Tuesday, September 24, 2019

Discount Bonds a tale of woe.

High Yield Bonds were enticing for income investors, including me, while we were in a low interest rate environment.  Safe bonds just didn't pay enough.

  • High Yield Bonds are not for beginners
  • Pay a steep discount
  • Risk is high

Since I started writing this blog about income investing,  I invested $81,670 in high yield bonds.  Each buy was for 10 bonds.  Eight different bonds make up the portfolio.

TheMoneyMadam's High Yield Bond Portfolio


The table below lists the bonds I bought with CUSIP, coupon rate, and maturity date.  The portfolio holds only one of the eight bonds.  The others defaulted, were redeemed or tendered.




It was a rocky and mostly unsuccessful venture.  My $81,670 turned into $72,949 not including income.  That is a 12% loss.  When adjusted for income the loss is cut to 4% but I don't like losing money.

The most painful rub is that quality bonds continued on a bull run during this time.  Those quality bonds gained more than my high yield bonds.  

If you read the dividend ideas on this blog you will see over the same time frame, I bought $875,687 worth of stocks.  The high yield bonds make up about 9% of the investments that I track in my portfolios. That alone is a good lesson. If you are going to take risk, you must keep it to a minimum.

It is a tricky business that requires even more due diligence than buying a dividend stock. Bonds are distressed for a reason and that is risk.

When will be enter a Bond Bear?


As we continue the 35 year bond bull market and enter what I had hoped to be a 20 year bond bear market, high yield bonds would not be as necessary even though they can be very rewarding (see Noble Energy Bond above.).

In 2019 the turning tide of interest rates has not yet revealed itself. 

I intend to ride the new cycle of increasing interest rates should it ever come true.  For average risk bonds I would like 5% for five years.  When bond prices decrease enough that I can get 5% for five years, I may change my mind and want more.  We will see.

As I find bonds I like, I will write them up.  

M* MoneyMadam

Disclosure:  Long Cinemark Bond However since the price is above par, I am tempted to sell soon.


HCI Exceptional Call


HCI Group, symbol HCI is a dividend stock I have owned for about two years.  I bought it based on the yield and dividend growth.  It also has reasonable debt, but revenues are not growing.  



The stock price has ranged between $36.72 and $59.32.  I would like to get rid of HCI through calls.  I sell calls and they have never been assigned.  



Today, I sold a call that does not capture the next dividend but the total return for me if they take my shares by exercising their right to buy is quite good – 13.8%. 



HCI $45 call expires October 18, 2019.





With this call I have income in mind.  The premium I received is over 1%.  I like that.  Moreover, the duration of the call is very short.  If HCI is assigned that is okay with me and if I keep it, I will continue to sell calls.   If the fundamentals deteriorate such as no longer increasing the dividend, I will sell it all.



M* MoneyMadam

Monday, September 23, 2019

Best call today was WHR Whirlpool

Last Friday, September 20, 2019 was quarterly expiration of stock options.  As an active income investor, I use covered calls to create income.  I certainly cannot get adequate income from the usual sources for safe money like bonds.

I had 25 calls on 12 different stocks expire last Friday.  Five calls on two stocks were taken.  Four of the calls that were exercised were on Novocure, symbol NVCR.  Novocure does not qualify as an income stock.  I do not want to risk losing the rest of my position on NVCR.  Therefore, I did not even tempt myself by looking at potential calls on this growth stock.

The other call that was taken, also known as exercised, or assigned was J.P Morgan, symbol JPM.  All the other calls expired.  I got to keep the premium paid and now I am looking for additional calls on those stocks.

Listed below are the calls I sold today:

IBM:  $150 strike expired on 9/20/19







You will notice, I am underwater on IBM.  But I like the dividend yield of over 4.5% and I have sold 4 calls on IBM since I bought eighteen months ago.   I don't like it enough to buy more shares but I do like the call premiums.

In this call I created an additional 1.1% on my basis.  I am willing to live with the unrealized loss as long as I cash those dividend and call premium checks.







Whirlpool (WHR): $160 strike expired on 9/20/2019


Whirlpool is quite volatile.  It responds to a lot of "headline risk."  Tariffs and international sales of washing machines is more exciting than you think.  



Again I like the yield of 3.19% but I would like more than 3.19% and calls are a way to boost the income.  I have sold calls many times on WHR that have been exercised.  This time my calls expired and I was able to sell more calls today.

In this call alone, I was able to capture a yield of 4.53% just from the premium.  






Without a doubt Whirlpool was the covered call of the day.  This is good income investing.  If any other calls come available, I will write them up.  Stay tuned.

M* MoneyMadam

Disclosure:  Long IBM and WHR with calls