the company a troubled asset.    I am cautiously holding HD.  I have no reason to think they will suffer a major disruption of business that would make them lose significant value or even go belly up.

With a yield of only 2.07% and a P/E (price earnings) ratio over 25, I am not afraid of losing HD.  I see selling a call on this stock an opportunity to boost my income.   This is not a risk free move.  I am contractually obligated to hold the shares on which I sell a call.   I could get stuck with a stock that goes down, but again, I do not expect this to happen during the 57 days before the call expires.

In summary, I am selling calls on HD hoping the call buyer will take my shares.  I will have booked good income from the call, the dividends, and then I can reinvest the capital into a higher yielding stock with better fundamentals.

Amgen (AMGN) - Low earnings

Amgen is another stock with a D/E ratio (debt to equity) the is a bit high at 2.27.  However, it is not uncommon for a bio tech stock to carry high debt.  It costs a lot to develop new drugs.

Amgen's yield is almost 3%.   That is marginal.  Yet they increase the dividend vigorously.   Too vigorously for my taste.  Over the past three years dividend increases have averaged over 22%.  The problem is earnings.

Again my readers know I need a stock to create more earnings per share than they pay out in dividends.    Is AMGN using their debt to increase the dividend or to develop drugs?   Earnings are $3.03 with dividends paid out $5.28.

I am not afraid of losing AMGN.   I have a solid gain and have booked the dividends and multiple call premiums.  I would like the call buyer to take my shares.  Look at the price chart, AMGN could very well go above my strike price and the call buyer may take it.  I hope so.

Source:  Schwab, Inc

Apple (AAPL) - Low yield

Apple is a very good company.  It does not have any of the trouble noted above with HD or AMGN.  Apple is stuck in a trading range that has not broken above $200 at least during the last 5 years.  See the price chart.

Source:  Schwab, Inc

I am selling calls on AAPL because I own a lot of apple and the yield is low.  I need to get 5% or more of income on my invested capital.   Calls provide that income.  If I lose these shares, I have more in my pocket.

Basically, I am selling calls on Apple because I can.

Folks, this is good income investing.

M* MoneyMadam
Disclosure:  Long HD, AMGN, AAPL with calls

Tuesday, June 19, 2018

Down market Tuesday 6/19/18

Remember that your dividend stocks with great balance sheets are still a strong hold.

Do not be scared.  If your good stocks drop a lot add to them.

If a good stock with a solid balance sheet that you have always wanted to own over shoots on the down side, buy it.

This is what I am doing.

M* MoneyMadam

Friday, June 15, 2018

Implications of June 15, 2018 Call expirations

Readers of this blog know I use calls, mostly on dividend stocks, to boost my income.  I have summarized the calls expected to expire and those expected to be assigned.  Every call expiration date comes with some uncertainty yet these ten calls are pretty straight forward.

  • Call premiums can be booked as income or as reduction of cost basis but not both.
  • When current price is greater than the strike price, you have lost opportunity.
  • Sell calls on only part of your position to preserve upside potential
  • Carefully selected strike prices makes selling covered calls an income strategy that works for income investors.

Let's first look at those calls that are outside my comfort zone.  

I wrote about taking a flyer on RIOT a block chain stock.   This trade is totally outside of my comfort zone.  I am an income investor.  I like dividends plus call premium income.  If my stock gets called away (assigned,) I expect to receive a capital gain.

Yet, even a disciplined investor like me occasionally makes stupid mistakes.   I was so successful with Twitter (TWTR) and Nvidia (NVDA) that I thought I could pull a fast one and make money on RIOT.

This did not work out well.  I still hold RIOT.  I have not lost everything.  I have received two call premiums and that helps salve some of my pain.   I want to make a point here about using call premiums for income.  You cannot both use the premium for income that you spend to pay your expenses and consider it a reduction of your basis.  Either you keep the money from your call premium in your account or you invest it in another security, but you cannot book the income twice once for spending and the second for cost reduction.  

The table below show how my RIOT trade has worked out so far.  Since I spend my income, I do not lower the cost basis.

Note that in the next section, I have included another trade on a stock that does not pay a dividend.  That stock is Novocure, symbol NVCR.   This stock was picked by my husband who is my biotech analyst.  You will notice, this trade worked out so far.

Calls I expect to be assigned.

Three calls should be assigned; they are CVX, NTR, and the above mentioned NVCR.  CVX is a bit iffy as the current price is just a bit above the strike price.  When you add in the call premium of $1.64 per share paid to me by the call buyer, they are not in the money if they take the CVX shares.

In my experience, they usually take these stocks.  Energy demand continues to grow with the overall economy and I would expect CVX's price to increase.   If they take these shares, I will be happy to book the gain and I have more shares on which I did not sell calls.

Nutrient symbol NTR is the successor to Potash.  This call and the NVCR call are examples of lost opportunity by selling calls.    If I really wanted to sell these two stocks, I would make more money selling in the open market rather than writing (selling) calls with a defined strike price.  This is because their current price is higher than the strike.  

The lesson here is to sell calls on only part of your position.  You get the call premium, dividends during the holding periods, and capital gain when the stock is called away.  If you continue to hold additional shares, you can participate in upside potential as well.

Calls I expect to expire.

These are the stocks I love.  They pay good dividends and those dividends tend to go up.  I sell calls above my basis so if they are called away (exercised or assigned,) I get a capital gain as well.  If they expire, I just keep working the calls to boost my income.

The table below illustrates the results of my favorite strategy for covered calls.  I love it when calls expire.  I just keep working them over and over again.

It is difficult to sell new calls right around the upcoming expiration date.  Wait until next week and start working those calls again.   This is an excellent strategy for income investors.

M* MoneyMadam
Disclosure:  Long all names with calls

Thursday, June 7, 2018

Two income ideas for this pricey market

Marty Zwieg (may he rest in peace) said "don't fight the fed. and don't fight the tape."  It is hard to buy into a hot market, but when you need income you have to deploy capital.  I am hoping Marty was right.  I am not going to fight the tape with two ideas for today.

  • Don't fight the tape, employ capital for income

  • Pristine balance sheets are very important for income investors

  • Covered calls are an income investor's friend

  • Do not ignore the risk of compromised upside potential when selling calls

Both of these stocks have pristine balance sheets.   A solid balance sheet does not mean a stock's price will not go down but it does go a long way toward making sure the company can continue to pay the dividend and that the company will not go down.

Every income investor needs to be confident that dividends will continue and hopefully increase.  We need to protect our principal since most of us are not working any more and depend on our money at work.  Covered call opportunities are icing on the cake for income investors.

Let's look at the fundamentals of the two stock ideas for today:   CVX and INTC.

Chevron - CVX

Chevron has been through a very rough patch.  Between the years 2014 and 2016 their revenue was cut in half.   The stock price suffered and earnings were less than dividends paid out for a while.  But things have turned around with the increase in oil prices.

During the bad years, CVX, increased the dividend but not by much.  Their average dividend increase over the three year period of May, 2015 through May, 2018 was only 1.55%.  This too has changed.  CVX's most recent dividend increase was 3.7%.  I really like a 4% dividend increase but 3.7% is o.k. Since CVX has a yield of 3.53%, it beats any U.S. treasury available today.

The table below presents the fundamentals I use to evaluate my income stocks.

In summary, CVX has a good balance sheet, increasing revenues, earnings per share greater than dividends paid out and a growing dividend.  These are good fundamentals.

Intel - INTC

Intel is a totally different stock than CVX.  What they have in common is the solid balance sheet, growing revenues and growing dividends.   Take a look at INTC's fundamentals presented in the table below.

Both stocks carry a current P/E (price earnings) ratio in the mid 20's.   Both companies have enough earnings growth that their forward P/E's are expected to be in the mid teens.  This is somewhat comforting as we don't like to buy stocks that are too expensive during times when we try to not "fight the tape."

CVX is more vulnerable to price fluctuations than INTC because CVX is dependent on the price of oil whereas INTC is not dependent on any one factor.  Technology will continue to develop and I believe Intel will not be left behind.

Covered Calls on CVX and INTC

Both of these stocks have calls that are intriguing.  Remember with calls you risk limiting your upside potential.  Therefore, you may want to sell calls on only part of your position.  If you are like me and feel there is always another stock to buy if you lose your shares in either stock, then you can make this a short term income trade.

Calls on CVX

I found two calls I like on CVX.  One expires in August and pays you 1% yield on the strike price of $135.   However, the ex-dividend date is just one day before the call expires and the call buyer could exercise the call just before the ex-dividend date and you get only the 1% premium plus the capital gain.

In the second call, you have to wait until September for the call to expire but you get a 1.5% yield from the call premium and most likely will receive the dividend as well.  If exercised, you will receive the same capital gain.

Call on INTC

The Intel call is more straight forward.  I selected an August 17, 2018 expiration date with a strike price of $60.   The premium on this call is $1.08.   INTC's ex-dividend date is expected to be about August 4, 2018 and you should receive the dividend of $.30 provided the call is not exercised early.

These are two ideas to consider.  I executed all three today.  I bought more CVX and INTC and sold the two CVX calls and the INTC calls.  Let's see how we do.

M* MoneyMadam
Disclosure:  Long CVX and INTC with calls

Tuesday, June 5, 2018

Updated Portfolio Summaries as of June 5, 2018

As an income investor and reader of this blog, you cannot lose sight of our major investment objective which is to retire with income that grows.  Dividend Machines are the stocks I use to create ever increasing and safe income over time. I also use covered calls and discount bonds in my three legged strategy to create retirement income.

No strategy is perfect.   Take a look at how the dividend strategy has worked by reviewing the portfolios created so far.   Only you can decide if this strategy is for you.

To review the criteria I use to select a stock as a Dividend Machine, please click on the page Dividend Machine Criteria. 

Good Income Investing,   M* MoneyMadam

Wednesday, May 30, 2018

AMGN has me worried therefore selling calls

I have held AMGEN, the pharmaceutical company, symbol AMGN, since 2017.  I am getting a bit nervous about this dividend growth stock.  When I get nervous, but the stock is still doing well, I sell calls that are close to the current price but fetch a big premium.

  • Dividend Growth alone is not enough
  • Revenue growth has to keep up with dividend growth
  • D/E ratio is important but can be above 1 in a growth stock
  • Covered calls  reduce cost basis

Let's first look at AMGN's dividend growth stock fundamentals beginning with the dividend.  Amgen's most recent quarterly dividend (ex-dividend date was May 16, 2018) was $1.32.   On an annual basis that is $5.28 per share.  AMGN is trading at $179.23 as I write bringing the yield to 2.945%.  

You could not ask for a more robust dividend growth history.  Just over the past 3 years, AMGN has increased the dividend from $.79 in 2015 to $1.32 in 2018.  That is an average annual increase of 22.36%.   Very impressive.

A dividend growth investor has to like this story.  While the dividend yield is competitive with the 10 year U.S. Treasury, the dividend growth is compelling.

Next let's look at the other fundamental criteria I use to evaluate my dividend stocks.  This includes earnings per share (EPS) which I always require to be greater than dividend paid out.  Other criteria are revenue growth and debt to equity (D/E) ratio.  

See the table below which presents all the criteria I use.  

The issues I have with AMGN are poor revenue growth and high D/E ratio and EPS.   EPS are a little out of wack.  AMGN took a one time charge that reduced earnings well below the dividend paid out.  However, this is not a permanent situation.   Their most recent quarter shows they are back to making more in earnings than they pay out in dividends.

I am much less concerned about D/E ratio because a biotech has to spend a lot of money to create a new drug and get it to market.  However, since 2015 revenue growth has been anemic.   When revenue growth is anemic the cash needed to fund those big dividend increases can be inadequate.

We income investors are always being warned to not chase yield.  Certainly 2.945% is not a great yield and we could not be accused of chasing yield but the we could be accused of chasing dividend growth. Without revenue growth, dividend growth is in jeopardy.

I am selling calls on my AMGN and here is the call I sold today.

I was able to find a strike price that is about 10% above my basis.  The sweet spot was an expiration date of July 20, 2018 just 51 days away and the premium of $3.11 was hard to turn down.

If I get stuck with AMGN after the call expires, I am hoping I can either sell more calls, which reduces my cost basis or I can sell the stock at a profit after the next ex-dividend date.

This is how I work my portfolio.

M* MoneyMadam
Disclosure:  Long AMGN with calls

Thursday, May 17, 2018

Update to 2018 Income Portfolio

Updated 2018 Portfolio

Some don't add to losers but I do when the fundamentals are still good.  Remember this blog concentrates on income and income that grows.  

Wednesday, May 9, 2018

Working the 2018 Call Portfolio

Today, I sold another call on AAPL.  I went out a little further than I normally do using an August 17, 2018 expiration date.   Going out this far does provide for two dividend payments. One of those has been declared and the ex-dividend date is 5/11/2018.  I expect the next quarterly dividend to carry an ex-dividend date of 8/10/2018.  The first dividend is $.73 and since the dividend was just recently increased, I anticipate the second dividend to also be $.73.

AAPL - August covered call

The table below uses my covered call calculator to present the data on this trade.

AAPL - Part of 2018 Call Portfolio

This year I wanted to put capital to work to create income.  The stocks in this portfolio are different from my dividend machines.

The point is to record and measure how this strategy works out.  I have to get 5% income from my portfolio.  At 5% I create enough income to make required minimal distributions without having to tap my capital.

The table below shows AAPL specifically and the second table shows the total 2018 call portfolio.

This portfolio has $68,222 in capital working to create income.  Current yield on that capital is over 6%.

M* MoneyMadam
Disclosure: Long RIOT, AAPL, NUE, GILD

Wednesday, May 2, 2018

Starter Portfolio of 5 percenters

I write for the individual, ordinary investor who wants to manage or monitor their own income stocks.  In this post I am looking at stocks that I call my "5 percenters."   These stocks are intended for retirement accounts.  Therefore, the universe of stocks does not include master limited partnerships due to their complicated tax implications.

  • Three percent is not enough
  • A pristine balance sheet is critical
  • Value is important
  • Dividend increases are desirable

Three Percent is not enough

When you can buy a totally safe instrument such as U.S. Treasury bonds that pay you 3%, why would you risk exposure to a stock?   Reasons are: (1) you either don't really need more than 3 % to live or (2) you think there is stock appreciation potential which you will tap for income by selling some shares. 

I have never been comfortable with the idea that I have to sell some shares to meet my income needs. Perhaps I have been in this business too long and know what can happen to stock prices in what seems like an instant.   1987, 1992, 1994, 2001 and of course the 2007 - 2009 debacle are fresh in my mind.

Another reason is my very low risk tolerance, especially in retirement account investments.   Once you retire, you cannot re-fill the coffers should you suffer a loss.  Moreover, so many people end up selling during a rout instead of waiting it out.   

You can wait it out better if you know your income will continue during times of turmoil.  If you don't look at the stock prices and only look at deposits from dividends and interest, you can make it through these difficult times.

I am not suggesting the stocks in my "5 percenters" portfolio will not suffer price declines.  I am suggesting, they will pay you an average of five percent and may even increase your income over time.

Selection criteria

I found five stocks that would make a good starter portfolio for retirees like me who need five percent.  I did not include any MLP's (master limited partnerships) that can deliver really high yields but also have complicated tax implications.

The average yield of these five stocks is 5.22%.  The range is 4.26% - 6.1%.  

Several stocks did not make the cut due to balance sheet issues.  I want a really solid balance sheet as measured by D/E ratio (debt to equity.)   General guidelines suggest a D/E of one or less or within industry standard is a desirable hurdle.  

The average D/E ratio of these five stocks is .59.  The range is .11 - .89.  All are within industry standard.

Earnings always have to exceed dividend paid out and some dividend growth is desirable.  


Let's assume, the investor reading this post has just received their corporate retirement payment.  Now they have to invest it.  You don't want to start by buying high.  Nothing can make a new retiree more uncomfortable than seeing the value of their holdings go down and that can happen in the best managed portfolios.

I am using P/E ratio (price earnings ratio) to measure value.   Current common wisdom suggests many good stocks are over valued.   Stocks are considered cheap when their P/E ratio is under 15 and expensive when their P/E ratio is over 20.   

Growth stocks almost always carry a high P/E ratio.  If you are going to live a full and long retirement, you will need some growth but this post highlights five stocks to consider not for growth but for five percent income.  

The average P/E ratio of these five stocks is 12.20.  The range is 6.61 - 17.64.

My Five 5 Percenters

Years ago when I would advise a client on a starter portfolio it almost always included names like Johnson and Johnson (JNJ).   Today stocks like JNJ pay too small a dividend.  JNJ's yield is not even 3%.   And, JNJ has had some earnings issues making their current P/E quite high although, JNJ will improve that metric in 2018.  

The five stocks I have selected are quite diversified and I am pleased to see that result.  I did not go into this study trying to find diversification, but I did hope to end up with a diversified portfolio.

All data is on the five percenters is presented below.


In the table below, I bought $40,000 worth of each of the five stocks.  You can see the dividend income and yield.

Investors who want to live off of their dividends and interest payments, need to look carefully at this chart.  This chart presents very realistic expectations of income from dividend stocks.


In the table below, you can see the EPS (earnings per share) as compared with dividends paid out.  Also note  D/E ratios of these five stocks.  Finally P/E ratios are displayed.  P/E ratios are based on previous earnings rather than future earnings.  However, when I look at projected earnings the P/E ratios change only a bit.  T's P/E is projected to increase from 6.61 to 9.60 and NHI's P/E is projected to decrease from 17.64 to 12.41. 

Also presented are the dividend increases over the past four quarters.  To calculate dividend increase %, I summed the most recent four quarter dividends, and compared them with the prior four quarters to create the dividend increase %.

Everyone of these stocks has some trouble.  That is why they are considered cheap.  Yet I believe their fundamentals are strong enough that I am using them in my personal portfolio to create 5% income.

M* MoneyMadam
Disclosure:  Long all stocks discussed

Wednesday, April 18, 2018

IBM covered call

I have been away due to a death in the family but I am back and trading again.  Consider this IBM trade.  
  • Revenue Beat $19.1 billion versus $18.8 billion estimate
  • Cloud growth 14%
  • EPS up 4%
  • Dividend Yield 3.8%

IBM is getting crushed today and I decided to take a chance on Big Blue.  I remember a mentor of mine talking about IBM never really creating anything new.  His view was they used their big blue boots to take over new ideas.   Today's IBM is doing the same thing and it takes a while.  

With the positive points listed above what is the problem you might ask.  Well, cloud growth in 2017 was 24% so that suggests cloud growth is slowing.  Forward guidance on profit remained flat at $13.80 per share.  And the balance sheet is not exactly pristine.  D/E (debt to equity ratio) of 2.26 is well above industry standard which is 1.30.   

I can justify all the negatives with the positives noted above. And one theory of using cheap debt is that when invested wisely, it can be the catalyst for growth.   Here is the trade I made today and the call I wrote on it.

Note that I actually think IBM will increase the dividend.  Their latest dividend increase from $1.40 to $1.50 or seven percent was four quarters ago.  I expect a similar increase to about $1.60.  I used the $1.50 dividend in my calculator for total return.  Also note that these calls are volatile and you may get more or less of a premium if you make a similar trade.

My bet on this stock is not for the long term.  Long term to me is over three years.  Rather, I think with the positive news noted in the bullets above, IBM's stock price will rebound.  I will pocket the dividend and the call premium.  If it the stock price does not reach $160 by the time the call expires, I don't expect the price to plunge again.   You never know but that is my strategy on IBM.   If it gets called away, I will be happy.  If it does not, I will probably exit this position.

M* MoneyMadam

Disclosure:  Long IBM with calls

Friday, April 6, 2018

Twitter - 16% iin just 11 days

A high risk trade.   How about 16% increase in just 11 days.   Nice money if you can get it.  Remember however, your upside potential is capped at 16%.  Your downside is you are stuck with Twitter for 11 days and when you can sell it, it could be lower than when you bought.

M* MoneyMadam

Wednesday, April 4, 2018

Risking QCOM loss with call option

I have updated my 2018 Calls.   To remind you, the point of this account is to employ the capital to create income using covered calls.  This strategy varies from my dividend machine strategy.  My dividend machine stocks have to pay a dividend that is greater than the 10 year U.S. Treasury (2.75%.)   I also use other criteria to pick those stocks.

My call portfolio is designed to create income through short term calls.  So far the shortest term call I sold was 4 days on Twitter, symbol TWTR.   The longest duration call so far is a call I sold on Apple, symbol AAPL.  I bought AAPL on January 22 and sold a call with a duration of April 20 or 88 days.  My strike price is $195.  With AAPL trading at about $176 right about where I bought this lot, I think I will be selling more calls on AAPL once this call expires.

Although the overall market is down again today, a number of calls are enticing.  Only one applies to my call portfolio and that is Qualcomm, symbol, QCOM.

I am taking a risk on a Qualcomm by selling a call with a strike price that is below my basis.  I have already sold one call on QCOM that expired.  My basis on that call was $64.87.  QCOM has corrected by over 16% to $54.00  I added 100 shares today at $54.00 which will bring down my basis to just under $60.00.   That makes the strike price of $60.00 more palatable.

I sold two  June 15, 2018 $60 call for $1.31 today.   If I retain ownership of these shares, I should also receive the dividend before the call expires.

I don't particularly like this new call but I am willing to lose my QCOM and move it into another stock with more calls.     I will be nervous until this call expires or is assigned.  If these calls on QCOM are exercised here is my return adjusted for my new cost basis and including both dividends and the call premiums.

One of the interesting sides to publishing my ideas, is I have to face the music when I am wrong or my strategy does not work.  Honest reporting here.

The table below represents all trades made in the 2018 covered call portfolio.  Overall I have a positive view of the economy but I know external influence will keep the market volatile.  Depending on when the volatility affects stock prices will determine how well I do on these trades.

M* MoneyMadam

Disclosure:  Long all stocks with calls listed

Sunday, April 1, 2018

LaSalle Hotel Properties my strategy to exit this position

I am more than a bit frustrated with LHO particularly in regard to their dividend policy.   LHO has announced it will reduce the quarterly dividend.  
  • LHO reduces dividend from $.45 to $.225
  • Income Investors should consider an exit LHO
  • Will call options imply LHO has upside potential
  • Exit strategy is to try to break even

Knowing that a REIT has to pay out most of its earnings,  I think LHO wants to husband its cash to (1) prepare for lower earnings or (2)  defend further acquisition threats.  

Should earnings be high enough that they did  not distribute the required amount in dividends,  LHO reserves the right to pay a special dividend in 2019 to make up the difference.

Every year LHO pays out their undistributed earnings in January.  I do not think LHO is suggesting this would be a major event; one that would make up for the dividend reduction.    This makes me think LHO is worried about earnings.   Perhaps I am reading too much into this but I see no confidence in their own plan.

An Income Investor should exit LHO

As an income investor, I cannot stomach income cuts.  I need a strategy to get out of this stock.  Should I sell everything right now.  I will receive their last $.45 dividend as the stock was ex-dividend on 3/29/18 so I can sell on Monday and still get that dividend.

But what about the implications of the PEB buyout offer.  It was a weak offer valued at about $29.95 or where LHO stock is trading. Yet this offer could suggest PEB or another company might up the offer and the value of my shares could still go up.  Selling now could be foolish.

Covered Calls could suggest upside potential

After the dividend reduction, LHO will still yield about 3%.   I am getting paid while I further determine if there is upside potential for LHO.  I still want to exit this stock.  It is one of my rules, get rid of stocks that cut dividends.   But, my rules don't say sell the day after the news.

My first move will be to place an order to sell a call on Monday.  I am aware that these calls are thinly traded and  I may not get my price. Call options can dry up quickly.  However, if other investors think their is upside potential for LHO, they will create a market in call options for LHO.  A lack of options will be a factor in my decision to sell LHO outright.

The table below uses trading prices from Thursday, March 30.

I selected the $30 strike price carefully.  I hope to sell the above call on one half of my position.   My basis, adjusted for dividends, on this lot is $31.30.  With the call premium, I will basically break even.  I can never get back the time value of the money but I will be happy to get out of this position and move it into a dividend growth stock.

I will hold the other half of my shares which are at a cost basis $36.65.  I am hoping there is positive news about acquisition interest in LHO and I can sell a call that will make me whole.  

I won't wait too long.   If the stock price deteriorates, I will sell quickly, lick my wounds and move on.  I just hope the price deterioration does not occur during the time I have to hold LHO to keep my call "covered."

M* Money Madam
Disclosure: Long LHO with open order to sell calls

Wednesday, March 28, 2018

LHO hotel Reit rejects PEB buyout offer

Let's hope this merger rejection will do the trick for LHO, LaSalle Hotel Properties.

  • Dividend Growth does not always lead to future dividend growth
  • One or two underperforming properties in a small portfolio can cause significant financial impact
  • A strong balance sheet provides some safety to holding LHO

Dividend Growth

I bought LHO for the yield.  My basis is $33.45 above the $28.94 where LHO trades today.  Current yield is 7.22%.  Yield on my basis is 5.38%.   Look at this dividend growth chart.  This is the kind of dividend growth that makes an income investor salivate.

As soon as I bought LHO for both the yield and the dividend growth, they stopped the dividend growth.  Suspension of a dividend is devastating but holding the dividend steady is acceptable.

Small Number of Properties

This holding of the dividend is a result of reduced income which in the hotel industry is called "rev par" or revenue per available room.   Some of this is due to increased competition from a growing supply of upscale properties.  Some is due to their Key West Florida property damage from Hurricane Irma.

LHO is investing in their properties as they take on the competition.  During renovations, rev par can be affected negatively on a short term basis.  Will the renovations stimulate rev par in the future?

Solid Balance Sheet

I can live with the over 5% yield on my basis while there are few options to obtain that yield elsewhere. Moreover, I don't think the company is in jeopardy of going belly up.  D/E (debt to equity ratio) is .447 (source ycharts.)  Strength of the balance sheet allows me to continue to hold.

Pebblebrook, symbol PEB, another REIT in this space,  has made an offer for LHO at about $30 a share.   LHO rejected the buyout offer and for me I am happy about that as I would like to get back my basis.  Perhaps, PEB will up their offer or perhaps another acquirer will show up.  Or maybe LHO will stay independent and return to Rev Par growth that will feed dividend growth.

This is one holding I will watch carefully.  I am not interested in PEB with a yield of 4.53% and a much higher P/E ratio than LHO (PEB = 29 and LHO = 18.)  PEB also does not have particularly impressive revenue growth.

Clearly, in this case, dividend history was no predictor of future dividend growth.  With a solid balance sheet, risk is not huge, but I am underwater and will hope for a more robust buyout offer.  At least it is some encouraging news.

M* MoneyMadam
Disclosure:  Long LHO

Friday, March 23, 2018

APPL call in a down market

Take a look at this call for Monday?

M* MoneyMadam
Disclosure:  Long AAPL with calls

Market update?

Whiplash !!!

Monday, March 19, 2018

Investor Fatigue

These weeks of 1,000 point swings are going to continue.  Investors are getting fatigued.  Other factors way on our psyche.

  • Interest rates are going up
  • Price to Earnings ratios are high
  • Domestic uncertainty is evident every day
  • Investors are locking in profits

Rising Interest Rates

The big boys who manage big money and the professional investment pundits worry about interest rates.  After a 35 year bull market in bonds, things have changed.  Their reasoning is that increasing interest rates and its first cousin inflation have a negative effect on stock prices.

The graph above, courtesy of shows interest and stock prices since 1962.  This graph cannot begin to tell the real story because during the entire period of time interest rates were going down and stock prices increased.   

You might notice that stock prices have been up and down over the past 20 years and interest rates were pretty steady.   

Closer inspection using the period 2010 through 2012 is more revealing.  Again from marketoracle the graph below comparing interest rates and stock price reactions.

For me, the interest rate argument does not affect my stock picking at this time.  I am starting to ladder some certificates of deposit but I have not yet bought any new corporate bonds.  Just taking this move steals assets from the stock market so perhaps interest rates do have an effect if only to be competitive.

High P/E Ratios

I look all the time at stocks that have been good performers in the past and I see them over priced.   Look at Caterpillar, symbol CAT.   Caterpillar is one of only a couple of stocks that I added twice in any single portfolio year.   The portfolios that I publish have to hold but I don't.  

I lost CAT to a call at $120 and it is now trading above $150 and has been as high as $173.  Truly lost opportunity, right?  So does the $150 a share seem like a bargain?  No.  Why? Because CAT has a P/E ratio of 120.  Will, CAT ever be back to $120, I don't think so. But I cannot invest in an income stock with a P/E of 120.  

Sticking with CAT as an example, if their earnings improve as they are predicted to do so and the price stays basically the same, the forward expected P/E ratio is about 15.5 (source  Moreover, they will finally have returned to earning more than they pay out in dividends.  What if those earnings don't show up?

This is the biggest conundrum, I believe.   The stock market is priced to expect very significant earnings increases. Those stocks that deliver will be rewarded.  Those that do not will be punished.  Some that are punished will unfairly suffer if their previous quarter was good and the expectations are just too much to ask for.    These are stocks I will be looking at.

Current S&P 500 P.E. ratio is 25.99 which is quite high.  See the table below (again from marketoracle) showing long term P/E ratios.

Domestic Uncertainty

CNBC reported during the end of trading today, they thought there was rotation into international stocks.  Investors do think the U.S. is a bad place to invest.   They rotate because they think the international market is better at this time.  

Trade and tariff issue are in the news hourly.   Clearly it was a trade and tariff issue that culminated in the colonies leaving the Crown so trade issues cannot be ignored.  Look at Whirlpool, symbol WHR.    The government gives them a carrot by restricting cheaper Asian washing machines then hits them with a stick by increasing the cost of the metal they need to make their washing machines by putting tariffs on imported, cheaper steel.

They always say the market can handle good new and bad news, it cannot handle uncertainty.  We have uncertainty and this is one of the catalysts leading to investor fatigue.  Investors have not pulled totally out of the market.  There has not been the "c" word:  capitulation.   Investors, especially income investors are just going to sit and wait until a real opportunity is revealed.

Taking some Profit off the Table

I bought a few stocks a few weeks ago when the market had a bit of a correction.  Most of the stocks I bought were for income and income growth but I did play a little on some growth stocks. I sold calls on the growth stocks and they were all taken last Friday, thank goodness.

Now I look at stocks like XOM and WMT and I am underwater on the shares I added during the "correction."    I am not interested in selling these stocks as over time I still believe they will deliver the mail box money I need.  But I am not interested in buying more at this point.  I will reinvest dividends during these weak times.

Also during this time, I sold calls on some very good stocks that have tepid dividend yields and high P/E's such as AMGN.   AMGN has a P/E ratio of 71.   I was glad the call buyer took about half of my shares.  I am totally willing to lose AMGN.  However, should AMGN correct enough while growing its earnings enough to lower the P/E, I will be back in.

In the meantime, I am holding onto the cash generated by having call options exercised.   I actually am putting it in 30, 60, 90 and 180 day paper.    This relieves some of my investor fatigue.  

M* MoneyMadam

Disclosure:  Long CAT, XOM, WMT and AMGN with calls

Thursday, March 15, 2018

Nucor Earnings

Nucor, symbol NUE, earnings update.

M*   Long NUE with calls

Tuesday, March 13, 2018

Breaking all my rules with these trades

I want to increase the cash flow from my portfolio. To increase cash flow, covered calls are a technique used by many portfolio managers.  Covered calls are the only options I sell and the only options I write about in this blog.  I decided to employ some of the capital in a Conversion Roth IRA and I decided to take more risk than in my dividend growth portfolio.

  • Short expiration dates with high premiums
  • Continue to sell calls even on stocks that are underwater
  • Exit strategy for dividend paying stocks is to have them assigned.

Let's take a look at the stocks I bought so far and the income generated.  I am not concentrating on growth companies or value companies.  I am looking for stocks with vigorous calls.   Although I expected to roll the calls quickly using expiration dates not far out.  However, I have deviated even from that idea with at least one stock and that is call I sold on RIOT a very speculative block chain stock.  

QCOM:  Qualcomm

Qualcomm was the first stock I bought at $64.87.  The $70 call on QCOM which paid me $1.25 will expire this Friday 3/16/2018.  Based on how QCOM is trading with the news that their being acquired by Broadcom is dead QCOM is below my cost basis.  Therefore, I expect the call to expire.   I will immediately  begin looking for another call next week.

QCOM has the advantage of providing a nice dividend. My cost basis is $ 63.12 when including the call premium and the dividend.  I do not have an exit strategy on QCOM and I am hoping to work the calls to yield significant income.  

NUE:  Nucor

I invested a lot of money in Nucor: 400 shares at $66.60.  I sold a February $70 call and received $1.35. The call expired and I immediately sold a $72.50 call on all shares with an expiration date of April 20, 2018.  Like QCOM, Nucor pays a dividend which I should get provided my shares are not called away prior to 3/28/2018.  My cost basis is now $63.82.

Again, I do not have an exit strategy on NUE, I will continue to sell near the money calls with short duration expirations and high premiums.

RIOT: Riot Blockchain

RIOT is a total departure from my typical strategy.  I bought this stock at $21.08.   My first call yielded quite a nice income of over 10%.  But the stock has crashed and burned.  My first call expired and I immediately sold another call but had to go out to June to get a decent premium of $1.00.    Right now my cost basis is $21.08 less the income of $3.25 or $17.83.

RIOT could go belly up by then, it could also easily go up enough that my stock is assigned at $12.00 and I would have lost $5.83 or 32.679%.  My exit strategy is to have this stock assigned or have it go belly up.

AAPL:  Apple

And then I invested in AAPL at $176.98.  My first call for a strike price of $195  expires on April 20, 2018.  I received a call premium of $2.25 and the dividend of $.63 making my basis $174.15.  Today Apple is trading at about $181.30 so I am in the money but not yet at risk of having my shares called away.   AAPL's all time high is $183.50.

Like every stock that pays a dividend, my exit strategy is to have this stock called away at some point while I sell calls as often as I can at the highest premium possible.

TWTR: Twitter

This trade is more emblematic of what I want to do in this account.   I bought TWTR at $25.91 and sold a call with an expiration of just 4 days away.  I received $1.15 for the call.  It was exercised at $27.   My income on this stock is 8.64% in just four days.  

Twitter is also an example of how selling covered calls limits upside potential.  Today TWTR is trading at $34.185.   You could buy TWTR today and sell a call 31 days out (4/13/2018) at a strike of $36 for a premium of $1.10.   Not as compelling as the four day call.

I am going to bank my money from Twitter and use it to fund my next buy.

GILD:  Gilead

And that next buy was Gilead at $79.99.  I sold a May $87.50 call for $1.10 and I should receive the dividend of $.57.  Like the other dividend stocks, I do not have an exit strategy other than having this stock called away.  

Gilead's high is $123.37 and I just may have my shares assigned.  If so I make 11.72% in a very short time frame.   If my call expires, I will continue to sell calls.

The Table below presents all the information on these trades.

I currently have $62,822 working and my yield so far this year is 4.51%.  As with all my portfolios, I will report on the results no matter what the outcome.  I write up these ideas so I can learn, as I hope my readers learn, what works and what does not.

M* MoneyMadam

Long: all stocks in the table with calls.  

Wednesday, March 7, 2018

High Yield Bond - MoneyMadam's history

High Yield Bonds were enticing for income investors, including me, while we were in a low interest rate environment.

  • High Yield Bonds are not for beginners
  • Pay a steep discount
  • Risk is high

Since I started writing this blog about income investing,  I invested $81,670 in high yield bonds.  Each buy was for 10 bonds.  Eight different bonds make up the portfolio.  

TheMoneyMadam's High Yield Bond Portfolio

The table below lists the bonds I bought with CUSIP, coupon rate, and maturity date.  The portfolio holds only one of the eight bonds.  The others defaulted, were redeemed or tendered.  

It was a rocky and mostly unsuccessful venture.  My $81,670 turned into $72,949 not including income.  That is a 12% loss.  When adjusted for income the loss is cut to 4% but I don't like losing money.

If you read the dividend ideas on this blog you will see over the same time frame, I bought $875,687 worth of stocks.  The high yield bonds make up about 9% of the investments that I track in my portfolios. That alone is a good lesson. If you are going to take risk, you must keep it to a minimum.

It is a tricky business that requires even more due diligence than buying a dividend stock. Bonds are distressed for a reason and that is risk.

Entering a Bond Bear

As we leave the 35 year bond bull market and enter what I believe to be a 20 year bond bear market, high yield bonds are not as necessary even though they can be very rewarding (see Noble Energy Bond above.). 

I intend to ride the new cycle of increasing interest rates.  For average risk bonds I would like 5% for five years.  When bond prices decrease enough that I can get 5% for five years, I may change my mind and want more.  We will see.  

Since I believe interest rates are going up, I think there will also be high yield opportunities.  There is always some company that needs to pay just a little more to get financing.  It is our job as investors to find the right companies.

As I find bonds I like, I will write them up on this page and I will add them to the portfolio so you can measure how I have done.

M* MoneyMadam

Disclosure:  Long Cinemark Bond However since the price is above par, I am tempted to sell soon.  However, the next call price is $102.563 in April.  I may wait until that call date.

Tuesday, March 6, 2018

Added more Chevron now selling a Call

I have been an owner of Chevron for a long time.  Chevron, symbol CVX, is in my 2011, 2012, 2013,2014 and 2015 portfolios.  Then the price of oil crashed creating major chaos in the oil companies.  I added and then sold a call; my reasoning is presented below.

  • EPS have returned and now exceed dividends paid out
  • Dividend yield far exceeds 2 year U.S. Treasury
  • Dividend growth returns and exceeds inflation
  • Balance sheet is strong as measured by D/E ratio

Recently, when the over all market weakened I added some more CVX at $113.15.  This did not seem wise when CVX traded at $108.90 intraday on February 22, 2018.  I am reminded that you cannot pick a precise bottom.

CVX Fundamentals

Chevron's earnings have finally rebounded as the price of oil has improved and CVX has made some structural changes.  Finally E.P.S (earnings per share) are exceeding dividends paid out.

Fundamentally, Chevron's 4% yield provides much better retirement income for me than a 2 year U.S. Treasury.  Moreover, dividend growth has resumed.  CVX's most recent dividend increase from $1.08 to $1.12 is an increase of 3.7%.  I prefer 4% dividend growth but 3.7% beats current inflation.

Chevron's dividend history is interesting.  They don't suspend the dividend but when they need to husband cash, they will provide a minimal dividend increase.  When cash flow is more robust, Chevron shares it with its share holders.

Lastly, Chevron's D/E ratio is a mere .2855 which is quite low for a company that needs a lot of money to do their work.

Selling CVX Call

Today, Chevron is trading above $114 so I am finally in the money of this latest lot.  I sold a call today that varies a little from my routine.  I selected a June 15, 2018 expiration date.  This is about 10 days longer than I usually go out.  My reason is to get the May Dividend.  May's ex-dividend date has not yet been announced but it should be about May 17 and the May call expires May 18.  Therefore, I selected the June expiration.

See the table below for the trade details.

I intend to stay long CVX but it is not the only oil company I have in my portfolio so I don't want too much.  Overall, I am encouraged by a few articles in the Wall Street Journal today about the strength expected in the price of oil which will help CVX and my other oils.

If the call buyer does take my extra share, that is fine with me.  I love a greater than 12% gain in under 120 days.

M* MoneyMadam
Disclosure:  Long CVX with calls
Boost your yield on CVX to over four percent this year!