Monday, November 26, 2018

Unilever Covered Call adds 3% to yield

Income investors know when the market is up, look for calls on your dividend stocks.  You can click on my Call Options page to learn more about call options.

Unilever for dividend and call income


Unilever, symbol UL, like Proctor and Gamble sells branded consumer goods.  All stocks in the space suffered but today UL is above my cost basis.   The point of this post is to illustrate how you can take a stock like UL that pays a 3.39% and increase your income by another 3%.

The way it works is to sell to another person the right to buy your UL shares at a strike price greater than your basis.  The call buyer pays you a non refundable premium for that option.

When you select an expiration date after the next ex-dividend date, it is highly likely you will receive both the dividend and the call premium as income.  This is not guaranteed.  If UL stock price soars, the call buyer might buy it from you before the next ex-dividend date.  You still get the nice gain and the call premium but you could lose the stock and the next dividend.

Calls Increase Income from your Nest Egg


I strive for an average income from my dividend stocks of 5%.   You could put all your nest egg in At&t (symbol T) or Ford (symbol F) and get more than 5%.  But, most of us need more safety and more diversification than just these two stocks.  I own both T and F.   I also own UL and this stock provides some international diversification and call option opportunities.

Take a look at the call I sold today.






I want to emphasize the over 14% return is only possible if the call buyer actually executes their option and buys your shares at $55.00.    Calls expire 90% of the time.  Therefore, as an income investor, you must be prepared to keep your UL shares even if they tank during the time you cannot sell them because of the option contract.   You will still receive your dividends from UL but you could be underwater on your basis. 

Income investors need to concentrate on the additional yield they receive from selling calls with a strike price high enough that it is most likely the call will expire useless.  Even when the call expires useless, you keep the call income and the dividend income.   In the UL example, your total income over a year would be the dividends plus the income from this call premium.   Let's use UL's  last four dividend payments plus the call premium and you get $3.306 per share for an annual yield of 6.62% on my basis.

If I lose UL, there is always another 3.39% yielding stock to buy.

M* MoneyMadam

Long T, F, UL with calls

Sunday, November 18, 2018

BIg Yield Portfolio - Can you get more than 5% from Dividend Stocks

A 39 year old successful man doing work for me asked me what I thought he could get in cash flow if he had a million dollars.  My standard view recently is to first remind him that any advice is worth what you pay for it and then to deliver the uninspiring number $50,000.

For someone dreaming to be a millionaire, the realization that safe income from a million dollars is about 5% can be disappointing. You could get a job earning $25 an hour and make that income. I could hear him calculating how many millions of dollars will he need to replace his current income?

  • Dividend Stocks should be one source of income
  • Dividend Stocks can increase dividends
  • Dividend Stocks with revenue growth may be able to increase stock price
  • Always remember Dividend Stocks can decrease in value and decrease or eliminate the dividend

You have worked and saved and now you are retired.  You have a sum of money to invest in the basket called Dividend Stocks.  You don't want to earn $25 an hour, you want to live off of what ever your multiple sources of income can create one of them being your Dividend Stock portfolio.

Can you get more than 5% from a stock portfolio with "Dividend Machine" quality fundamentals? I say yes and here are the stocks I would buy.

In the table below you see a $200,000 portfolio invested in nine stocks.  The stocks are not equally weighted .  The weighted basis uses closing price on Wednesday 11/21/2018.



11/21/2018
Price
Shares
Basis
Div/Shr
Div. Income
Div Yield
LVS
$51.96
481.139338
$25,000.00
$3.00
$1,443.42
5.77%
MAIN
$37.86
660.3275225
$25,000.00
$2.34
$1,545.17
6.18%
MFC
$16.19
1080.914145
$17,500.00
$0.76
$824.08
4.71%
WDC
$46.90
373.1343284
$17,500.00
$2.00
$746.27
4.26%
T
$29.77
839.7715821
$25,000.00
$2.00
$1,679.54
6.72%
NHI
$75.26
332.1817699
$25,000.00
$4.00
$1,328.73
5.31%
CM
$85.74
204.105435
$17,500.00
$4.17
$852.00
4.87%
WY
$26.68
843.3283358
$22,500.00
$1.36
$1,146.93
5.10%
MIC
$39.28
636.4562118
$25,000.00
$4.00
$2,545.82
10.18%



$200,000.00

$12,111.95
6.06%



In order to invest your precious savings, you need to be sure your investment has a good chance of continuing the high income, some chance of increasing the income, little chance of going belly up, and resilient during down times.   In the table below, you will see important fundamentals that I use to pick my Dividend Machines.



11/21/2018
EPS
DIV
DIV INC
D/E Ratio
P/E Ratio
Rev Growth
LVS
$4.80
$3.00
15.38%
1.75
10.6
3.6
MAIN
$3.18
$2.34
8.33%
0.63
10.5
11.04
MFC
$0.92
$0.76
46.15%
0.33
22
11.02
WDC
$2.20
$2.00
0.00%
0.98
24.8
15.62
T
$5.12
$2.00
6.38%
1
5.9
3.88
NHI
$3.67
$4.00
17.65%
0.89
20.4
8.38
CM
$8.60
$4.17
9.31%
0.13
10
3.81
WY
$1.47
$1.36
31.82%
0.71
16
2.14
MIC
$5.55
$4.00
-11.50%
1.12
7.2
5.05


This is an interesting group of stocks. I mostly like the combined yield of greater than 6%.

Measure of Balance Sheet Safety - Debt to Equity Ratio


Next, I like the debt to equity ratios.  None of these stocks seems to be in financial distress.  LVS has the highest D/E ratio at 1.75.   This is higher than 1 but it is within industry standard.  Note WYNN D/E 4.95 as of September 2018 and MGM 2.165 (source Ycharts.)

T has regularly paid down debt and increased equity so their D/E is right around 1.  Competitor VZ carries a debt load of 2.072 (source Ycharts.)

For anyone who looks at this portfolio and thinks these stocks are risky consider their balance sheets.  I like to use D/E ratio but you can delve deeper into the balance sheets of these stocks and be satisfied that this group of stocks is quite safe.

Potential to Continue Dividend Payments - Revenue Growth & EPS greater than Dividend Paid out


Revenue growth starts the funnel to earnings and then dividends.   Finding nine stocks with revenue growth was not easy.   For instance IBM did not make the cut because their revenues growth is not positive.    These stocks all have revenue growth which makes me think there is the potential to continue paying dividends.   We might even find some stock price growth.

We have one stock on the list that is a REIT,  National Health Institutes which looks as if EPS are only equal to dividends paid out.    By law, NHI as a real estate investment trust has to pay out the majority of its earnings.  Many people prefer to use free cash flow for a stock like this.

There are two schools of thought on dividend payout ratio.  The ratio is calculated as how much of earnings are paid out in dividends.  The best of this group is Telephone, symbol T.   Their payout ratio is .39%.

One school of thought on dividend payout ratios is to find a stock that loves to reward its shareholders with income in the form of dividends.   When the company makes money they share it with us.  However, says the other school of thought, when the payout ratio is high, the margin for error is low and could mean a dividend reduction or suspension could happen.

Dividend increases.


One of my mottoes is to retire with income that grows.  I used to tell my clients to go back 20 years and list some of the same expenses you had back then that you have now and you will find they usually double about every 20 years.  That means if you retire today, even as a millionaire, your financial plan has to provide for income increases over time.   Let's look at these stocks from an income growth viewpoint. 

Macquarie, symbol,  MIC cut the dividend in half in February of 2018 and the stock had a concomittment reduction in price.   That is when I bought it and I will add because I like the fundamentals post cut.   It still sports a yield of more than 10% and has returned to having earnings greater than dividend paid out.  Western Digital (WDC) a previously overpriced stock is getting earnings back above the dividend suggesting they may be able to deliver dividend increases. Those two experiences are balanced by MFC with annual dividend growth over the past 3 years of 10 plus %.

If, and that if always a big if, these stocks can continue to deliver strong fundamentals, they should be able to deliver income.

Diversification is always important.  I used my Dividend Machine fundamental screens to select this group of stocks.  I did not try to find stocks in industries where my assets are under deployed.  I use only my Dividend Machine criteria to select these stocks.  See the table below to learn about the industries.


INDUSTRY
11/21/2018
Price
Shares
Resorts & Casinos
LVS
$51.96
481.139338
Asset Management
MAIN
$37.86
660.3275225
Insurance - Life
MFC
$16.19
1080.914145
Data Storage
WDC
$46.90
373.1343284
Telecom Services
T
$29.77
839.7715821
REIT - Healthcare Facilities
NHI
$75.26
332.1817699
Banks - Global
CM
$85.74
204.105435
Lumber & Wood Production
WY
$26.68
843.3283358
Airports & Air Services
MIC
$39.28
636.4562118



This group of stocks ended up heavy in the financial services area.  That is where the value is and with a sniff of interest rates increases, they should be poised for a growth spurt.  Remember insurers function very much like financial stocks.  When interest rates go up, they can get more income from their investments and payout less on their deposits and payouts.

We shall see what happens with this portfolio.  Our millionaire will now have about $60,000 annual income with a chance to grow that income.   I don't know about you, but for most of us an extra $10,000 per year can make a difference.   As always I will track this portfolio and report on it.

M* MoneyMadam


Disclosure:  Long T, NHI, CM, WY, MIC, LVS  expect to add WDC and strongly considering moving some existing positions into, MAIN or MFC.