While each of these stocks is considered a technology stock, they are quite difference in many ways. Without analyzing the similarities or differences in focus, strategy, or execution, I will apply my screening criteria to each one to decide if I should add to my position in the case of MSFT and AAPL and if I should again take a position in QCOM.
MONEY MADAM SCREENING CRITERIA FOR INCOME
Target Dividend Yield = 2.75%
To remind you, I write about income stocks. I am looking for solid companies with a strong history of delivering ever increasing income through dividends and covered calls. My target dividend yield is 2.75% but I will compromise if there is a catalyst such as hefty call premiums or significant revenue growth that could suggest big capital gains down the road.
Dividend Growth = 4% minimum
The most useless data out there is inflation data. If you believe the so called experts, some suggest deflation and some suggest a hint of inflation. I look back at my expenses 10 years ago and 20 years ago and I can tell you that my expenses doubled about every 20 years. Therefore, in 20 years I must plan to produce twice the income I get now to cover my expenses. Using a 4% dividend growth rate will get that done.
Covered Calls = 10% total return if the call is exercised
When I sell calls on my stocks to create income, I risk losing that stock to the call buyer and it happens quite often. I would say more often than the conventional wisdom of 10% of the time. Should my stock be called away this means I lose the chance for future capital gain in that holding. Therefore, I must be sure that my total return makes it worth while.
My target total return on a stock that is called away is 10%. I rarely sell a call with an expiration longer than 90 days and I almost always pick an expiration date that is far enough out that I receive the dividend (unless the stock is called away early.) I also prefer the call premium to be equal to or greater than 1% of my basis.
MONEY MADAM SCREENING CRITERIA FOR SAFETY
The only way I will achieve my income goals using dividend stocks is if those stocks continue to grow. My crystal ball is in the shop and I must, therefore, use historical data to help me predict future income streams. Revenues and Earnings per share (EPS) create the cash needed to deliver ever increasing dividends.
Target Revenue Growth = 4% minimum
EPS must exceed dividend paid out
Safety for me is not measured by stock price volatility. I am interested in total return but I have been in this business long enough to know that my stocks could tank like they did in 2009 but as long as they continue to pay the dividend, I will not suffer greatly. Moreover, I should not have to worry about my stock going "belly up" if I choose a stock with a strong balance sheet.
Debt to equity ratio (D/E) of 1 or less or = industry standard
I use D/E ratio but I if you are adept at reading a balance sheet, you may use another criteria to make you feel comfortable with a company's balance sheet.
The table below presents this data on all three stocks.
The choice to initiate a position or add to a position is solely yours. I will be adding Qualcomm to the 2016 Model Portfolio as it meets all my criteria including nearly a 1% call premium. And I will add to my AAPL position on a pull back because the call premium is very robust and makes up for the low dividend yield. Finally, I will hold MSFT for now.
Consider these three stocks for the income producing portion of your portfolio.
M* MONEY MADAM
Disclosure: Long AAPL with calls, Long MSFT, with calls, expect to initiate a position in QCOM shortly.
