I invest for income.  I need a dividend; I need a dividend that grows; I like low risk of bankruptcy and I love covered calls.   Not a unique strategy.   Many successful investors who live off of their portfolio income invest with a similar strategy.

In the retail space, we find low valuations and quite a bit of volatility.  Everybody has an opinion and it can change on a dime.  I named Kohl's, symbol KSS, as my first Dividend Machine pick for 2017 and it has been up and down.  Most significantly, though, is the cash it spins off to me through the dividend and through calls.

Target is a similar story.   In the charts below, you can see that Kohl's has a better call than Target.










Moreover, Kohl's has a higher dividend than Target:  KSS = 5.39%  yield TGT = 4.25% yield.
Kohl's most recent dividend increase is better:  KSS = 10% dividend increase TGT = 3.33% dividend increase.
Kohl's is a bit cheaper using P/E ratio:  KSS = 11.3 P/E ratio TGT = 12.26 P/E ratio.
Percent of earnings paid out in dividends is again won by KSS:  KSS 50% payout ratio TGT = 61.2% payout ratio.
Lastly, KSS beats TGT on D/E (debt to equity ratio):  KSS = .5561 D/E ratio TGT = 1.103 D/E ratio.

Put it all together and KSS is a nice stock in a volatile space that will reward the income investor with high dividend yield, robust dividend growth, and covered call option opportunity.

M* MoneyMadam
Disclosure:  long KSS with calls long TGT

http://www.themoneymadam.com/2017/01/kohls-kss-first-2017-dividend-machine.html

http://www.themoneymadam.com/2017/04/covered-calls-2-edged-sword-gild-kss.html

http://www.themoneymadam.com/2017/05/kohls-kss-option.html

http://www.themoneymadam.com/2017/07/income-investors-should-consider-kss.html

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Income Investors should consider KSS Kohl's

I was recently watching Jim Cramer's show on CNBC when he discussed differences between investing and trading.   Since investing is a long term project, when investing, he said, you want the price of the stock to initially go down so you can buy more.  Trading is a short term project.  When trading you want the stock price to go up so you can sell and move on.

When I write about a stock in this blog it is strictly from an investor's viewpoint.  Moreover, I invest for income as do my readers.   If you take Cramer's advice KSS, Kohl's is a stock to consider.

• Income investors do not sell shares to pay their bills, they use stock dividends to provide cash flow.
• Dividend growth investors expect their stocks to increase their income over time.
• Dividend investors are willing to add to positions when stock prices sink below their basis.
• Income investors also use covered calls to boost their cash flow.

Kohl's was my first Dividend Machine in 2017 and boy have I gotten a lot of bad mail about that one.  I am used to that and I have no choice but to hold KSS because I do not trade, buy or sell, any holdings in the portfolios I publish.   As an income investment KSS has been a good one.  And for investors, KSS also provides the very opportunity Cramer presented   The stock price has gone down.

DIVIDEND INCOME FROM KSS

I have posted several blogs about Kohls, symbol, KSS.  I like it for income.  Once source of income  has been the dividend.   KSS pays a dividend of $2.20 annually for a yield of 5.4%.  Income from dividends since establishing a long position in KSS on January 17, 2017 @ $41.88 has been $1.10.  It is significant to note that Kohl's most recent dividend increase was 10%.







Dividend income from KSS on the first 100 shares held since January 17, 2017 was $110.00.   

CALL INCOME FROM KSS

At the same time I wrote about adding KSS in January, I sold (also known as write) a call.  I picked an April $47.50 strike price and received $1.25 per share in call premium or $125 for the 100 shares.  I liked the expiration date because it was after the first dividend opportunity in March providing another $55 of income.

This April $47.50 call expired.  On the expiration date KSS closed at $40.07. Upon expiration, I held. In May I received an alert that calls were selling well.  On May 10, 2017, I sold another call.  This time I selected a July $45 strike and received $1.00.  Again, I selected a strike date after the next dividend which was in March so that I could book both the call premium and hopefully get the dividend.   KSS was trading at $40.34 at the time.

 This $45.00 call also expired and I continued to hold.  On Monday, July 24, 2017 I sold another call.  I selected an October $45 strike and received $.90.  By now you see how these rolling calls work.  I should get the September dividend since the call expiration date is after the next expected ex-dividend date.

On Monday, KSS was trading at $39.36.   Here is where I employed Cramer's advice and added to my position @ $39.36.

The table below illustrates the call income received.  Note that the first two calls were one contract each.  One contract is equal to 100 shares.  The final call was on two contracts or 200 shares.



Rolling calls every 90 days is an excellent tool for income investors.  Not all stocks provide this opportunity.  KSS and a few others do.  

SUMMARY

If you calculate this income experiment using only the original 100 shares bought in January, total income on those shares is as follows:



Any investment that you hold for just over 6 months that earns you 10% in income is a good investment for income investors.

KSS is in a difficult industry, brick and mortar retail.  It is not a growth stock.  KSS has decent fundamentals.  With a D/E ratio (debt to equity ratio) around .53, their balance sheet is solid.  Revenues have slowed but remain solid.

When I sold the July call in May, I used another of Cramer's words of wisdom for guidance.  Basically he opined that you need not give up on retail.  He specifically discussed KSS.  You can hear that broadcast on this link.   http://www.cnbc.com/video/2017/05/10/cramers-stop-trading-kss.html

In a recent interview, KSS's president suggested they are optimistic.  His plan is to steal share from struggling competitors.   See this video on CNBC.  http://www.cnbc.com/2017/07/18/kohls-ceo-is-out-to-steal-customers-from-its-struggling-rivals.html

For income investors, KSS is a good investment right now.  The retail space is challenging without a doubt.  Yet, KSS seems to have the fundamentals needed to support the dividend and the strategy to provide speculation on potential which leads to covered call income.

M* MoneyMadam
Disclosure:  Long KSS with calls


Monday's Call:

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Kohl's KSS option

I received an alert today on call activity of Kohl's, symbol KSS.  Kohl's is a controversial 2017 Dividend Machine.   It fits all my criteria and I particularly liked the most recent 10% dividend increase.

Apparently, there is quite a bit of call activity on KSS.  The chart below presents the price of a $42.50 call with an expiration date of May 19, 2017.










With this in mind, I looked for a call further out; a call that would capture a good premium plus the dividend.  I am selling this call today on a portion of my KSS.  You might consider the same move if you are long KSS.  If you bought when I wrote up KSS as a 2017 Dividend Machine the first table presents your potential return.



If you bought KSS today, at $40.34 your potential return is presented in the table below.




M* MoneyMadam

Disclosure:  Long KSS with calls

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Covered calls a 2 edged sword GILD, KSS, MSFT, LLY

Selling covered calls is a frequently used technique to boost income.  I am not talking about trading options.  Trading options is a totally different animal.  Selling covered calls delivers additional income.  When you use them on stocks that already pay a dividend, your income can benefit from both dividends and call premiums.  However, no strategy is perfect including selling covered calls on dividend stocks.  In this post I review 4 calls that just expired (4/21/2017) and review how these can be a two edged sword

• Selling covered calls on dividend stocks can boost your income.
• Calls that are assigned (called away) where the call buyer executes their option to buy your stock can rob you of upside potential.  - Lost Opportunity
• Calls with expiration dates after bad news can saddle you with a stock whose price is deteriorating and you are stuck with it. - Downside Risk

The four calls I am writing about today are Microsoft, MSFT, $65, Eli Lilly, LLY, $80, Kohl's, KSS, $47.50, and Gilead, GILD, $77.50.  All expiration dates were 4/21/2017. 
MSFT and LLY calls were assigned.   The KSS and GILD calls expired.  Let's see how we did.

Microsoft $65 4/21/2017 - An example of how calls should work

I am using one lot of MSFT for this explanation.  I bought this 100 shares on February 23, 2016 at $51.25.  The next day I sold a May 20, 2016 $55 call for a premium of $1.00.   Microsoft is tricky because their ex-dividend date tends to fall on the day before some call expiration dates.  I have had MSFT called early by a very savvy call buyer and I assume they wanted the dividend.

In the case of the May 20, 2016 call , the ex-dividend date was May 17, 2016.  I was in no danger of losing MSFT to the call buyer because it was trading around $51.75 and the buyer would need to pay me $55.

I collected the May dividend and July 20, 2016 I sold another call on these shares.  The strike price this time was $60 and the premium I received was $.85 the expiration date was 10/21/2016.   I always like the premium to be no less than 1% of the strike price.  I love being able to raise the strike price on a stock as my gain increases should the stock be called away. 

Again this call expired as MSFT was trading right at $60 and apparently the call buyer did not want to take the risk to go long.  During the waiting time, I collected another dividend.  After the call expired, I waited for the next opportunity and collected yet another dividend.

Finally on March 2, 2017, I sold one more call on this 100 shares of MSFT.  I was able to move up the strike price to $65 and received a premium of $1.06.  The call expiration was 4/21/2017.  This call was assigned.  Microsoft closed at $66.40 on April 21 so the call buyer paid me $65 for my stock plus the $1.06 to buy the call.  His/her basis is $66.06.  They made a whopping $.34 so far.  See the table below



For me this is the perfect use of covered calls on a dividend stock.  MSFT may move up a lot more and I have more shares in my stable.  As a matter of fact I sold additional calls of $67.50 and $70.

The point of going through the detail of this trade is to show how well covered calls on dividend stocks can work to your benefit.   Now let's look at Lilly

Eli Lilly $80 4/21/2017 - An example of lost opportunity

LLY is a very interesting case.  The only thing Lilly and Microsoft have in common is they are both dividend stocks. MSFT yields 2.4% and LLY yields 2.57%.  Both are a bit pricey when you look at P/E ratios (price to earnings ratio.)  MSFT carries 31 P/E with a forward P/E of 20.5 and LLY 31.74 with a forward P/E estimate of 19.94 earnings growth is expected at both companies.

When I bought LLY,  November 1, 2016  at $73.30 I did it because the calls were so lucrative.  I immediately sold an $80 call with an expiration date of 1/20/2017 for $2.43. This call expired without action.  During the waiting period I collected the November dividend.

LLY's stock price languished in the  $75 to $77 range.  Not long after the above call expired, I sold another call ; a 4/21/2017 with a strike price of $80.  I was not so sure how LLY was going to perform and I was willing to let someone take it.   In this post I am only covering this 100 shares but I will tell you on a later date I received $3.94 for an $85 call.  Calls were robust but once I sold the 4/21 $80, I was stuck with having to sell if the call buyer exercised their option to buy my shares.

That is indeed what happened and Lilly scooted up to $86.34.  I was sure my $80 was gone.  LLY then backed up and closed at $81.89 and that was good enough for the call buyer; they took my shares.  The table below shows the details.



This trade illustrates the lost opportunity of having to hold a stock because it is on call and not being able to sell it when it surges.  The next two calls show how you can get stuck with a looser using covered calls.

Kohl's $47.50 4/21/2017 - A wash

I bought Kolh's, symbol KSS, on January 6, 2017 at $41.50 and I immediately sold a $47.50 April 21, 2017 call and received a premium of $2.01.  This call expired this last Friday and I received the March dividend during the waiting period.

You will see in the table below that KSS has not been an awful trade.  It closed at $40.07 on Friday so the call buyer did not take these shares at $47.50.  I am hoping to sell more calls as I would like to keep the stock in view of their robust dividend; yield is 5.62%.  With the income from the dividend and call, I technically have a wash.  But it is a loss on my basis and that is always worrisome in an industry like retail.  

Gilead $77.50 4/21/2017 - Stuck with a loser

Gilead, GILD, is a real stinker.  I wrote up an article about why I like GILD even though it is hanging around the 52 week low.  This is one cheap stock with a pretty good balance sheet.  I don't know how long it will take to turn it around but with a yield of 3.1% and still good earnings, I am suffering with this holding.  

I bought this lot of GILD on August 16, 2016 at $79.59.   I immediately sold an $85 10/21/2016 for $1.10.  Again during the waiting period, I received the dividend but the stock price was gradually sliding to around $75.   That call expired and January 30, 2017, I sold another $85 call.  This one had an expiration date of 4/21/2017 and I received a premium of $.90.   The table below has all information.



Since I sold the April call, the stock price has eroded.  It closed at $65.93 on Friday.  I don't like having an investment with a 17% loss and this illustrates the perils of using covered calls.  It I may be too late to sell.  Covered calls barely help soothe the pain.

Covered calls are a two edged sword even when employed on dividend stocks.  When I look at all 9 calls I had working, 2 were assigned and 7 expired.  GILD is really the only stinker. 



Qualcomm, QCOM, and National Health Investors, NHI,  like KSS are weak.  Eaton, ETN, and International Paper, IP, are winners like MSFT.

I will still use covered calls on dividend stocks as it has been a winner but you should be aware of the risks and I hope this post helps you.

M* MoneyMadam

Disclosure: Long MSFT, LLY, KSS, GILD, QCOM with calls.  Long ETN, IP, and NHI.

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