I ran into Alfred Ferol playing golf in Palm Beach, though not at Mar-a-Lago*.   He said to me, "did you notice all the real estate for sale?  A property I think should be priced at $1.5 million is now $15 million. "  Yet here I live, quite well, on the income I create without owning a palace in Palm Beach.

The point Alfred was making, is to not measure investments by their price but by the income.  All retired people who live off the income from their investments have to focus on income.

Income is expensive these days.  

When I got to know Alfred, he bought a Certificate of Deposit (CD) earning 18% for 2 years.   Let's put this in perspective: $10,000 @ 18% provides $1,800 simple interest.  Today, you would have to invest $75,000 in a two year CD to get the same $1,800 simple interest income.  Two year CD's pay only 2.4 - 2.5%.   Does that nail the point that income is expensive.

Trade issues are affecting income.

Investors here and abroad are nervous about trade issues and international affairs in general.  The U.S. is the safe haven.  The nervous Nellies are all buying our U.S. backed fixed income which renders it very expensive and low yielding.

 

Alfred re-assured me to not be nervous about trade issues.  Trade is not a problem, it is an opportunity.  Industrial production is much more facile and mobile than in the past.  Capitalism has invaded many continents and the human predilection to do what we have to to eat has provided a very large labor pool.  Today, moving production from China to Vietnam for instance is easier than in the past. 



He admits the trade issues affect stock prices which is why he sees opportunity.  But, you have to find stocks with good fundamentals that are cheap.  Find a stock that is cheap for a reason that will not negatively affect your income. 

A stock that pays a good dividend but is cheap because survival of the company is in question; think Gamestop (GME) or Pitney Bowes (PBI) or even General Electric (GE) is not your target.

Is the stock cheap because upside stock price potential is less than say Chipotle?  But for you it is an opportunity because it produces dividend income and dividend income that grows.  Your first objective in this exercise of picking stocks is income not growth. 

It is all about income.  Income is dividends. Dividends come from earnings and earnings are driven by revenue growth.   Put all that together with a solid balance sheet and you can find stocks with dividends that beat that 2.5% CD.

Guideline for Picking Dividend Stocks.

• Earnings per share, EPS must exceed dividends paid out.  Otherwise, don't take the risk
• Dividend yield has to exceed 2 year U.S. Treasury.  Otherwise, don't take the risk
• Dividend growth has to keep up with inflation
• Debt to equity ratio has to be 1 or less or within industry standard.  Otherwise don't take the risk. 

Industries with low P/E stocks.

Industries with stocks that pay dividends but have low P/E price earnings ratios include:

•  Regional and Commercial Banks, 
• Refiners, 
• Steel, 
• Materials, 
• Auto and Tires in the consumer discretionary area. 
• Grocery stores in retail and finally 
• Railroads.   

There are the industries I will search and these are the criteria I will measure. As I identify stocks I like and that I buy, I will write up their fundamentals and post my trade.   Here is an interesting link to a list of stocks for consideration.   https://www.theonlineinvestor.com/top_25_low_pe_ratios/

Good Income Investing

M* MoneyMadam

* Mar-a-Lago does not have a golf course.  Trump International Golf course is in West Palm Beach

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Caterpillar Covered Call - An explanation of how to create income!

KNRM Caterpillar CAT (Photo credit: Wikipedia)

Caterpillar is the perfect stock to demonstrate how covered calls can boost your income and to discuss the risks associated with this type of strategy.    In this post I will explain why CAT is a good stock to consider for this strategy, the risks of investing in CAT, and how to use the covered call calculator to determine what I expect to gain.

Why Caterpillar has been a good stock for income.

Caterpillar, symbol CAT has been around a long time.  It makes a lot of money; it is a solid company in that it manages it debt and its business very well; CAT shares income with its shareholders and has increased the investor income every year for over 10 years.   

Going back to 2005, after CAT split the stock, you would have received $.25 per share in a quarterly dividend.  Today, those same shares pay $.52.   When you income more than doubles over eight years, you have a good income stock.

What risks exist using Caterpillar?

You risk CAT’s stock price going down, simple as that.   The risk that CAT will reduce or (gasp) eliminate the dividend are very small.    Even during the market crash in 2008-2009, they continued to increase the dividend.    But during that time the stock price moved violently.   Let’s look at a few data points.

April 18, 2005 $41.79 three years later the price has gradually increased to April 17, 2008 $78.59.  On March 2, 2009 the price hit a low of $22.17.    If you bought in April of 2008, you would have lost three quarters of your principle.   Yet your income would have continued and increased every year.  If you bought in March of 2009, you would be considered brilliant because CAT hit a high of $116.20 on February 23, 2012.   Your principle would have increased fivefold.

Your risk, if you buy CAT today at around $80.81, is it could go down to $22 again.   Only you know if you have the courage to take that risk.  

What do I expect to gain?

By adding CAT to my income portfolio, I obviously, expect to add a source of steady and increasing income.  I also expect to boost my income by selling covered calls on the shares I own.   You must have a minimum of 100 shares to sell a covered call.   To review what a covered is:  another person pays you for the option of buying your stock at a specific strike price with a set amount of time.   They do not have the obligation to buy it but you have to sell it to them at the strike price is they decide to exercise their option.  When they buy it, it is considered “assigned.”   The point of the covered call is you get to keep the premium, the money they pay you for the option, no matter what. 

Use this table to learn how to determine your gain.

CAT Aug 2013 Call				Results If Assigned
Strike Price	$        90.00			Cap. Gain	$9.19
Basis	$        80.81			Strike Price - Price Paid
Call Amount	$           1.10			Prem Yield	1.36%
				Call Amt/PricePaid
Dividend	$           1.04			Total Return	14.02%
Must own on April 22 and July 20				Cap Gain+Call Amount+Dividend/Basis

The left table includes the data you need to determine your potential gain.  You need to know the strike price of the call, you cost basis, the call amount which is what you receive, and any dividend that you are entitled to provided you own the stock at the ex-dividend (sometimes called the effective) date.

The right table calculates your return.   Cap. Gain is the gain you would receive based on buying the stock at $80.81 and selling it at $90.00 so you subtract the basis from the strike price.   Premium yield is the call amount of $1.10 divided by the basis expressed in percent.   Total return add all the gains, the capital gain, the call amount and the dividends ($9.19+$1.10+$1.04 = $11.33) divided by the basis of $80.81.   Total return is expressed in percent.   $11.33 divided by $80.81 = 14.02%.

I have used CAT as an income investment many times.   It is rarely a dividend machine because the stock tends to be high enough that the yield is less than my three percent minimum.   However, if Caterpillar’s stock price continues to deteriorate, it may become a dividend machine.  CAT’s stock price would have to go down to around $68 to be a dividend machine.   I would rather it stays in the $80’s and goes back up to $116 while we cash our dividend checks and our deposit our call premiums.

TheMoneyMadam

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Covered Call Income on DOW

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Dividend Machine for week of 8/20/2012 CINF

The Ohio state seal. (Photo credit: Wikipedia)

            Catastrophes come and go but insurance companies seem to be able to weather most storms.  At least Cincinnati Financial symbol (CINF) has been around for a long, long time having weathered many storms. 

            Using my four dividend machine criteria (see the left hand column to review these criteria); you can see that CINF easily makes the grade.

            CINF is located in Ohio.  This well managed company has paid a dividend since 1954 and increased the dividend every year for the past

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Secure Retirement Income - multiple income streams

Multiple income streams are very important in retirement.  Think of multiple income streams as income diversification.    Just as investment diversification among industries is important to protect against capital loss should one industry have trouble, having multiple income streams helps to protect against loss of income.

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Dow down 700 points in 5 weeks; should the income investor care?

                Income investors care about the Dow Jones Industrial Average because many of the quality, dividend producing companies we own are in this average. 

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