Retired people who live off the income from their portfolios are in turmoil.  We have no safe source of income.  The stock market has made even the worst invest adviser look good and we have felt rich as we watch P/E ratios increase and interest rates go down.

Now we are faced with market turmoil that questions the wisdom of staying in the market and yet our income opportunities outside the market are poor, U.S. Treasuries yield nothing.

Yet, if you are a retired person who lives off the income from your portfolio, you have been through stock market meltdowns before; actually several times.  The difference now is your expenses are two times what they were in the dot com collapse in 2001 and your get basically no income from debt instruments where early in the decade you could get decent yield.  What is a disciplined, knowledgeable investor to do?  Here is my approach.

I am adding to certain stocks. very carefully.  I believe it is called nibbling.  Here is how I am approaching my income portfolio.

Conditions:  I am not looking to add a new position.  I am combing through my portfolio for stocks I want more of based on their dividend yield, their dividend growth and their balance sheet.

• You have a low cost basis in a dividend stock
• You still like the stock and have been adding or wanting to add over time even at higher prices than you paid.
• You have money available to invest:  you receive more dividends, interest, and call premiums and other sources of income than you spend.

During situations like a long bull market, we investors can get a little lazy about working our portfolio.  We tend to look at our holdings more closely when we are not sure they are safe. 

I suggest looking for stocks in your portfolio that are winners.  One of the nice aspects of holding 35 or so stocks in your income portfolio is that you can have a concentrated position in each holding.  That allows you to work some of your holdings by adding to them during a market correction even through you are buying at prices higher than your cost basis.  

The concept of dollar cost averaging down has never worked for me.  I like to add to my winners eventhough I may have a loss on a more recent buy.  Maybe we would call it a hybrid dollar cost average strategy.  

I say adding to a current position is always a prudent decision.  What to look for.

• Balance sheet
• Dividend performance during 2008-2009 meltdown
• Current P/E 
• Dividend yield greater than average yield on your portfolio
• Ability to survive a 50% decrease in earnings and still cover the dividend

EXAMPLES OF STOCKS TO ADD TO INCREASE PORTFOLIO YIELD

Using the stocks selected in the 2011 portfolio.  The entire point of adding is to boost income.   The 2011 portfolio yields only 2.9% on the current value.  Income has increased by 70% during these last 9 years and value effective on the close 3/3/202 has increased by 120%.  These are acceptable metrics.

However a yield of 2.9% is not as robust as we would like.  If we have money to invest which are the best stocks to add for dividend income.

The 2011 portfolio holds more stocks than I really like, there are 52 symbols.  I analyzed the entire group eliminating those on which I have a loss and eliminating those with higher D/E ratios than I can stomach in 2020 in spite of cheap interest rates.

Out of that scan, I found 6 stocks worth the effort.  At the current price each stock has a yield greater than the portfolio average; each stock has an acceptable D/E ratio.  Moreover, 5 of the 6 stocks increased the dividend between 2007 and 2009.  PSX does not have dividend history during that time frame.

3/4/2020	Stocks to add for Dividend Yield - Using M* 2011 portfolio holdings
Industry	Symbol	Price	Correction since 2/21	Div Yield	D/E Ratio	P/E
Oil & Gas Integrated	CVX	$98.53	11.09%	4.04%	0.21	16.9
Banks - Regional - US	CFR	$79.24	15.49%	2.94%	0.06	13.7
Specialty Retail	GPC	$89.25	9.24%	2.90%	1.16	19.3
Leisure	HAS	$77.85	15.14%	2.62%	0.93	50.4
Oil & Gas Refining & Marketing	PSX	$74.63	17.29%	3.19%	0.48	11.4
Packaging & Containers	SON	$52.28	9.36%	2.80%	1.01	19.2

I would eliminate HAS based on the P/E. And, I would prefer a bigger correction in GPC with barely a 9% correction and a P/E of 19.3.  Similarly I would prefer more of a correction in SON.

Since we are so conservative, we worry about everything.  If we add to a position we want to know what would happen to our income during an economic disruption similar to 2007-2009. See the dividend performance of all of the picks during that time frame.

Symbol	Qtr Div 2nd qtr 2007	Qtr Div 2nd qtr 2009	Div Growth
CVX	$1.38	$1.79	29.71%
CFR	$0.79	$1.06	34.18%
GPC	$0.97	$1.16	19.59%
HAS	$0.37	$0.60	62.16%
PSX	no history	started divs in 2013
SON	$0.65	$0.77	18.46%

I find this result encouraging.  Each one of these companies was able to not only weather the storm of the financial crisis that caused stock prices to crater, but these stocks also continued to pay their stockholders an ever increasing dividend.

Can these stocks do it again? What happens if there is real fundamental deterioration of these stocks.  If earnings were cut in half would earnings cover the dividend?

Symbol	Current Earnings	EPS cut in half	Dividend	Coverage Ratio
CVX	$1.55	$0.78	$4.76	-3.985
CFR	$6.88	$3.44	$2.84	0.6
GPC	$4.26	$2.13	$3.05	-0.92
HAS	$4.02	$2.01	$2.72	-0.71
PSX	$6.80	$3.40	$3.60	-0.2
SON	$2.90	$1.45	$1.72	-0.27

Two stocks stand out.  One is Chevron with poor recent earnings.  It appears that covering the dividend with earnings could be a problem.

The other stock is Cullen and Frost Bankers.  If their earnings are cut in half they can still cover the dividend.

EXAMPLES OF STOCKS TO ADD FOR DIVIDEND AND CALL PREMIUM INCOME

If you use a covered call strategy on stocks where you keep your low cost basis shares and trade more expensive shares you boost your income with covered calls.

• 10% correction on your most recent buy
• Each add should have a call yielding no less than a quarterly dividend
• Strike price is above the price of your add

Again using the holdings in my 2011 portfolio, I found 2 additional stocks where I have a gain, but a 10% or more recent loss.  These stocks have good balance sheets, but their dividends are less than the yield on the portfolio.  

They are Intel, INTC and Raytheon, RTN.  

Buying stocks with a puny dividend  at higher prices than my cost basis makes me question my judgement.  I do it when I can supplement my income with covered calls. 

Today  I looked at calls on all the above mentioned stocks and here is what I found.

Symbol	Price	Strike	Premium	Added Yield	Expires
RTN	$201.34	$220.00	$2.40	1.19%	4/17/2020
INTC	$58.68	$65.00	$1.10	1.87%	5/15/2020
CFR	$79.24	$85.00	$1.50	1.89%	4/17/2020
PSX	$74.63	$82.50	$1.50	2.01%	5/15/2020

If I add additional shares, even with the correction, I am adding to my cost basis all for the purpose of increasing my income.  If I keep the shares beause the call expires, I have added a quality stock and I have beat the yield on my portfolio.  Just by adding an extra quarterly dividend per year on a quality stock, you increase your income by 25% .    If my shares are taken, I pocket both the premium and capital gain.   

These are all good scenarios.  Should the shares retreat again and I have money to invest, I will do the same analysis as presented above.

This is a volatile market.  Do your home work and do the math on your trades.  You can make a living on dividend stocks and covered calls.  

M* MoneyMadam

Disclosure:  Long INTC, CVX,

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Maximize yield with capital gain potential MPC CVX or XOM

The goal of every income investor is income followed closely by capital preservation.  Next on our list of goals is to maximize income and retain the opportunity for capital gains.

• The goal of the trades discussed in this post are to achieve 8% annualized cash flow from a combination of dividends and covered call premiums and to keep an opportunity for capital gains.
• My analysis illustrates how to determine how much premium from a covered call you need to meet your goal.
• In this article I present three stocks to consider with only one of these stocks that meets my 8% hurdle. 

In reality this is just a math exercise.  You start with either your basis on a stock or the target price at which you want to buy a stock.  For me I want 8% annual income yield on these stocks.  I will discuss why I set 8% for these stocks later in the post.   Once you have that number in hand, subtract the annual dividend.   After subtracting the dividend from the desired total income, you can determine how much you want in call premiums.

Since you want to capture the dividend with each call expiration date, you can expect to sell no more than 3 calls per year.    Assuming you actually can sell three calls per year, you simply divide the total income you want from the call premiums by three and that determines the premium you need per call to meet your goal.  Let's look at an example then we can apply this theory to real trades.

EXAMPLE XYZ STOCK

For XYZ stock we need $2.50 of additional income from premiums on covered calls.  If we get lucky you might get the whole $2.50 on the first call.  However, it is more highly likely that you will end up selling, also known as writing, calls three times during a year at an average of $.83 per contract.  One contract is 100 shares.

SCREEN BY PREMIUM FIRST

In this situation, once I target a stock, I start by looking for premiums rather than strike price.  In most of my covered call trades, I look for a strike price no less than 8% above my basis and usually, I like 10% or more.  I want a strike price high enough that it is not likely to be called away.

On a potful of stocks, however, I will start by looking for a premium and then determine which expiration date is after the next ex-dividend date.  In other words you do not want to sell a call with an expiration date before an upcoming ex-dividend date.  The last value I look at is strike price.

These are good stocks and I know I risk losing my shares if the strike price is too low.  If the best premium comes from an expiration date in fewer than 30 days, I am more willing to risk losing the shares to the call buyer but never, ever at below my basis.   I always want a capital gain if the shares are assigned to the call buyer.

How much capital gain I want is different with each and every stock.  Stocks like Broadcom, symbol AVGO, are very volatile.  Tweet, tariff and headline news can hammer these stocks providing an entry point and these same factors can send it soaring which makes the calls create more income for us.  Picking a high strike price is appropriate.  If you get hit, you'll likely have another chance to get in.

Other stocks are not so volatile and you are at less risk of losing your shares even when you pick a strike price only 5% or so above your basis. Let's get to specifics.

CVX (Chevron), MPC (Marathon Petroleum) and XOM (Exxon Mobil)

Below are tables of the calls available when I did my search today. November 4, 2019.

Remember, I want to add one or more of these stocks and am looking for an annual combined (dividend plus call premium) yield of 8%.

The eight percent comes from the idea that this group of stocks needs to create enough income to fund a specific project.  For me it is an annual charitable contribution but you might think of the idea when you are trying to create the income you need for your required minimal distribution from an IRA.    You don't have to use 8%.  If your hurdle is 5% simply change the parameters in the calculation.

Chevron CVX

All three stocks have good balance sheets.  Chevron carries a D/E (debt to equity ratio of only .20.)    They all have good dividend yields, Chevron's is over 4%.  And they all have revenue growth.  They earn more than they pay out in dividends as measured by EPS and free cash flow.

You can see from the table above, the concept that I can get 8% annual return on this stock by using dividends and calls is not encouraging.  I will pass on the single call available with the premium I
need.

Marathon Petroleum MPC

MPC has the highest D/E ratio at .91 and that it is still acceptable.  It has the lowest dividend yield of 3.19% but that too is acceptable because MPC has the most robust revenue growth.  Revenue growth stimulates the juices of the call buyers.  Moreover, there has been speculation that MPC may split up to provide more shareholder value.

You can see from the table above, we have more than one option to consider.  Note the first call after the ex dividend date is November 22, 2019.    You cannot go out too long on the expiration date or you will not be able to sell three calls in a year.   Within 90 days, MPC provides two calls worth consideration.

December 20, 2019 $72.50 call for a premium of $1.18 and the January 17, 2020 calls for a premium of $1.32.

Exxon Mobil XOM

XOM pays the best dividend of the group with a yield of 5%.  XOM also has a good balance sheet with a D/E ratio of .24.  Revenue growth is the slowest of the group.  XOM calls are interesting.

Notice the only call for me that has interest is the January 17, 2020.  You could sell this call and receive two of the three call premiums you need to receive an 8% combined income yield.  However, the capital gain opportunity is weak at only 1.16%.    You could very easily lose your shares to the call buyer.

END RESULT

Today I added MPC and sold two calls.  I sold the December 20, 2019 $72.50 call and the January 17, 2020 $75.00 call.

We will just have to see what happens.  This is an exercise in working calls in a market with an upside bias.  It is a conservative approach because in the end if the market tanks 'ala 2009, we will still have a stock with steady income and a solid balance sheet.

Good income investing.

M* MoneyMadam
Disclosure:  Long CVX, MPC, XOM with calls on MPC

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Two income ideas for this pricey market

Marty Zwieg (may he rest in peace) said "don't fight the fed. and don't fight the tape."  It is hard to buy into a hot market, but when you need income you have to deploy capital.  I am hoping Marty was right.  I am not going to fight the tape with two ideas for today.

• Don't fight the tape, employ capital for income

• Pristine balance sheets are very important for income investors

• Covered calls are an income investor's friend

• Do not ignore the risk of compromised upside potential when selling calls

Both of these stocks have pristine balance sheets.   A solid balance sheet does not mean a stock's price will not go down but it does go a long way toward making sure the company can continue to pay the dividend and that the company will not go down.

Every income investor needs to be confident that dividends will continue and hopefully increase.  We need to protect our principal since most of us are not working any more and depend on our money at work.  Covered call opportunities are icing on the cake for income investors.

Let's look at the fundamentals of the two stock ideas for today:   CVX and INTC.

Chevron - CVX

Chevron has been through a very rough patch.  Between the years 2014 and 2016 their revenue was cut in half.   The stock price suffered and earnings were less than dividends paid out for a while.  But things have turned around with the increase in oil prices.

During the bad years, CVX, increased the dividend but not by much.  Their average dividend increase over the three year period of May, 2015 through May, 2018 was only 1.55%.  This too has changed.  CVX's most recent dividend increase was 3.7%.  I really like a 4% dividend increase but 3.7% is o.k. Since CVX has a yield of 3.53%, it beats any U.S. treasury available today.

The table below presents the fundamentals I use to evaluate my income stocks.

In summary, CVX has a good balance sheet, increasing revenues, earnings per share greater than dividends paid out and a growing dividend.  These are good fundamentals.

Intel - INTC

Intel is a totally different stock than CVX.  What they have in common is the solid balance sheet, growing revenues and growing dividends.   Take a look at INTC's fundamentals presented in the table below.

Both stocks carry a current P/E (price earnings) ratio in the mid 20's.   Both companies have enough earnings growth that their forward P/E's are expected to be in the mid teens.  This is somewhat comforting as we don't like to buy stocks that are too expensive during times when we try to not "fight the tape."

CVX is more vulnerable to price fluctuations than INTC because CVX is dependent on the price of oil whereas INTC is not dependent on any one factor.  Technology will continue to develop and I believe Intel will not be left behind.

Covered Calls on CVX and INTC

Both of these stocks have calls that are intriguing.  Remember with calls you risk limiting your upside potential.  Therefore, you may want to sell calls on only part of your position.  If you are like me and feel there is always another stock to buy if you lose your shares in either stock, then you can make this a short term income trade.

Calls on CVX

I found two calls I like on CVX.  One expires in August and pays you 1% yield on the strike price of $135.   However, the ex-dividend date is just one day before the call expires and the call buyer could exercise the call just before the ex-dividend date and you get only the 1% premium plus the capital gain.

In the second call, you have to wait until September for the call to expire but you get a 1.5% yield from the call premium and most likely will receive the dividend as well.  If exercised, you will receive the same capital gain.

Call on INTC

The Intel call is more straight forward.  I selected an August 17, 2018 expiration date with a strike price of $60.   The premium on this call is $1.08.   INTC's ex-dividend date is expected to be about August 4, 2018 and you should receive the dividend of $.30 provided the call is not exercised early.

These are two ideas to consider.  I executed all three today.  I bought more CVX and INTC and sold the two CVX calls and the INTC calls.  Let's see how we do.

M* MoneyMadam
Disclosure:  Long CVX and INTC with calls

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Added more Chevron now selling a Call

I have been an owner of Chevron for a long time.  Chevron, symbol CVX, is in my 2011, 2012, 2013,2014 and 2015 portfolios.  Then the price of oil crashed creating major chaos in the oil companies.  I added and then sold a call; my reasoning is presented below.

• EPS have returned and now exceed dividends paid out
• Dividend yield far exceeds 2 year U.S. Treasury
• Dividend growth returns and exceeds inflation
• Balance sheet is strong as measured by D/E ratio

Recently, when the over all market weakened I added some more CVX at $113.15.  This did not seem wise when CVX traded at $108.90 intraday on February 22, 2018.  I am reminded that you cannot pick a precise bottom.

CVX Fundamentals

Chevron's earnings have finally rebounded as the price of oil has improved and CVX has made some structural changes.  Finally E.P.S (earnings per share) are exceeding dividends paid out.

Fundamentally, Chevron's 4% yield provides much better retirement income for me than a 2 year U.S. Treasury.  Moreover, dividend growth has resumed.  CVX's most recent dividend increase from $1.08 to $1.12 is an increase of 3.7%.  I prefer 4% dividend growth but 3.7% beats current inflation.

Chevron's dividend history is interesting.  They don't suspend the dividend but when they need to husband cash, they will provide a minimal dividend increase.  When cash flow is more robust, Chevron shares it with its share holders.

Lastly, Chevron's D/E ratio is a mere .2855 which is quite low for a company that needs a lot of money to do their work.

Selling CVX Call

Today, Chevron is trading above $114 so I am finally in the money of this latest lot.  I sold a call today that varies a little from my routine.  I selected a June 15, 2018 expiration date.  This is about 10 days longer than I usually go out.  My reason is to get the May Dividend.  May's ex-dividend date has not yet been announced but it should be about May 17 and the May call expires May 18.  Therefore, I selected the June expiration.

See the table below for the trade details.

I intend to stay long CVX but it is not the only oil company I have in my portfolio so I don't want too much.  Overall, I am encouraged by a few articles in the Wall Street Journal today about the strength expected in the price of oil which will help CVX and my other oils.

If the call buyer does take my extra share, that is fine with me.  I love a greater than 12% gain in under 120 days.

M* MoneyMadam

Disclosure:  Long CVX with calls

http://www.themoneymadam.com/2011/01/dividend-machine-chevron-cvx-11-of-52.html
Boost your yield on CVX to over four percent this year!
http://www.themoneymadam.com/2014/01/dividends-income-2014-dividend-machine_20.html
http://www.themoneymadam.com/2015/04/a-four-year-history-of-cvx-next-2015.html

http://online.wsj.com/article/SB11796467727259013743904584081183365492134.html?mod=ITP_businessandfinance_0

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CVX good insight

If you are long  CVX like I am, this is an encouraging read. M*

Chevron: Simply Impressive http://seekingalpha.com/article/4028189?source=ansh-d $CVX

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CVX Income steady

All Dividend Machine portfolios are stuck with Chevron.  My theory is to buy a stock that provides nice income while you wait for fundamental improvement.  MM

Chevron declares $1.07 dividend http://seekingalpha.com/currents/post/2869536?source=ansh-d $CVX

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Chevron CVX You cannot pick the bottom

Not too long ago one half of my position in Chevron was called away. Do I really want to lose all my CVX?  It has been such a good income stock but the yield was below 3%.  Then the price of oil crashed. 

I am happy to have these shares of Chevron as they provide nice steady income.    Recent increases have not been good but what has been good recently? 

I just have to add to CVX again.  Buy when there is blood in the streets and that would have been last week.  You cannot pick the bottom.  If you want safety, look at the long term dividend payout through thick and thin. Look at the D/E ratio.  I have to add when no one else wants it.  I can add even more income with fantastic covered calls.    See below

THE CHEVRON TRADE

Buy 300 shares at $76.84 based on closing price 9/8/2015.

Sell an October 80 call for $1.68














Sell two November $85 calls for $1.05
Receive the November dividend of $1.07 on 300 shares or bank the capital gain.




Let's see what happens tomorrow.

TheMoneyMadam

Disclosure:  Long CVX expecting to add with calls

9/9/2015 Update:  Sticking with these calls.  Putting in limit orders of $1.05 on the Nov. $85and $1.70 on the October $80.    If you are really greedy you might consider a November $80 for a whopping $2.47.  MM

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