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