Sunday, January 28, 2018

2018 A Value Play for my next Income Stock

AT&T commonly known as Telephone, is a stock that has not participated in this lovely bull run. I like value and find that when I stick to my guns and invest using my disciplined income stock selection criteria, I am eventually rewarded.  Just look at Caterpillar (CAT) or Darden (DRI.)

  • AT&T gains from tax law change should provide long term benefit to its shareholders. 
  • VZ benefits from tax law change will provide price improvements.
  • Income stock fundamentals make Telephone the better stock for income investors looking for value.
Just last week monthly call options expired and a number of my options were called away leaving me with the daunting task of investing the proceeds.  Where to put this money is a challenge as everything seems expensive.

I look back and think about the ridicule of picking Kohl's stock in January, 2017  @ $41.88.  Several dividend payments and call premiums later, I personally no longer own KSS.  I made a nice tidy sum on Kohl's which I considered a value and income stock at the time.  Notice the 2017 portfolio has benefited greatly.   

Symbol Price Basis Date Acquired Forward Annual Dividend Dividend Yield % Gain 
KSS $63.40 $41.88 1/17/2017 $2.20 3.47% 51.38%

Management for the Long Term

Some complain that AT&T is not looking out for its shareholders.   They should take tax benefits and provide a special dividend or at least announce a major hike in the quarterly dividend.   As an income investor, I would like an income surprise.

However, Telephone has not declared a special dividend and that is okay with me because I am investing for the ongoing dividend and the hope for future increases.

I like that Telephone is using much of it's tax benefit to invest in the future.  Notwithstanding the Direct TV and Time Warner acquisitions, AT&T has a long term vision I hope. Some portion of their windfall goes to current employees, some portion goes to investing in the future but none goes to us the share holders and that is ok.

Management for a price increase.

A recent Seeking Alpha article noted that the tax benefits will not help T.   You see Verizon will receive a similar benefit and they will use the windfall to add to earnings.  Price and earnings are related so I would expect Verizon, symbol VZ, to have a price increase.  

The case is well laid out in the article noted here and I agree with it.   Telephone will not be using the tax benefits to add to earnings; at least not yet; and I do think that we will have to wait for earnings growth before we get stock price growth.  VZ on the other hand may do better in the short term.

Telephone Fundamentals

Let's take a look at AT&T's income stock fundamentals.  Telephone closed at $37.82 on Friday 1/26/2018 midway between it's 52 week high and low.  Earnings per share do exceed dividend paid out but not by a lot and that is why T needs to invest in growth.   Debt to equity ratio is a bit higher than my maximum of 1 but the industry standard is also above 1.  Notice Verizon's D/E ratio is much greater than 2.

  T 1/26/2018 $37.82  
  D/E Ratio 1.31    
  E.P.S   $2.07  
  Dividend   $2.00  
  Dividend 3yr Growth 2.13%  

Verizon and Telephone Comparison

Look at these comparisons in the table below and perhaps you will agree with me that Telephone is a good pick for 2018.  Let's see how the year unfolds.  Hopefully we income investors will not only continue to collect the over 5% dividend, the modest dividend increases, and future potential.

Price 52 wk Hi 52 wk Low
T 37.82 42.7 32.55
VZ 54.72 54.77 42.8
Div Yld Last Div ^ 3 yr Av Div ^
T 5.16% 2.04% 2.13%
VZ 4.24% 2.25% 1.64%
3 yr Rev Growth D/E ratio
T 7.51% 1.31
VZ -0.02%
Use of Tax Savings
T Capital investing and 200,000 employees getting $1,000 bonus
VZ Tax savings added to Earnings per Shares (EPS)

On Monday I will execute my trade and record it in my portfolio to track.  I will also invest the same amount of money in the ETF that tracks the S&P 500 called SPY.  Over time, we can determine which was the better investment, SPY or the same amount invested in T.

M* MoneyMadam

Disclosure: Long AT&T
Bought on 1/29/2018 @ $37.27

Friday, January 26, 2018

Avoiding KMB

logoKimberly Clark, symbol KMB, is a house hold name.  I am avoiding it.  D/E ratio is quite high.

KMB is starting lay offs and perhaps that will help but they are also increasing dividends, not a good way to husband cash.  KMB's most recent dividend is 3% versus previous dividend increases of 5%.   To their benefit, dividends paid are only 63% of Earnings.

The debt scares me.

Source:  Ycharts D/E ratio for KMG 25.92

M* MoneyMadam

Disclosure:  I do not have a position in KMB.  I lost it to a call buyer at $103 so I have lost out on the upside as KMB is trading at just over $120.

KMB is in my published 2011 portfolio.  I  bought at $65.06 but with the HYH spin off, the portfolio basis is $59.93.

Thursday, January 11, 2018

First Dividend Stock for 2018 XOM

Good New Year everyone.  I can report to you that I bought my first Dividend Stock for 2018 and it is Exxon, symbol XOM.

  • Low Debt to Equity Ratio (D/E) of a dividend stock is downside risk protection for the income investor 
  • Emerging from EPS weakness when dividends were maintained or even increased is another measure of strength
  • Long term dividend growth is important in a mature stock 
  • Adjusting your strategy to the new normal can help participate in gains but good fundamentals limit risk

I am changing my approach a bit this year.  I built seven pretty successful portfolios using my Dividend Machine Criteria; my 2011 portfolio is up over 130% or 18% per year.   I still want to make sure I am buying solid stocks but I am not going to restrict my buys quite as much.  I am going to deviate from my strategy to adapt to the new normal.

We need to pick stocks for income but limit our risk by using solid fundamental analysis yet this year I want to look at participating in gains by adding to those stocks I trust to deliver income when the new normal breaks down and becomes the same old boom and bust cycle of stocks.

I think we need to be very facile in our investing for 2018.  Our job as income investors is much easier than the investor who needs to create the wealth off of which they live.  We just need to invest our savings in instruments that deliver income and make sure those investments are safe.

The value of these income investments can vary but as long as they continue to deliver income when times are not so good and increase our income when times are good, we can stick with these stocks.

When I look at a stocks, I  must have income in the form of dividends and I really like covered calls where possible.


Debt to equity ratio (D/E) ratio is one of the most available and easiest measures of a company's fundamentals. I will not compromise on this metric.

Readers know I used earnings per share being great than dividend pay out as another measure of safety.  This year I am not going to be so severe a critic of EPS.  If the earnings per share of a stock only barely cover the dividend I won't immediately eliminate it.

For instance in the case of XOM, my first Dividend stock of 2018, this stock continued to pay dividends during some difficult times.   When oil prices collapsed, earnings were not covering the dividend.  Because of the strength of the balance sheet, XOM was able to continue to pay us dividends.  Now earnings are turning around and are equal to dividends paid out.

We cannot be sure that oil prices will stay strong.  However, I am hoping that during the bad times, Exxon used it talent to develop technologies that will improve performance.  They have diversified to include multiple energy sources.  I believe they are a solid company and will maintain and improve the ratio of dividends paid/earnings.


I have summarized the fundamentals I track on my dividend stocks.  I bought XOM on January 3 at $86.78 right about where it is today (1/10/2018.)  The table below summarizes the metrics I track on my dividend stocks and provides the detail for XOM.

  Exxon Mobil Corporation   
  XOM 1/3/2018 $86.78  
  D/E Ratio 0.14    
  E.P.S   $3.07  
  Dividend   $0.31  
  Dividend 3yr Growth 3.86%  

XOM would not have been in my previous portfolios because their revenue growth is negative.  This is mostly due to the price of oil.  However, times have changed and XOM has a better diversified revenue base and oil prices have improved.  In fact in their most recent quarter (9/30/2017) revenue grew by 5.9%.


Based on XOM's current dividend stock fundaments, I think the dividend will be safe when the next bust cycle confronts us.  Stock price may go down if markets suffer a major disruption but XOM will stay in business and it is highly likely they will continue to pay their dividend.

Based on improving management fundamentals, and the sheer size of XOM operations, they have the potential for stock price gains.  With a price/earnings (P/E) ratio of only 22 as compared with Chevron, symbol CVX, of 30, Exxon is going into my portfolio.

M* MoneyMadam

Disclosure:  Long XOM

2011 Portfolio up over 130% or 18.% per year