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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Market timing with covered calls

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

One of the many ways to use covered calls to manage your stocks is to use them to get rid of a stock.  

 

You should have a good reason to get rid of a stock because when you use covered calls with the idea of being assigned (the call buyer exercises the option and buys your shares) it happens a lot.  You do not want to use this strategy on stocks you will be sorry to lose.

This technique is really a timing mechanism.  I think the stock market seems a little expensive based on P/E ratio.  Times are uncertain locally and globally.  I lighten up on stocks that no longer meet my dividend stock selection criteria with emphasis on stocks that are over valued by P/E (price earnings) ratio.   Microchip Technology, MCHP is the stock I am writing about today.



Dividend Machine Fundamentals to decide which stock to sell.

I started using only four criteria to pick a Dividend stock and in 2016 I added two criteria.   My first four metrics were (1) EPS greater than dividends paid out (2) dividend yield of 3% (upped to 3.5% in 2014), dividend growth rate year over year (minimal 5 year growth rate upped to 4% in 2014), and D/E or debt to equity ratio of 1 or less or equal to industry standards.

In 2016 I lowered the dividend yield minimum to 2.75% but added two criteria (1) revenue growth over the past 3 years of at least 4% and (2) availability of covered call options that would yield at least 1% on each contract and a minimum of 8% capital gain over basis should the call be assigned.  In other words, the strike price has to be 8% greater than my basis.

Microchip Technology Dividend Stock Fundamentals


Microchip Technology (MCHP), my very first Dividend Machine, is still in my personal portfolio and I have been working the calls and receiving the dividend.  Now I am working the calls to get rid of Microchip.


Microchip violates two of my key criteria: it has a D/E ratio of 1.38 which is too high and the dividend growth rate is to low.   Moreover, I think the market may be overvalued and I think MCHP is ripe for selling because the P/E ratio is 30.38.   


MCHP's stock price appreciation has been quite good since I initiated a position in November of 2010.  My first buy was at $33.55.  MCHP trades to day about $49.50 for quite a nice gain.  My personal basis is $34.93.   The dividend yield is 2.95% which isn't bad but the dividend growth has been a tepid .869% per year which is another reason to dump it.

In an effort to grow, MCHP, bought another company, Atmel and is working through the process of making money from that acquisition.  I don't use that kind of news to make my decisions about dividend stocks.  I just don't know enough about it.  I stick to my fundamentals.

However, for those knowledgeable about the acquisition, you may be willing to wait for the acquisition to pay off.  Analysts think that indeed MCHP will grow and project a forward P/E around 18.  Due to the debt and slow dividend growth, I am still wanting to get rid of MCHP


Getting rid of MCHP with Covered Call Options

Now take a look at the list of calls that I have used to boost my income and more recently to try to get rid of MCHP.



As time progressed and I realized that that their debt was increasing and the dividend was not, I wanted to get rid of it so I sold calls very close to the current trading price.  So far, I have had no takers on my last 200 shares but I will continue to try.  You will see that I just sold May 20, 2016 calls for $.95 a contract.  Notice that the range of call premiums was $.55 to $3.80.

Actual MCHP Covered Call Experience

Covered call premiums on the 300 hundred shares in my Dividend Machine Portfolios have been good and all three hundred shares would have been assigned.  I bought at the same time I wrote about MCHP.  I personally bought 500 shares.  300 of my shares were assigned as they would have been in the model portfolios and I am left with 200 shares.

http://www.themoneymadam.com/2010/11/microchip-technology-dividend-machine.html
http://www.themoneymadam.com/2012/02/microchip-technology-dividend-machine.html
http://www.themoneymadam.com/2013/02/microchip-technology-mchp-2013-dividend.html

My basis on my remaining 200 shares is  $6,986 or $34.93 per share.  My basis on all 500 shares is $17,465.   My income from MCHP covered calls so far is $2,365.  Covered calls added  13.54% to my income.   That does not include dividends.

Strategy Keys

The key to this strategy is to select a strike price very close to the selling price and with an expiration date no greater than 30 days out.  You don't want to wait around while the stock price deteriorates to meet the deteriorating dividend fundamentals.   I sold my most recent call on April 19 with an expiration date of May 20. 

You want a really good premium.   If the call expiration date is before the next ex-dividend date, you want the premium to be even richer.   I like a minimum of 1 % plus the amount the quarter dividend that I may lose out on.  The most recent call premium was $.95 or 2.7% on my basis and 1.9% on today's price.

This is an example of how to use covered calls to time the market and get out of a stock that for one or more reasons seems over valued or under performing as a dividend machine.

M* TheMoneyMadam 
Disclosure:  Long MCHP with calls

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Microchip Technology Dividend Machine again

Image via CrunchBase

Dividend Machine for week of February 6, 2012

            Earlier this month I profiled a high yield (read high risk) bond and that is new.  The stock market may seem boring but this week, so far, I have found two new companies that qualify as Dividend Machines but neither one has covered call options that could boost our income.  And, I have been waiting to profile a third stock that I included in the 2011 Dividend Machine list until covered call options on it looked attractive.

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Option Income - 2011 Dividend Machines

Option Income analysis – 2011 Dividend Machines

            Income investors, covered calls, as you know, are contracts that pay you money known as a call premium. These premiums can be as little as ten cents a share or as much as several dollars a share.  So you see covered calls can provide significant investment income.  In retirement, this is very important.

 In exchange for receiving the call premium, you give the buyer the right to buy your stock at the strike price of the contract. The strike price is critical because income

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Stopping Microchip Technology, MCHP - just in case!

Microchip Technology, MCHP has doubled during the time I have owned it.  It paid a healthy and ever increasing dividend. MCHP was my first dividend machine.  However, they did not pay a dividend in March and I believe this is due to the fact that they paid a double dividend in December.  In other words  the March dividend was paid in December along with the December dividend.

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Dividend Machines and Diversification

Diversification is one of the most important aspects of investing.

I try to profile companies that meet all our criteria as a dividend machine and also provide diversification. Never own just one company. One hundred companies are too many to own. Know your companies, what they do as well as their fundamentals.

Diversification is not just measured by how much cash you have versus the percent invested in bonds and stocks. Diversification can be measured in many ways. Let's look at the companies I have profiled over the last 4 weeks as an illustration of how to diversify with dividend machines.

11/14/2010 – MCHP Microchip Technology a smaller electronics company that makes microprocessors and receives about three quarters of its income from outside the U.S.

11/21/2010 – JNJ Johnson & Johnson a very large multinational company that is a big pharma, biotech, and band aid company. You get a lot of diversification in just one company.

11/28/2010 – GPC Genuine Auto Parts is both a producer of auto parts and a retailer with most of its business in the United States.

12/06/2010 – KMB Kimberly Clark a very large multinational company concentrating on consumer staples like tissue and diapers with sales in both the U.S. and abroad.

Look for companies that meet our criteria and that also provide diversification and sit back and watch your income grow.

Very Truly Yours,

TheMoneyMadam

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Covered Calls for more cash!

Dividend Machine, Microchip Technology has been a good company to create a little extra income in addition to its ever increasing dividend. 

Using covered calls to add income from your investments is one of the techniques, TheMoneyMadam, and all good income investors employ. 

To remind you about covered calls; when you own at least 100 shares of a company you can sell to another person the option to buy your shares at a set price (the strike price) within a set period of time. 

The other person obviously thinks the stock is going to increase in value and they are willing to pay you money to reserve the right to buy it at the strike price which almost certainly is below where they think the stock price will be in the future. 

This is a call option. The option gives the buyer the right but not the obligation. Therefore, if the stock does not perform as well as the buyer expected, they do not have to buy it from you and you pocket the cash from their buying the option. You risk being stuck with the company until the option expires if its stock price goes down. 

This risk is why I always recommend you buy stocks with dividend yields that are solid, and balance sheets that are solid. If you are stuck with the stock you liked it in the beginning and unless some huge fundamental factor has changed, you can sit with it cashing your dividends. 

Companies that have stock prices that move more than the over market can be identified by looking at their beta. Beta is a measure of price volatility. 

Microchip technology has a beta of about 1.13. A beta of 1 means the stock price moves just about in line with the overall market. A beta of 1.13 means MCHP is a little more volatile than the overall market. 

This situation provides the opportunity for selling covered calls. 

If you sell the right to buy MCHP to another person at a strike price at 10% above your cost basis and they exercise the right within 90 days you get the 10% gain, the cash from the covered call and probably the cash from the dividend. 

Another stock is always out there to buy, so do not be afraid to risk losing your stock at a 10% gain. Plus, with some volatility, you may have a chance to buy your stock again and repeat the whole procedure over and over. 

MCHP is a good example of this technique because I held this stock through the major downturn of 2008. I bought MCHP in October, 2007 at $36.50. I sold a call one year later at a strike price of $40.00 and received $1.60 per share for the call plus I had collected the dividend during that year. The market crashed, the call expired and I was stuck with the stock, but it is a stock I liked so I added to my position. I bought more at $31.87. 

I then wrote a call on those shares with a strike price of $35 and received $1.45 per share. I still held the stock because the market continued to deteriorate. When the market hit its low I added even more shares at $20.75. 

I continued to like the company and they continued to increase the dividend and I continued to cash that dividend. Finally I wrote a call for $1.05 with a strike price of $22.50. The market recovered and I lost the shares I bought for $20.75 at $22.50. I still own the other shares. 

I have not seen calls recently that I want to sell on MCHP but this exercise clearly illustrates how you can get 10% per year or more using covered calls on dividend producing stocks to create income.


Very Truly Yours,
TheMoneyMadam 

Another Dividend Machine idea next week

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Dividend Machine Microchip Technology, MCHP

As promised, I will help you learn how to invest for income using dividend machines and I will do that by analyzing one company a week. My intent is not to recommend a stock but to teach you how to analyze a potential dividend machine by reviewing one per week. MCHP is the first of fifty two dividend machines I will profile for your income investing portfolio.

Well defined research

A little well defined research eliminates 90% of the bad companies. Know what you want to know. Keep it simple. Spend a minimum of time with this very simple first screen.

1. EPS – Earnings per share has to be a positive number because this is how to measure if a company makes money.
   
2. Dividend – The amount paid out has to be less than the EPS or earnings per share.
   
3. Dividend growth – The most recent dividend should be greater than it was a year ago.
   
4. D/E ratio - Debt to equity ratio is one measure of financial stability. The less the debt, the less the risk and the D/E ratio should be low.

MCHP Dividend Machine Fundamentals

MCHP Microchip technology is a smallish company, it has some 5,000 employees. It has been a dividend machine and as a matter of fact it has also provided covered call income potential. Let us deconstruct MCHP using the four measurements I described above.

EPS: Using the most recent quarter's earnings are $.577 per share

Dividend to be paid on December 2 $.344 per share

Dividend growth rate has been 3.5% per year and this year if you own the shares by November 15 you will receive the quarterly dividend of $3.44 plus if you continue to own it on December 12, you will receive an additional dividend of $.345. So nice to see a company share the good times with it's owners.  Based on last Friday's closing price of $33.55 the dividend yield is 4.1%.

D/E ratio. This company has debt to equity ratio of .21 well below the industry average of .89.

A little well defined research does not take that much time. Learn about one company a week from me and use it as a model to help you find a company that is a dividend machine and add it to your income producing portfolio.

Young people are wise to adopt the technique early. Steady growth with reinvested dividends will set you up to create an income stream when you are done working.

More on how this company is good study on using covered calls to create additional income later this week.

Very Truly Yours,

TheMoneyMadam

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