Showing posts with label Dividend strategy. Show all posts
Showing posts with label Dividend strategy. 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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Thursday, March 12, 2020

Shouldn't P/E ratios be really low if this is a buying opportunity for ordinary investors?

  • 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.


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.


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 19.63.23%     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 10.12.62%    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.


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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Sunday, December 1, 2013

Small Cap Dividends and Income - Auburn National Bancorp AUBN

This post discusses how Auburn National Bancorp, symbol AUBN, qualifies as a Dividend Machine and has two features that make me want to add it to the income producing portion of my portfolio.

AUBN meets all four Dividend Machine criteria.   This is a small Alabama bank that has been in business since 1990.  AUBN’s dividend history is solid.   If you own AUBN by 12/10/2013 you will receive a quarterly dividend of $.21 on 12/26/2013.   Ten years ago your December quarterly dividend was $.12.  The dividend increase works out to 7.5% per year.    This is good for a small bank that continued to pay you during the financial crises of 2008/2009.   A snapshot of AUBN’s Dividend Machine bona fides is presented in the table below. 

Can you better the Dividend Machine strategy?

Your strategy is dividends and income.  You know you need to beat the 10 year treasury income.  You know your income needs to increase every year.  You want a low risk stock but you are experienced enough to know that even when a major disruption in stock prices occurs, many companies will continue to pay you and even increase your income during these troubled times.   You are disciplined and will stick with your picks. 

Just look at the 2011 Dividend Machine Portfolio and you will find that at least during that year, you could use only four criteria to pick a darn good portfolio of dividend stocks.  The question is, could you do better than the Dividend Machines?

Today I am profiling AUBN and I have two reasons above and beyond the Dividend Machine criteria that make me like this stock.   One is my view of the interest rate curve and the other is the outperformance of small cap stocks.

Interest Rate Curve benefits banks:

Banks lend out the money you deposit.   When they can lend the money at a greater rate than they pay you for holding your money safely, the banks make money.   Today, even small banks, like AUBN, engage in financial transactions that are broader than just making money on your deposits but the effect of rising interest rates on a bank’s ability to make money benefits the bank’s owners.   Interest rates are on the rise.   Nothing alarming yet in terms of inflation, but they are on the rise and that should benefit a banking stock like AUBN.

Small cap Stocks do better:

In a recent post I used another Dividend Machine stock, ESP, to illustrate the positive history of small cap stocks.  AUBN is another example of how well a small cap stock can benefit the income investor’s portfolio.  Vanguard Investments published this report which shows small caps do well.  AUBN’s capitalization is $90 million. 

Consider Auburn National Bancorp for the income producing portion of your portfolio.  AUBN qualified as a Dividend Machine in 2012 and it shows up again today as a stock that meets all four Dividend Machine criteria plus it can take advantage of the interest rate curve and the advantage of being a small cap stock.

The Money Madam
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