If you are long Caterpillar or thinking about it, you should read this article. Caterpillar Free Cash Flow M*MoneyMadam

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MSFT, MCHP, CAT More calls for more income!

Readers of this blog know I use covered calls extensively to boost my income.  What is a girl to do with interest rates so low and with dividend stocks being priced high?  I still think the best income investing during these times is to use high quality dividend stocks with covered call potential.

CAT, MCHP, and MSFT

Among the many stocks on which I tried to sell calls today are these three:  Caterpillar, Microchip Technology and Microsoft.  I have owned them all for a long time.  As a matter of fact, Microchip (MCHP) was the very first Dividend Machine I wrote about in late 2010.

English: Wheel loader (front end loader) made by the Caterpillar company. (Photo credit: Wikipedia)

Caterpillar is so very weak.  I added a little last October.  I am working those shares for income with calls.  I am reinvesting the dividend on my other shares, with a higher basis, as it is too late to sell them and the yield of 4.4% is good.   I don't want to add anymore CAT because their EPS are less than the dividend ($.46 versus $.77) and because their revenues have collapsed ($47,011m in 2015 versus $65.875m in 2012.) 

Here is the CAT call I sold today:

Microchip Technology on trade fair Embedded World a few minutes before opening the fair, Nuremberg, Germany 2008 (Photo credit: Wikipedia)

Microchip Technology, in an effort to grow, has acquired other companies and used debt to do it.  A 1.13 D/E ratio is too high for me.  Intel, for instance, has almost no debt.  MCHP is not so bad a company that I need to sell it.  Indeed, they are working through this acquisition.  However, their dividend growth rate is so meager I will sell calls with strike prices close to the current trading price hoping the call buyer will take my shares and I can move into a higher yielding stock.

Here is the MCHP call I sold today:




Microsoft is a good dividend stock. MSFT actually meets all my fundamentals.  However, it is expensive.  MSFT sports a P/E (price to earnings ratio) of 40.  Note that AAPL has a P/E of only 10.85. 

WELCOME TO Microsoft® (Photo credit: Wikipedia)

MSFT just barely meets my dividend yield criteria of 2.75%.  At today's price of $51.40 ish their yield is 2.88%.  I need more than 2.88 so I am supplementing my income with calls.

Here is the MSFT call I sold today:



This post is another example of how to your dividend stocks to create more income.

M* MONEYMADAM

Disclosure:  Long all with calls

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Another CAT call

Caterpillar was a 2015 Dividend Machine.  In fact, I was so enamored with CAT's fundamentals that I profiled it twice in 2015.   Cost basis for those buys are $79.94 on March 9, 2015 and $85.30 on June 29, 2015. 

Clearly the 2015 portfolio has suffered and CAT is one of the reasons.    However, I believe it will claw back to life.  Headwinds such as the strong dollar and global contraction make predicting when that will occur a total guessing game. 

In between waiting to get back to better revenue and EPS growth, I see opportunities to make income.  For instance, look at this call that I sold today.



M* TheMoneyMadam

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CAT - WIll it bounce?

January 27, 2016

Catching a falling knife? Eight percent in 51 days but you could be left with a dead cat.



M* TheMoneyMadam

Disclosure:  Long CAT with calls

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2015 Dividend Machine Failures?

The 2015 Dividend Machine portfolio is a scary thing to look at.   Losses all over the place.   There are few better ways to learn than to evaluate your performance, it is essential that I take a critical look at my 2015 picks.

 

2015 Dividend Machine Picks

Each of these stocks met my criteria to be a Dividend Machine using the data available at the time I wrote about them.  So far, I have added 13 stocks.   The fewest number of stocks in any of my portfolios.  

Eight of these 13 stocks have double digit stock price declines.  Three stocks have minimal losses.  Only two stocks are in positive territory. My 2015 Dividend Machines have a collective loss of 11.80%. If you are a growth investor, you would be really upset.  

Income investors have a different measure.

I want my investments to pay me predictable income that increases over time.   The value of the asset that creates the income will vary over time.  I try to invest in assets that create income for distribution and I try to not worry about the value of the asset.   Income investors use a different measure.

I use the ETF's SDY and VIG to measure the effectiveness of my Dividend Machine strategy.  Let's look at income.

SDY and VIG concentrate on dividend stocks.   The goals of these ETF’s are to create income, capture growth generated by the stocks that make up the S&P 500, and buy stocks with a history of dividend growth.   SDY is focused on income and growth whereas VIG is focused on dividend income plus dividend growth.  These are goals similar to mine.  

 

Look at the table below and you can see that you would have been better off buying either of these ETF’s if your major investment object is capital preservation, with a secondary objective of generating income.  My 2015 Dividend Machines have a collective loss of 11.80%.   SDY’s loss is only 4.35% and VIG sports a minor gain of .46%. 

Income Investors Have a Different Measure

Look at that table with the nose of an income investors and you will notice that you will receive more current income from the stocks in the 2015 Model Portfolio than you would with either SDY or VIG.   The stocks in the 2015 Model Portfolio will deliver $2,903 of income for a yield on basis of 4% and a yield of 4.54% on current value.    

A similar amount invested in the ETF SDY would deliver $1,601 over a year.  This is a yield on basis of 2.21%.   VIG’s income would be even less at $973 for a yield on basis of 1.34%.  Yield on current value is 2.31%.

Dividend Increases

SDY’s dividend increase has been 24% if you measure it by the amount increased over the latest two dividend payments.   If you compare only the 2^nd and 3^rd quarters, the dividend actually decreased.   But that would be unfair as last year they paid an extra $2 in dividend December of 2014.  It is difficult to measure dividend growth in these ETF’s.   

Over the past quarter VIG stock holdings created dividends that were less than the previous quarter by 3.85%.   But the figures change if you look at the last three quarters and you will discover about a 13% dividend increase for VIG.  

It is difficult to measure dividend growth of these ETF’s.  However, if over time dividends go up, these low cost ETF’s will pass on those dividend increases. 

For those of us who want to manage our own holdings, it is important to note that the 2015 Dividend Machines have increased income by over 13% so far this this and I am very happy with that.

Stocks are down:  Will the 2015 Portfolio go belly up?

I have comforted myself with the income analysis.  Ignore capital gain and go for income and increasing income is even better.  But how risky are these 6% yielding stocks?  Will Chevron go bankrupt?   Will I lose all my principle on COP (Conoco Phillips) or LHO (LaSalle Hotel Properties.?)

I use D/E ratio to help me determine if a stock is risky.  The Table below presents the D/E ratios of each of the 2015 Dividend Machines. 

Every D/E is reasonable.  I like a D/E of 1 or less or equal to industry standard.  The D/E ratio of typical utilities is greater than 1.  Therefore, I am not worried about any of the utilities included in this list going belly up.

Caterpillar might be of concern as the D/E is more than 2.    In this case, you have to compare to industry standard.  Deere symbol (DE) is a good comparison and their D/E is more than 4.

Forward Strategy

I believe in this disciplined investment strategy so much that for the first time in five years of publishing my selections, I added to a position.   CAT digs for dividends.  Their most recent quarterly dividend is 10% more than when I bought it.

Without a doubt VIG and SDY might look better on paper, but I am sticking with my disciplined strategy of using at least the four Dividend Machine criteria to build my income portfolio.   Right now I will reinvest dividends in the stocks with big losses and I just might add to those with a solid history of dividend increases such as CAT, LHO, and PAYX.

TheMoneyMadam

Disclosure:  Long SO, TU, COP, CAT, CVX, MHLD, PAYX

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