Thursday, January 24, 2019

CAT calls

I have been busy working a few positions and Caterpillar is one of them.  Caterpillar, symbol CAT, has been quite an income machine but it has also caused a lot of concern.  Caterpillar requires a lot of capital to build and distribute its big yellow machines.   CAT is very dependent on global growth.  I keep thinking some day Syria will be rebuilt and Caterpillar should benefit from that project.  While we wait for these catalysts, CAT is back to my basis. 

  • Waiting for a catalyst to boost Caterpillar's stock price.
  • Selling covered calls with a strike above my basis to capture more income than just the dividend.
  • Willing to lose CAT should the call be assigned because that will lock in gains and will make my portfolio safer as CAT has a very high D/E ratio.

At my age, I need a portfolio that creates income and I cannot live on 2.20% from rolling C.D.''s (certificates of deposit.)  With the dividend yield of 2.61% being less than I need, which is 4-5%, I turn to calls to boost my income.   The first table below shows the dividend machine fundamentals of CAT. 


 


To remind you, I like Dividend yield to exceed the 2 year Treasury at a minimum and CAT meets only that minimum.  Other dividend machine criteria include EPS greater than dividend paid out, dividend growth greater than implied inflation (3.8% annual inflation is a good number to use as it is the average over my investment life,)  

CAT is an excellent dividend grower and right now EPS are greater than dividend payout.  Finally a strong balance sheet is very helpful if you want to sleep at night without fear of the company having to reduce or cut the dividend or even go out of business.

CAT is volatile with a 52 week trading range of $173 - $112 making for some nice calls.  The table below shows a call I sold today.  




I selected a call expiration date of April 20, 2019.  The duration of the call provided a bigger premium.  However, the next ex-dividend date is expected to be right around the call expiration date and this means I may not get the dividend.  Of course, if the call expires as 90% do, I will get to pocket both the dividend and the call premium.  The next table shows the yield with the dividend included.





The difference is the yield from both the call and the dividend.  Unless the call is assigned, I will not book the capital gain, I will book only the combined amount of the dividend and the call premium.

This is just one example of working the portfolio for income.

M* MoneyMadam

Disclosure:  Long CAT with calls


Sunday, January 6, 2019

Intel call premium exceeds annual dividend

During this time of year  Alfred Ferol reminds me that it is time to write down our investment strategy for 2019.    Despite a softening U.S. treasury yield, we decided one goal will be 4% on dividend stocks.  We also agreed that market dynamics support earning more than 4% if we add covered calls.

  • Double your income by selling calls on dividend stocks.
  • Use current market volatility to find exceptional call premium value.
  • Use current market volatility to add solid dividend stocks and sell calls with exceptional premiums knowing 90% of calls expire.

Readers of this blog are not surprised by this approach.  Yet when I look at Intel, symbol INTC, the subject of this post,  I see a stock that to a new investor may not be so exciting.  It is almost like a utility but it pays only a 2.54% dividend yield if you bought today.  Less on your basis if you bought last year.

Yet one of the rules of successful long term investing is to buy stocks that are solid and INTC is solid.  See the table below. 

INTC
E.P.S.
Dividend
Yield
3 Yr Div Growth
D/E Ratio
$47.22
$3.21
$1.20
2.54%
8.33%
0.4
 


The table above are MONEY MADAM's  four criteria for finding a Dividend Machine.  (Earnings per share greater than dividend payout, yield greater than U.S. 10 year Treasury, dividend growth greater than long term inflation rate of 3.8% and Debt to equity ratio of 1 or less or equal to industry standard.)   INTC misses my 2019 criteria on the 4% dividend yield hurdle, but makes the grade on EPS, Dividend growth, and Debt to Equity ratio.  The point of this post is to show how you can work this solid stock for income by using the covered call option strategy.

I present two INTC calls that I implemented last week.  The first table presents data on the call I sold on an existing position.  The second table presents data on the new position I took and the call I sold on that position.  These examples are for 100 shares and 1 call option contract.


Selling Calls on a portion of my existing position:


If I love a stock I don't sell calls on it but there are not very many of those. Do you really ever have a stock that you absolutely will not lose?  Perhaps you do.  Most often we have stocks we would rather not lose even when they are kind of stuck in the mud but income investors can always cash in a capital gain to get more yield.

One of the ways to cash in on a capital gain is to sell calls on your dividend stocks.  Look for calls on your dividend stocks often.  You won't find a good deal everyday.  You may even have to go months before your find option interest.  But, when you do find option interest, you must really consider using call options.

As we get older and need more income and more income increases, we get more picky about the stocks we keep in our stable.   When you can find a stock with good fundamentals but with enough volatility that you can nearly double your income albeit at the risk of losing the stock, it is ok to play in that field. 

Lately we have had big daily swings.  I am not a day trader but these are extraordinary times and I found some calls I could sell on part of my existing position.  If I chose the right strike price and expiration date, I can more than double my income. I was surprised to find this call on INTC.  The call premium of $1.50 is more than the whole year dividend of $1.20.  









Price on Open
Call Expiration


Intel (INTC)
$47.22
3/15/2019


Cost Basis: 
Multiple Lots
$35.60


Strike Price:

$50.00


Call Premium:

$1.50


Dividend
Exp Ex Div 2/6/2019
$0.300







Call Yield on Basis

4.21%


Call + Dividend Yield on Basis

5.06%


$ Gain if Assigned

$16.20


Max Return  if Assigned

45.51%






 


The risk is I may lose these INTC shares.  Great I say.  Look at the return using my basis.  I can find another stock that is solid, that pays 2.54% yield.  If INTC goes on a tear, I still have the remainder of my position to take advantage of that upside potential.   And, I still have those shares if I want to sell more calls.  Full disclosure, I have lost all my shares on stocks that I wish I still had so beware and pick your options carefully.

My guess, since 90% of calls expire, is this INTC call will expire and INTC will continue paying dividends and calls buyers will pay premiums that deliver well above the 4% Alfred suggests we need for all of 2019. 

Adding to my position and selling an immediate call:


For all the reasons stated above, INTC is a good dividend stock for conservative income investors.  The dividend yield of 2.54% is safe.  Dividend growth has been solid at 8% per year over the past 3 years.  Adding to your position is reasonable.  But, these are scary times and maybe you feel really conservative but feisty so you add at 20% off the 52 week high and immediately sell a call.  You pick an expiration date that will get you the dividend provided the call buyer does not exercise their right to buy your stock before the ex-dividend date. More than 90% of the time, they will not exercise before the ex-dividend date.  The call data are in the table below.









Price on Open
Call Expiration


Intel (INTC)
$47.22
3/15/2019


Cost Basis: 
Price on Option Contract Open
$47.22


Strike Price:

$50.00


Call Premium:

$1.50


Dividend
Exp Ex Div 2/6/2019
$0.300







Call Yield on Basis

3.18%


Call + Dividend Yield on Basis

3.81%


$ Gain if Assigned

$4.58


Max Return  if Assigned

9.70%









These are two examples of using calls to boost income on Intel.  INTC is only one of many stocks to work during this extraordinary market.   These are the safe havens in the long term: keep a little, add a little, lose some shares but always book that income.

M* MoneyMadam

Disclosure:  Long INTC with calls