Showing posts with label Covered calls. Show all posts
Showing posts with label Covered calls. Show all posts

Wednesday, April 1, 2020

What should retirees do?

  • Understand impact of crisis from Government printing trillions upon trillions of dollars
  • Adjust investment plan to tilt toward income growth
  • Use dividend stocks with dividend growth history over bonds 
  • Employ a covered call strategy on selected dividend stocks

Most of us are income investors who also know in the best of times the need for more income in the future is expected.  Good financial planning means you include this goal when picking your investments.

We will get over the Corona Virus impact but as James Mackintosh said in the Wall Street Journal:  "There'll be debt to pay after crisis."

What will cause problems for us?

  • Government just printed 2 Trillion Dollars
  • With more and more dollars out there, those we have are worth less
  • In addition we have cut down on making things
  • We will have to spend more of our dollars buying scarcer goods whose prices will probably rise. 

This is not a difficult scenario to swallow.  There may be pockets such as energy that will not respond in this way.  "Stuff" however will cost more.  If you believe in this scenario then the question is:

What to do.

  • Buy as many scarce goods as you can
  • Accumulate more dollars as you will need them to live on
  • Stimulate increasing supply to get supply to catch up

In our society, a capitalist society equilibrium will win, but that takes time.  And the individual investor has little influence on stimulating the supply chain for "Stuff."  We could hoard goods to hedge against increasing prices.  We could go back to work to accumulate more dollars to put to work so we can afford rising prices.

When you can't go to work, your money goes to work.  Bonds have been a safe haven but are not a good investment.  Safe Bond yields at half of a percent make you think of buying higher risk bonds and those carry a good chance of losing value.

Stocks with dividends and a history of dividend growth are a better way to earn the 3 or more percent yield you need.  You know 3% on a million dollar portfolio is only $30,000 per year.

Real estate is an investment class of its own.  Ordinary retired investors use REIT stocks as a proxy for owning real estate and indeed REIT's provide a lot of yield.  REIT's are complex; you need to know what  you are doing.

Another source of income for ordinary investors is to sell, also known as write, calls on stocks you own.  This is a bit complex but not that difficult if you follow some guidelines.

I posit the best investment for retirees who want income to grow and want more than just 3-4% is dividend stocks with a covered call strategy.  I cannot reinforce this enough.  I make my income off of dividends and covered call premium income on those dividend stocks.  You can easily increase your 3-4% by another 1-3% by employing this strategy.

Never before have dividend stocks been so cheap.  The market will continue to bump along the bottom while we work through the crises.  Quality dividend stocks are available.  Here is what I look for:

  • Dividend yield 2.5% or more
  • 3 Yr Dividend growth rate 4% or more
  • Optionable
  • P/E ratio (trailing) 15 or less
  • D/E (debt to equity ratio) 1 or less
  • No dividend reduction if paying a dividend in 2008

Let's look at an example available today.

Intel, symbol INTC, is a common holding in a conservative investor's portfolio.  I certainly have been in and out of Intel for years.  My previous cost basis is in the mid teens.  As INTC corrected recently, I nibbled at around $56.  That was about 19% below the recent high of $69.29.  Intel corrected even more and those shares are under water.  Today INTC is trading around $53.00- $54.00

The table below shows the quality of Intel's fundamentals.  Notice that earnings and P/E ratios are based on trailing earnings.  Intel's P/E ratio is 10.99.  We do not know how earnings will be affected by this crisis so P/E's will change.

I call this a quality company because even if earnings are cut in half, they can still cover the dividend.  With a D/E ratio of only .37.  I think the dividend is quite safe.  

One of the most important pieces to building a portfolio for retirement is to have about 35 stocks and to have enough of a position in a stock that you can work covered calls.

INTC Annual EPS Annual Div
  Earnings>Dividend $4.78 $1.32
  Debt to Equity Ratio 0.37
  Dividend Yield 2.47%
  3 Yr. Rev. Growth 7.22%
  3 Yr. Div. Growth 8.90%
  Cash Flow/Share $7.41

But, and it is a big but, living on a dividend yield of 2.47% is not easy.  One would have hoped that with the price correction, the yield would be higher.  On the other hand, I like the quality of the fundamentals enough that I can swallow having this name in my portfolio.

I sold a call today on those new shares.  I picked a strike price of $60 so if I am called away, I make capital gains.  If I am not called away, I pocket the premium.

I picked an expiration date after the next ex-dividend date which is May 6, 2020.  Provided my shares are not called away before the next ex-dividend date, I get to pocket the dividend and the premium.

Using my Cost Basis Price on Open Call Expiration 
INTC $53.44 5/6/2020
Cost Basis:   12/3/2019 $56.00
Strike Price: $60.00
Call Premium:  $1.25
Dividend  5/6/2020 $0.330
Call Yield on Basis 2.23%
Call + Dividend Yield on Basis 2.82%
$ Gain if Assigned $5.58
Max Return  if Assigned 9.96%

Basis is price on open Price on Open Call Expiration 
INTC $53.44 5/6/2020
Cost Basis:   Price on Option Contract Open $53.44
Strike Price: $60.00
Call Premium:  $1.25
Dividend  5/6/2020 $0.330
Call Yield on Basis 2.34%
Call + Dividend Yield on Basis 2.96%
$ Gain if Assigned $8.14
Max Return  if Assigned 15.23%

Looking at INTC's fundamentals, I am willing to risk not losing the shares even though I am underwater for now because I am adding a quality stock with low debt and a reasonable dividend yield.

Of course all this data will change over the coming months.  But even if earnings are cut in half, INTC should still be able to maintain the dividend.  Even between 2008 and 2009 INTC was able to increase their dividend 3.2% while earnings were cut by 16% during the same time frame. When I received that $1.25 premium, that is equivalent to three extra dividends.  

If I hold Intel through a full year, and sell only this one call, my income yield on the $53.44 is up to 4.7%.  Now that is an investment I can live on.  Just think how you can milk your stocks by doing more than 1 call per year.  With multiple lots (you must have 100 shares to sell one option contract) you can roll the expiration dates as the market provides opportunities.

With the market so very volatile, there is no way to tell how this trade will unfold;  let's just see what happens.

You have to do your work.  On my first screen I found 81 stocks, but then on closer inspection I found maybe 10 stocks where I could work this strategy.  I wrote up Intel because it is such a quality stock to add on weakness or to start a position and because I have had such success selling calls.

M* MoneyMadam
Disclosure:  Long INTC with calls

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Sunday, December 14, 2014

INTC income potential

He thinks like I do.  MM

Intel Has Outperformed In 2014 And Offers 2 Ways To Earn An 8%-Plus Yield $INTC, $AMD, $TXN

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Monday, April 21, 2014

Dividends & Income When do I sell?

When do I sell?

I sell when a stock has increased in price so much that the dividend yield is less than 3% and I can boost my income from that stock position by selling calls.   

A few other circumstances may make me sell but this post concentrates on MSFT as an example of when I sell because my stock is taken by a call buyer.      

The story is described below.

MSFT a first time Dividend Machine.  This post includes the fundamental data that made MSFT a dividend machine and profiles a covered call opportunity to boost income.   Incidentally, the call was not taken. 

MSFT, a dead money conundrum.  This post shows that confidence in the dividend quality of a stock pays off. I added to my position.  

MSFT tests the best income investor.  This post shows how you can make income and capital gains on a stock like MSFT.

And then comes the payoff and the loss:

In January 2014, I sold April $39 calls on my position.   If you read the above posts, you know the basis on MSFT is about $27.50.    When I sold the calls, MSFT’s stock price was in the $36 range and at the high of the year.  This week, when April calls expired, I lost my MSFT.  The call buyer (s) bought them all from me.

The loss and gain are bittersweet.  Total gain on MSFT is in the fifty percent range.  But more important, I lost a stock that is increasing the dividend by over 20 percent per year on average.

If  MSFT corrects enough that I can get close to 3.5% dividend yield, I will jump back in.  Or maybe I will buy at less than a 3.5% yield when calls that will net me a four or five percent yield are available and forty percent capital gains are likely.

Until we find our next 2014 Dividend Machine, these are the kinds of stocks that make sense for income investors.


BTW, I also sell when the stock price has increased so high that the yield is less than 2.5% and the P/E ratio is at historical highs but no calls are available.  KMP is a good example.  

Another reason to sell would be a dividend cut or a big increase in debt.  PBI is another good example.

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Friday, April 4, 2014

Dividends & Income Dividend Machine for 2014 - LEG Leggett & Platt

Another dividend machine for 2014. 

I have owned this stock for a while and now I think it should be a 2014 Dividend Machine.  Leggett & Platt makes all kinds of things for homes, offices, airplanes … they’re everywhere.   As you know I do not use current trends like housing starts to determine which stocks to buy.  I use my four Dividend Machine criteria and by golly LEG qualifies.

I noticed it today as I was looking through my portfolio for covered calls.    I found a nice call on LEG and I checked the Dividend Machine Fundamentals of LEG to make sure I still wanted to own it.  LEG's Dividend Machine Fundamentals are presented below.

Leggett & Platt (LEG) Dividend Machine Fundamentals

Today, as I write, LEG is trading about $32.50 which is the price I will use for my analysis.    Over the past 8 quarters, LEG consistently earned more than it paid out in dividends.   EPS = $1.34 and Dividends = $1.20.   LEG’s dividend yield is 3.68%. 

Dividend increases are very important to income investors and LEG makes the grade with an average dividend increase of 4% over the past five years.  LEG has been solidly managed and sports a debt to equity (D/E) ratio of .625.

See the table below for a summary of LEG’s Dividend Machine Fundamentals. 

Covered Call on LEG

The table below summarizes the income potential for investors who buy LEG at $32.50 and sell a June $35 call.   This kind of additional income is why I own LEG as one of my Dividend Machines.

Consider LEG for the income producing portion of your investment portfolio.

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