Tuesday, October 23, 2018

A bit oversold on WHR

Today my alert bell rang regarding high call volumes on Whirlpool, symbol WHR.  This stock has suffered mightily because the cost of their materials is going up.  Meanwhile, Whirlpool continues to sell washing machines but their earnings have taken a hit.

I doubt that Whirlpool will go belly up in the next few days.  Therefore, I love this trade.  Buy WHR at just above the 52 week low of $102.85 and sell an October 26, 2018 $115 for $2.20.  Schwab shows 171 contracts traded which shows some serious intent on the call buyers. 

Another idea is the $113 strike price (same expiration) for about $2.70 with over 1,700 contracts traded.

I just think WHR is oversold.  They took a big adjustment against earnings last quarter.  I am not all in on this stock; WHR provides the opportunity to get a high dividend, 4.4% yield, if you end up holding it for a while and the chance for a quick 2% yield on the call premium.

Should you be stuck with WHR after the expiration you can take some solace in the fact that the experts predict WHR's future P/E (price earnings ratio) will be in the mid teens.  

Tomorrow I hope to make a trade similar to the one outlined below.  Let's see if it materializes. The key to this trade is the call yield.  As you know, options' prices vary significantly so you have to be vigilant.

Good income investing.  During volatile times, the vigilant income investor can put money in the bank.

M*  MoneyMadam
Disclosure:  Long WHR with calls

Caterpillar is not going out of business. Adding with a call

Caterpillar (CAT) is part of my portfolio.   CAT can be compelling not because of the size of its products, but the size of the call premiums.   If you have ice in your veins, you might consider a trade like this one.

Note, I did not include the January dividend because the call expires on the day CAT is expected to go ex-dividend.  If we get the dividend that would be nice but this call gives a juicy enough return to go for it without capturing the next dividend.

M* MoneyMadam
Disclosure:  Long CAT with calls

Monday, October 22, 2018

A little risk off - bought a Four Year Bond

Some would not call this a "risk off" trade because the bond I bought is rated B-.  I have dabbled in Cinemark bonds before and you will see the 2023 Cinemark bond already in the bond portfolio is doing well.

Look at the underlying stock Cinemark.  Applying my Dividend Machine criteria makes Cinemark, symbol CNK, look good.  The dividend is around 3% but the bonds are paying closer to 5%. 

I bought the December 15, 2022 5.125% coupon for $96.10 ytm (yield to maturity) 5.437%. The cusip for this bond is:  172441AX5.

This bond is just another feather in the quiver not where I will put all my investments. 

M* MoneyMadam

Thursday, October 11, 2018

New Dividend Machine Eaton ETN

Let's review my criteria for picking a dividend machine and then I will explain why I am adding to Eaton, symbol ETN.

  • Dividend exceeds 10 year U.S. Treasury
  • EPS (earnings per share) greater than Dividend
  • Dividend Growth equal to or exceeding inflation
  • Recent Revenue Growth
  • D/E (debt to equity ratio) less then 1 or equal to industry standard

Dividend Exceeds 10 year U.S. Treasury

This is a hurdle that is hardest to meet as interest rates are going up.   Why not just buy a 10 year Treasury and go play golf.   In 10 years your principal will be returned by the Government but due to inflation the spending power of the returned principal will be diminished.   Using this logic, I can buy a stock with a yield close to the 10 year Treasury if I feel both my principal and income will grow over that 10 years.  (See 1 year graph of 10 year Treasury courtesy of Market Watch.)

EPS must exceed dividend.   

This metric seems so simple but companies with externalities outside their control may need to take a charge off against earnings during a given quarter.   This is not the case with ETN.   With ETN we have a straight forward EPS measure.  

For ETN, earnings at $7.06 far exceed the dividend pay out which is $2.64.   This ratio is often times referred to as payout ratio.  A high payout ratio is a doubled edged sword.   On one hand you would like a company to pay the stock holders as much as possible.  On the other hand, a stock that has a big cushion between EPS and dividend pay out is less likely to cut or suspend the dividend.  For conservative investors, this is critical.

Dividend Growth

All the time I helped other people manage their money I emphasized that in 20 years, your non discretionary expenses will double. I have been through this 2 times and I can verify that for this average girl, the projection is accurate and must be included in your financial plan.

You can ladder bonds as yield go up or you can put some of your income investments in stocks with solid dividend growth.   This post is not to discuss the vagaries of high current dividend versus low dividend yield but high dividend growth.   You must have dividend growth to meet your long term income goals.

Current Annual Inflation Chart

Eaton meets that goal with a 10% dividend increase recently and an average of over 11% increase annually over the past five years.


Recent Revenue Growth

In a previous post I wrote this week, I looked at 5 stocks with a combined average yield above 5%.  I looked at around 20 stocks but finding stocks with positive revenue growth was very difficult.  ETN describes it's business as "Eaton has approximately 96,000 employees in 59 countries and sells products to customers in more than 175 countries."  

Eaton suffers from exchange and tariff issues but prevails as an energy generator despite these challenges.  Revenues in 2015 were $20,855 (m) and in 2017 $20,040 (m).  That is flat to down a bit.  However, looking at their two most recent quarters and you see distinct revenue growth over the same two quarters one year ago.

2017 Quarter 1 = $4,848   2018 Quarter 1 = $5,251
2017 Quarter 2 = $5,132  2018 Quarter 2 = $5,487

D/E Ratio

Debt to equity ratio is very important to me.  A pristine balance sheet makes life much easier when we face the head winds of increasing interest rates.  For a power generator, ETN has always carried a very respectable amount of debt.  Eaton's debt to equity ratio is .40 (source MSN Money.)

Dividend Machine Fundamentals:

The table below presents ETN's Dividend Machine bona fides.

I believe Eaton deserves to be a Dividend Machine.  I will add it to my 2018 Model Portfolio that I post in this blog and I will be adding to my current position. 

M* MoneyMadam

Disclosure:  Long ETN

Home Depot debt makes me sell calls

Those who read my blog know I am always worried about balance sheet strength.  I don't care why a company has more debt than usual, then their peers, it makes me nervous.  Moreover, in this rising rate environment, I get even more nervous.

I hear that Home Depot (HD) took on debt to finance stock repurchase and that makes it o.k.  I go to their stores and see the crowds shoving their credit cards into the self check out and I am amazed.  Since there is little entry level housing available, it makes sense people are fixing up their abodes.

So here is my typical strategy. Milk HD for income.  I like their dividend and other's enthusiasm, so I am selling December $210 calls.  Even if I bought today it would be a good trade for call and dividend income because I picked an expiration date that would capture the dividend if, like most calls, this option expires without action. 

My basis over time is around $148.   I am willing to take a risk and lose HD if I don't lose it, I will either sell it or sell more calls.  It all depends on how their fundamentals look after the December expiration.  

The table below presents the details of this call.

Work your portfolio no matter what the broader market does.   Opportunity is there for your taking.

M* MoneyMadam
Disclosure:  Long HD with calls

Wednesday, October 10, 2018

Invest $200 K in a down market - for income M*

I don't know where the market is going any better than you or the experts on CNBC.  However, I know how to use fundamentals to build a portfolio.   I am busy working my holdings but here is a good start for a $200,000 portfolio using closing prices on 10/10/2018.  Be ready when opportunities come up.

Let's look at their P/E's (price to equity ratio) and D/E's (debt to equity ratio.)

Remember my focus, my specialty is income.  I don't have a pension.  My family lives off of the money our savings create.   Think about it.  You have to be ready when opportunities come up.

M*  MoneyMadam

Disclosure:  Long all positions

Thursday, October 4, 2018

Savers need this!

Put a little money in a one year C.D. (certificate of deposit.)  Chose Morgan Stanley 2.5% with an expiration of 10/11/2019 which is one year and seven days.  CUSIP is 61747M6Y2.    If rates go up again next month, I will ladder the next C.D.  

By the way, I could have picked a CD with a 2.65% yield that also is FDIC insured but, I just preferred the issurer is really safe.

M* MoneyMadam

Tuesday, October 2, 2018

Lightening up on INTC

As an income investor, I have to not fall in love with a stock.  Yet, I am a seasoned investor and I like to work even those stocks that I have owned a long time.   Even stocks that I have loved like Intel, symbol INTC.

One technique often discussed among income investors who have built large positions over time is to take your cost basis off the table.   Sell enough shares to pocket your original investment.  Clearly you need a stock that has price appreciation over time to make this work.   

Intel, INTC, is a good example of a stock that over time has had significant price appreciation.  It has been an income investor's friend by paying a steady dividend through think and thin.   And, INTC has raised the dividend consistently over time.  Take a look at the 10 year price chart below (from Nasdaq.com.)

So what's the problem?  

I need 5% income from my portfolio.  Intel is paying 2.49% dividend yield.   I could make up the difference between the yield of 2.49% and my 5% income requirement by selling calls.   But, then you risk losing your position unless you are a very savvy call seller.

INTC delivers strong dividend growth.  Their most recent increase was 10.09%.   However, October of 2011 through November of 2014 the dividend growth was only 2.4% annually.   If we go through rough times again, I have every confidence that INTC will continue to deliver the 2.49% dividend but I also know the calls will dry up and so will the dividend increases.  I will be stuck with only half of the income I need from this investment.

Put all this together and I think it is times to make a change.  I am selling a call on enough shares that if they are called away, I get back my cost basis.   You will see in the table below the return on this trade.   I fully expect the calls to be exercised because I picked a strike price just $1.00 away from where it is trading to day.   Moreover, I selected an expiration date that is only 18 days away.

When they do take these shares, I will move them into a 4 or 5% yielding stock that also delivers dividend increases.  I am not looking for a stock that delivers both high yield and calls.   For the money I get from selling INTC, I want only to double the income I getting right now.

My strategy also includes keeping the rest of my shares of INTC.  I have already pocketed my original investment.  If INTC gets their act together and can meet the demand for chips for PC's, then I fully expect to reap the benefits of these remaining shares through dividend increases and possible call income.

INTC can be considered a boring stock that just cranks out a dividend but faces growth challenges.  Stocks like this can be a drag on your income.   Unless they are raising the dividend well above inflation, one gets the itch to move at least some of it into a higher income instrument.

M* MoneyMadam