Wednesday, February 26, 2020

Buy high and sell higher - my way of nibbling MSFT

Thursday, February 27, 2020

All investors have to use opportunities to build their portfolios.  Always keeping your emergency fund of one year's expenses in cash/money market equivalents is important.  But I nibble.

Today I am adding again.  In the pre-market MSFT traded in the low $160's.   I added a little. Nibbling and building the position for the future.  Skate to where the puck will be not where it is.

M* MoneyMadam




I lost all but 100 shares of Microsoft to call buyers.  My shares were assigned and assigned early.  I bought October 22, 2019 at $138.  December 2, 2019 I sold calls with a strike  price of $160, expiration date of 2/21 for a premium of $1.88.   MSFT was ex-dividend on 11/20.   The end result is I received the dividend of $.51 per share + the premium.  My shares were assigned on 2/18/20.

Actual result of this MSFT trade:

MSFT Call sold on 12/2/19 2/21/2020
Cost Basis:   10/22/2019 $138.00
Strike Price: $160.00
Call Premium:  $1.88
Dividend  Ex-Div 11/20/19 $0.510
Call Yield on Basis 1.36%
Call + Dividend Yield on Basis 1.73%
$ Gain if Assigned $24.39
Call Assigned on 2/18/2020 17.67%

Microsoft's stock price increased significantly and I looked like an idiot for picking such a low strike price.  Who knew?  The call buyer knew and bought these shares at $160 on the day that MSFT traded as high as $187.70.  We all benefited I got my over 17% gain and the call buyer, if they sold those shares immediately received a net gain of 15.95%.   A win win for all.


Buy high and sell higher

My next MSFT trade was to buy at $161 per share on 1/9/2020.  I bought higher than the strike of the previous call.  Getting nervous about the price and P/E ratio of MSFT, I didn't want to commit for so long.  As soon as I bought MSFT on 1/9, I sold a $170 call to expire on 3/20/20.  I will get the dividend on this trade.  I still own those shares.

Here is how that call looked when executed.

Call Expiration 
MSFT Call sold on 1/9/20 3/20/2020
Cost Basis:   1/9/2020 $161.00
Strike Price: $170.00
Call Premium:  $2.23
Dividend  Ex-Div 2/19/20 $0.510
Call Yield on Basis 1.39%
Call + Dividend Yield on Basis 1.70%
$ Gain if Assigned $11.74
Max Return if Assigned 7.29%


Today I bought even higher.   Microsoft soared to $190.70 on 2/11/20 but during this recent market adjustment, MSFT has reverted to around $170 per share.  The call buyer on the original call noted above, if they held the shares, is still in the money.  The call buyer for the second lot may or may not take my shares at $170 on or before 3/20.  We will just have to see.

Today I bought at $170.50 and sold a call that expires in 10 days on March 6, 2020.  I remain very nervous about the volatility but I have to make a living and I do that by selling calls on dividend stocks.

Here is the call I sold today:  Expiration 3/6 with a strike price of $177.50.  I received $1.75 per share in call premium.  This call is on for 10 days.

Price on Open Call Expiration 
MSFT $171.41 3/6/2020
Cost Basis:   2/26/2020 $170.50
Strike Price: $177.50
Call Premium:  $1.70
Dividend  Ex div after exp $0.000
Call Yield on Basis 1.00%
Call + Dividend Yield on Basis 1.00%
$ Gain if Assigned $8.70
Max Return  if Assigned 5.10%



I do like MSFT and you can see the fundamentals below.

MSFT Earnings Dividend
 Earnings > Dividend $5.80 $2.04
 Debt to Equity 0.72
 Dividend Yield 1.19%
 3 Yr. Rev. Growth 13.84%


It remains expensive but I believe what it sells will continue to be needed in spite of the Corona Virus.   If it goes down lower, I believe I will sell more calls and most likely eventually will have all my MSFT called away.  I rarely love a stock so much that I cannot stomach losing it.

Good luck in this volatile market.

M* MoneyMadam

Disclosure:  Long MSFT with calls

If you're considering a call use this calculator to determine your potential gain:


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Tuesday, February 25, 2020

Selling calls in a down market is possible CVS

  • Down markets can still provide call option opportunity
  • Looking for a stock that will continue to pay the dividend even in a down market
  • Making sure the expiration date captures the next dividend
  • Searching for an over 10% potential gain should the call be exercised

CVS is a stock that has a low P/E (price earnings ratio) forward looking 9.54 and a good dividend yield currently 2.8%.   Even a 30 year U.S. Treasury cannot deliver that kind of income.

Readers know the criteria I use to pick a dividend stock and here are the facts on CVS.

CVS Earnings Dividend
 Earnings > Dividend $5.09 $2.00
 Debt to Equity 1.43
 Dividend Yield 2.98%
 3 Yr. Rev. Growth 8.90%


The call I sold this morning 2/25/20 on CVS after a more than 1,000 point decrease in the DOW industrials yesterday  and a further erosion in the range of 300-400 points today is presented in the table below.

CVS is down 1.86 points today and off its 52 week high of $77.03 by over 14%. Yet, someone thinks CVS has potential and they are willing to pay me $1.25 per share to buy low.  And I am willing to buy low and take the $1.25 per share in hopes that I will keep the stock.  On other hand, I can also hope they take my shares because then I pocket an over 12% gain.

In the milieux of politics with its potential effects on the stock market, CVS will be volatile and both scenarios are possible.  

Note this call's expiration captures the next dividend.  The value of the call premium is worth 2 and 1/2 dividends.   For an income investor this is a very good outcome.


Stock Price on Open Call Expiration 
CVS $67.15 5/15/2020
Cost Basis:   2/25/2020 $66.07
Strike Price: $72.50
Call Premium:  $1.25
Dividend  4/22/2020 $0.500
Call Yield on Basis 1.89%
Call + Dividend Yield on Basis 2.65%
$ Gain if Assigned $8.18
Max Return  if Assigned 12.38%


M* MoneyMadam
Disclosure: Long CVS with some shares on call

Use the covered call calculator below to determine how a call would work for you.


Enter Cost Basis:
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Enter Dividend if ex-div before Option Expiration:
Call Yield
GAIN
Total Return Percent if Assigned

Wednesday, February 19, 2020

Adding another name to my Private income ETF

I am in the continuous process of creating my own ETF to create income from dividend stocks.  In this personal ETF I use covered call options.

  • Dividend Machine stocks are essential when building a stock income portfolio
  • Dividend growth at a reasonable price is required for a stock income portfolio to keep up with inflation
  • Solid fundamentals allow you to sleep at night when the market gets volatile on the downside
  • Call income can add as much as 25% to the income stream
Last week I wrote up a post about Prudential.  This week I am adding UPS, United Parcel Service.
I always start with fundamentals and then I look to see if covered call options are available.

You cannot expect every stock you pick for your portfolio to be a winner. To use a sports analogy, some stocks will deliver home runs and others will allow you to bat for average; and some will just be another strike out.

Look at the portfolios I built between 2011 and 2018 and you will see evidence that using solid criteria to pick stocks that I call Dividend Machines will produce a solid portfolio with some home runs, lots of batting for average and yes a few real strike outs.  

The second stock I am adding for 202 is UPS.   Let's look at UPS's fundamental performance over the past 11 quarters (data from Nasdaq.com.)

UPS DIVIDEND MACHINE FUNDAMENTALS


Fiscal Quarter
2019
2018
2017
 UPS (Fiscal Year) (Fiscal Year) (Fiscal Year)
March
   Revenue $17,160(m) $17,113(m) $15,510(m)
   EPS 1.28 (3/31/2019) 1.55 (3/31/2018) 1.33 (3/31/2017)
   Dividends 0.96 0.91 0.83
June
   Revenue $18,048(m) $17,456(m) $15,927(m)
   EPS 1.94 (6/30/2019) 1.7 (6/30/2018) 1.58 (6/30/2017)
   Dividends 0.96 0.91 0.83
September
   Revenue $18,318(m) $17,444(m) $16,173(m)
   EPS 2.01 (9/30/2019) 1.74 (9/30/2018) 1.44 (9/30/2017)
   Dividends 0.96 0.91 0.83
December  (FYE)
   Revenue $19,848(m) $18,975(m)
   EPS 0.52 (12/31/2018) 1.26 (12/31/2017)
   Dividends 0.91 0.91
Totals
   Revenue $53,526(m) $71,861(m) $66,585(m)
   EPS 5.23 5.51 5.61
   Dividends 2.88 3.64 3.4


Dividend payout is less than earnings, revenues are growing which fuels dividends.   UPS allots some of  that growth to us, the investor, by increasing the dividend over time.  And now the yield is within my range at over 3%.  Moreover, their balance sheet has improved over recent quarters.

I use debt to equity ratio (D/E ratio) when I write up posts about my stocks.  D/E ratio is a measure of balance sheet strength.  Many other investors use different measures and I applaud any investor who can delve more thoroughly into the balance sheet to determine balance sheet strength.

The chart  below presents UPS's debt to equity and free cash flow on a quarterly basis.  Debt to equity has gone down significantly over the past four years and that is good.   Free cash flow is greater than debt to equity and that too is good.   However, UPS's D/E ratio is quite high.  With that in mind you may want to be more careful with this stock


The table below is a nice summary of UPS's Dividend Machine fundamentals.

UPS Earnings Dividend
 Earnings > Dividend $5.14 $3.84
 Debt to Equity 4.76
 Dividend Yield 3.62%
 3 Yr. Rev. Growth 6.41%

Notice the revenue growth in the table above.  Then look back up at dividend growth in first table and we can see a stock that delivers for the income investor.

When a stock, even a relative value stock like UPS, has growth potential, you can sometimes see that in their call option premiums.   UPS does not command premiums like Nvidia but it does have some option activity to work with for the purpose of our personal income ETF.

COVERED CALL BOOST INCOME 25% or MORE

Here is a call I sold today on half of the shares I added today.  I didn't sell this call because UPS is going to be a growth machine like Nvidia.  I sold the call to boost my income by at least 25%.


UPS $106.65 4/17/2020
Cost Basis:   2/19/2020 $106.17
Strike Price: $110.00
Call Premium:  $1.52
Dividend  2/24/2020 $1.010
Call Yield on Basis 1.43%
Call + Dividend Yield on Basis 2.38%
$ Gain if Assigned $6.36
Max Return  if Assigned 5.99%


The call doesn't look that impressive until you analyze it from an income viewpoint.   By selling this call with an expiration under 2 months, I have  added income greater than a quarterly dividend.  The next dividend will be $1.01 and the premium I received today was $1.52.

UPS goes ex-dividend on February 24 and to get both the dividend and the call premium you have to own the stock by 2/24 and sell the call by 2/24.  You can buy it on the 24th at least at Schwab.

Selling the call on half the position allows me to keep upward potential if the stock goes higher by not risking losing half the shares.   On the other half of the shares, this strategy gives me a chance to book a quick nearly 6% gain in fewer than 60 days.  And if I get to keep both lots, I have good dividend yield with 25% more income than I would have by not selling the call.

INDUSTRY INFLUENCE

Regarding the industry.  Amazon has impacted Fed Ex (FDX) more than UPS.  I fell comfortable with the revenue growth and dividend growth and the fact they are tackling the debt issue.

Good Income Investing:

M* MoneyMadam

Use this calculator (or click on the call options at the top of this blog) to calculate how a covered call will work for you.



    

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