• Stocks were over valued as measured by P/E ratios
• Markets were heading higher on P/E ratio expansion
• Looking for low P/E stocks in the Dow 30 reveals eight stocks to consider
• Dividend Fundamentals remain of utmost importance

If you follow my blog, you know I have been writing about Dividend stock investing since just after I retired as an investment adviser in 2009.    To say I have been through this before more than once is accurate; to suggest I am immune to the pain is wrong.  However, I know that even with my shortened life expectancy, I am 11 years older than I was in 2009, quality stocks will continue to deliver the income I need to live my lifestyle.

FEAR NOT; BE PREPARED

I always advised my clients to have a debt free house to live in as one goal and to have money in stocks and bonds that are highly likely to continue to pay the income needed to support their lifestyle and in stocks that will increase that income over time.

I also advised my clients to have their rainy day fund always in safe, liquid assets even if it is painful to receive virtually no income from that stash.  For clients who have more cash than they need and for clients who expected to receive cash in the form of a bonus, or tax refund, or gift from Uncle Henry, you have to be willing to add stocks in downturn.

WHICH STOCKS?

Today I am looking at the Dow 30 stocks to find something of value.  Here are my criteria:

• Good balance sheet, I use D/E ratio and interest coverage ratio
• Dividend yield of more than 3% 
• Dividend history during previous market disruption in 2009
• Price correction that mirrors the overall market
• P/E ratio under 15

Looking at each of these criteria I begin with balance sheet.  Companies have been adding debt because debt is cheap.  The old saying goes that you should borrow when you can not when you need to.   What are they doing with added debt.  Apple for example has a ton of cash around so they borrowed at cheap rates and used that additional liquidity to pay investors dividends.    Home Depot borrowed the money to buy back stock and increase the value of the shares held by investors.

Debt matters if the company cannot pay the interest on the loan and cannot pay out our precious dividends.  Therefore, looking at a combination of D/E ratio and interest coverage is a good guide for the ordinary investor.

It used to be that dividend yield needed to beat the 10 year U.S. Treasury but in today's world those metrics are unreliable as Treasury yields are so low, no one can live on them.  A more reliable yield for me is 3%.  If I get 3% on my portfolio, I will not suffer but I also will not be accumulating cash from the difference between my income and my expenses.  Yield is very personal and each investor needs to do their own math to determine the minimum yield they need.

Dividend growth is more significant for the long term investor who does not work for a living.  In 20 years everything will cost about double what it does now.  If you don't believe me, go back twenty years and look at the cost of ground beef, or your car insurance or your home owner's fees.  Even if a stock did not increase the dividend during the 2007-2009 debacle but resumed dividend increases after the crises abated, you are probably okay with that investment

Why buy a stock that has not corrected as much as the market?  Hard to find one of these but I do have an example.   This is a two handed assumption.  On the one hand, if you are buying during a market crisis, you certainly want a bargain.   On the other hand, if you find a stock that has held up well, maybe you have a winner that can weather any storm.  Again, investing is an individual process and only you can decide if a stock meets your personal criteria.

That lead's us to P/E ratio which the ratio of the price of a stock divided by the earnings.  Zacks reports the average long term P/E ratio of the Dow Industrials is about 16.  Ycharts shows a P/E of 22.29 on 12/27/2019.   Other sources show a range of as low as 7 and as high as 30.  In 2009 the Dow's P/E was about 15.  Hence, I picked 15 as a cut off.  

Note that while the DJI (Dow Industrial Average) is just that, you can find average P/E's for each stock you are considering.

I was quite surprised to find stocks that I have liked in the past but found to too expensive to buy or to hold to still have higher P/E's than I like and some with dividend yields below the 3% goal.  Johnson and Johnson carries a P/E/ of 24.23 and a yield of only 2.88%.  Apple carries a P/E of 21.13 and a yield of 1.21%.   Great businesses but I have to stick with my disciplined approach.

Here are the stocks  in the Dow industrial average that today meet the P/E criteria and the dividend yield criteria.  Some have higher D/E ratios than I like but all have positive interest coverage ratios.  Anything interest coverage ratio that is under 1 is too risky.  

Symbol	Price	P/E	D/E	Int.Cov.	Yld	Other Factors
JPM	$88.92	8.72	1.42	2.7	3.00%	Neg Int Rates
CAT	$90.97	9.69	2.58	19.6	3.23%	World Recession
IBM	$104.48	11.15	3.27	8.6	4.83%	No Rev Growth       but new CEO
TRV	$106.33	11.71	0.25	10.1	2.62%	Less than Dow        correction
PFE	$30.78	11.78	0.83	12.2	4.18%	No Rev Growth
VZ	$51.93	12.01	2.17	5.8	4.23%	Leader in 5G
XOM	$38.74	12.46	0.24	25.2	6.78%	Oil Glut
CSCO	$34.31	14.81	0.45	20.4	3.60%
*Price, Int.Cov. Yld from Market XLS P/E from Schwab

Note the one stock that has not corrected as much as the market is TRV.

You should always look for more data on the stocks you are considering.  I noted in the table above some of the externalities that might color my decision to buy.

BE BRAVE, BE DISCIPLINED

M* MoneyMadam
Disclosure:  Long JPM, IBM, CAT, VZ, XOM, CSCO.   I have covered calls working on a portion of my holdings in each name.

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4 Dividend Stocks of interest after a down day.

I don't have a lot of time to write about these stocks.  In this post I summarize four stocks I am nibbling at with very optimistic limit orders.  Orders that will get me a good income stock at a recent discount.

All four pay a dividend and have dividend growth.  I am long all stocks and want to add.  In the table below I note reasons I like each stock:  either high dividend yield or high dividend growth.   I just did an analysis of this subject and concluded you need a lot of both.






Good Income Investing

M* MoneyMadam

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Selling into this rally

In this post I review the guidelines I use when I sell.

• Major changes in fundamentals such as EPS or D/E ratio
• Lack of Dividend or Revenue Momentum
• Diversification adjustment due to sector overweight or individual stock overweight
• Excess valuation

I rarely sell and I am not a market timer, however, the time has come to trim some positions.  Like herbs, trimming can provide the stimulus for future growth.

The market does not go straight up and at some point, I think I will have an opportunity to buy some good stocks at reduced prices.  I am not predicting an immediate correction and I am not selling everything I am trimming.

I have two ways to trim.  One is to sell outright and the other is to sell call options that are very close to the current trading price suggesting it is highly likely that my stock is assigned when the call is exercised.

Listed below  are the positions I trimmed that are in the target portfolios I have published and that I follow.  It is important to note that these trades were done in my account.  I do not make any trades in the target portfolios.  They are long only for the purpose of tracking.  Each one of the trades listed below uses the basis in the target portfolio which also is within $.50 of my personal basis.

Which Stocks to Trim?

When the market is at a high which was quickly achieved rather than slowly attained, as we have now, I often look over my stocks and decide to get rid of some positions.  I try not to look back at lost gains should these stocks go up.  Lost gains can drive you crazy so if I have a stock that is a dividend aristocrat but has gained so much that I want to lock in profit, I often times sell only part of my position.   If the market tanks, I can add back or use dividend reinvesting.  If my stock continues to go up, I still have some left but I use the proceeds to buy another position.  Remember there is always another stock to buy when you are an income investor.

Changes in Fundamentals:

Pepsico, symbol PEP, is an excellent example of a change in fundamentals.  Because PEP never had a high enough yield to be a Dividend Machine for my target portfolios, it does not appear in the table below.  But I have owned it and I sold it because their debt has skyrocketed.  Readers of this blog know, I don't like high debt to equity ratios period!   I sold PEP at $109.861 today. My basis was $66.

PEP Chart from Nasdaq.com



Examples of changes in fundamentals that are in the first table include: Caterpillar, symbol CAT.  Caterpillar's earnings have been under pressure as their revenues tanked due to global influences.  Other countries have all the big equipment they need for a while.  When earnings are less than dividend paid out, I look to sell out.

However, I put my sell in a just above the bid price  rather than a market order and before the news of the investigation that sent CAT shares down about $5.00 today.  I did not want to chase the price down and I found a May call for $2.20.   I took the call and will suffer with this holding until the call expires.  My personal basis is $78.  The Dividend Machine portfolio basis is $82.50.

CAT Chart from Nasdaq.com



Chevron, symbol CVX, is in a similar boat as Caterpillar.  Their earnings are less then dividend paid out.  In Chevron's case it is due to the price of oil.  This stock is in the first 5 Dividend Machine portfolios and I have a similar cost basis.  I sold only those shares on which I have a gain.  I am reinvesting dividends on the other shares as I wait for some turn around in CVX's earnings.

CVX Chart from Nasdaq.com

Lack of Dividend  or Revenue Momentum:

AT&T, symbol T, is an excellent example of a stock with a good price gain but a lack of dividend growth.  Their most recent dividend increase from $.48 to $.49 is disappointing.  You can make the argument that their robust yield makes up for it, but here was a chance to take some profit off the table and employ it for more growth.  I took advantage of that gain today.

T Chart from Nasdaq.com



Cisco, symbol CSCO, on the other hand had a good recent dividend increase but I have waited for revenues to improve.  CSCO's most recent four quarters of revenue were $ 48,570 (m) versus $47,873 (m) three years ago.  This is anemic.  I kept half of my position but I am looking to raise some cash and this stock stood out.

CSCO Chart from Nasdaq.com



Genuine Parts, symbol GPC, is another stock I have owned a long time and have enjoyed robust capital gains and dividend growth.  However, during the past three years revenue has stagnated $15,339 (m) from $15,341(m).  With that in mind and a meager 2.6% dividend growth, I sold half of my position today.

Diversification:

Johnson & Johnson is such a good stock but their stock price is pretty high.  I have owned this stock a long time and periodically taken profit.   It is hard to recommend trimming my position, however, I personally own an awful lot of big pharma.  I am probably going to use half of the proceeds to move into Pfizer, symbol PFE, which has a higher yield.   A post I did recently comparing big pharma stocks makes me want to the buy the revenue stream PFE offers.  I will still hold half of my JNJ position.

JNJ Chart from Nasdaq.com




I sold a large portion of TC Pipelines an MLP, symbol TCP,   My reason is similar to JNJ.  TCP is a high yielder, but I just own too much in the energy space and particularly in the MLP space.

Part of the diversification puzzle is not just sector diversification, it is also to make sure you do not have too much money in any one stock.  Leggett and Platt, symbol LEG is an example.  I have benefited greatly from the stock price increase and the dividend increases (up 4.4% over the past 3 years.)  However, I just own too much so I sold part of my LEG.

Sysco, symbol SYY, is a similar stock for me as LEG.  I just simply own too much of this very good Dividend Machine and am trimming my position.

Excess Valuation:

Valuation is a tough metric.  The most simple measure for the ordinary investor is P/E ratio (price earnings.)  I have no argument with investors who use a different metric.  I considered lightening up on Microsoft, symbol MSFT, because with a P/E ratio of 30, MSFT is richly valued.   Since, earnings are expected to grow as MSFT capitalizes on their "cloud" work, I am willing to stick with MSFT.  However, if I can unload some by using a call, I am also willing to do that.  Today I sold an April $65 call for a premium of $1.06.  If they take it, I like the gain.  If they do not, I get to keep it.

Paychex, symbol PAYX, was a good Dividend Machine pick.  I added it when I was working on the 2016 portfolio (now closed.)  I do not have a big enough position to make a difference and with a P/E ratio of 29, this stock was a good target for me to sell to raise cash. Although I sold a call on my position in the past, I could not find a call and therefore, sold all my shares in PAYX. 

Summary:

I must reinforce that market timing is fool's folly, but taking profit is never a bad idea.  In this post you can see I took nearly a 50% gain on stocks while improving my portfolio.  Never a bad idea.

M* MoneyMadam

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