Showing posts with label RTN. Show all posts
Showing posts with label RTN. Show all posts

Wednesday, March 4, 2020

Retirees should add to stocks on dips - a conservative guideline

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


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.


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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Sunday, October 15, 2017

Low interest rates are fueling the next crisis

I believe that low, in some cases zero or even negative interest rates will fuel the next crisis.  When the next crises comes has not yet been revealed to me through my crystal ball but it is going to happen.

  • Bond bull leads to need for alternatives
  • Systemic risk not mitigated by regulations
  • Pressure building on assets and cash flows that back bonds
  • Dividend income fared the best last time


A Bond Bull market means the price of bonds is high.  The higher the quality of the bond, the higher the price.  When bond prices go up yield goes down.   Take a look at this graph from that shows the dramatic decrease in yield from CD’s (certificates of deposit) over the past 30 + years. (WSJ article by Katy Burns)  Later in this article I provide a link to that article for your review.

Since safe bond prices go up when interest rates go down, you can see that safe bond income is very expensive today.  

This equation only matters if you want the safety of a portfolio of investment grades bonds to fund your retirement.  How much yield do you need?  Four percent seems reasonable.   They say you can take four percent out of your retirement and it will last.  So if your retirement earns 4%, you should be o.k.

What is the reality of buying a safe bond with a 4% yield.  This bond is going to cost you more than the bond will pay back when it matures.  For instance, you pay $101 for a bond that pays you back $100 in 10 years and in 10 years inflation has eroded that $100 even more you made a bad investment.  Where do you go for income?  This low interest rate scenario sets the stage for “alternatives.” 


Alternatives are creative ways to raise money by pledging not just assets, but also cash flows to you the lender.   You get a share of the assets pledged which could be a building or other hard asset.  Or, the money you lent could be backed by an income stream such as someone else's mortgage or the cash flows from a business.    They get even more exciting  when a firm clumps them together, then dices them up again and sells you a piece of the pie.  This is called a securitized debt.

Collateralized Debt Obligations or CDO’s are complex.  Click here to read Investopedia’s definition of CDO’s 

Look at this chart and you will see how these instruments proliferated before our most recent major market disruption in 2008.

While ordinary investors should be averse to so complex an investment, many people fell for this type of “alternative program” time after time.   If they could get more income life would be better.   Sold as an income instrument CDO’s and their first cousins CLO’s (collateralized loan obligations) and CAO’s (collateralized assets obligations) CMBS (commercial mortgage backed securities) deliver higher income and higher total return when they work. 

This article from Knowledge@Wharton, University of Pennsylvania in 2013 is a must read if you want a good review of these investment ideas.  Risks are covered in this article but they suggest that things are different now: published in (2013.)

In 2017 these investments are tempting for ordinary investments but even more tempting for institutions who must deliver more income than they can get from safe investments.   Teachers unions, municipal pension funds, hedge funds are the big market for these investments.  If you are a beneficiary of any of these investment pools, the risk is on you.  


Why are these investments coming back?   The answer is need for yield.  Harvard published a review of regulatory changes resulting from the 2008 crisis.  A link to the article is here.

The Economist published this graphic that illustrates that few things have changed:   "Old alphabet soup, new taste."

Another sign that regulation has not mitigated risk is provided in an article by Katy Burns in the Wall Street Journal where they discuss the repo market.  Repo's buy bonds with borrowed money sort of like buying stocks on margin.   Repo's are now processed by only one bank.  Whenever one institution is a key to this much debt, systemic risk is real. 


Speaking of "new taste."  Ben Eisen in the Wall Street Journal "Restaurants Like This Debt Flavor."

In this article, a debt instrument called "whole business securitization" is popular among restaurant stocks.  They can pay a little less interest than they would have to pay in the junk bond market.  The securiter matches this need with investors who need more income than an investment grade bond can deliver and they sell this new idea as safer because you own a piece of the business.  As Eisen notes, the lender and borrower have to iron out what happens to the debt in a bankruptcy.  But the pressure is on and these loans are increasing.  Eisen states the volume of these types of loans is greater than occurred before 2008.

This "whole business securitization" came about in the U.K. in the 1990's.  Lehman Brother's borrowed (pardon the pun) the idea in the run up to 2008.  We all know what happened to Lehman Brother's; bankruptcy.

Another sign of trouble is well documented by Christopher Whitall and Mike Bird in the Wall Street Journal 8/29/2017 “Crisis-Era Scourge Reignites Worries.”   Click here


Actual personal history is important to me.  I have been through many market crashes beginning with 1987. The October 1987 crash was not too bad for me. I was able to refinance my mortgage as rates went down and still I could use my savings to buy a 1-year C.D. for 7%.   I didn’t own enough stock or enough real estate to be affected by the stock market crash.  All I cared about was working. I had no idea about synthetic investment but the junk bond debacle was the fuel of that awful fire.  I got through it because I was young and working.  Retirees had it a lot worse.

In the early 1990’s I decided to join this business of investment advising.   The 1992 and 1994 recessions were challenging.  Already in my early 40’s, I knew that creating investment income to replace my working income and my spouse’s was the single most important financial goal of our investment plan.   I started to use these market disruptions as an opportunity to employ cash.  

During the early to mid 1990’s we created cash by spending less than we made; better known as savings.  Every extra dollar went to investing for our future income.

By the time the next major disruption occurred in 2001, I was still working but my husband had retired.  The dot com crash of 2001 was painful.  It tested the theory that it doesn’t matter what your portfolio is worth, what matters is what income it creates. 

The absolute worst scenario is to have the market crash just when you retire.   In 2001, I couldn’t afford to sell because I needed the income from our portfolio of quality dividend stocks and some quality bonds we so carefully built and the real estate I invested in that an MBA classmate of mine put me into.  A few stocks did reduce the dividend and many suspended increases.  But, most quality dividend stocks continued to pay their dividend every quarter although their stock values were down.

We recovered from 2001, although it took 16 years for the Nasdaq to get back to its 2001 highs.  During the next 15 years bonds yields and therefore, safe income continued to deteriorate.   Bond values increased and I sold many bonds at premiums to par and well above where I bought them.  This bond bull helped to salve the bear stock market of 2001. 

The 2008 bear market was a rout for every investor.  Every safe investment was suspect.  Even money market funds were in trouble.    Real estate wilted, credit markets were in total disarray and stocks prices plunged.  What occurred between 2001 and 2008 that allowed my family to weather the storm.  Dividend income.  Again some of our stocks reduced their payout but only about 10%.   Some continued to pay but did not increase the dividend.  Others were able to continue dividends and increases.  

If you stick to a strategy you can use these opportunities to add to dividend growers at very low prices.   Very low prices occur when there are major troubles.  Look at those quality stocks that made it through 2008 and still paid dividends.  Those are the stocks to invest in until bonds are cheap.   


Here are few of the stocks that made it through the past market disruption and are highly likely to continue to deliver income during the next one. 

Johnson & Johnson (JNJ)

Yearly summary of dividends

Genuine Parts (GPC)

Dividends & Shareholder Return

Raytheon (RTN)

Mc Donald's (MCD)

Good Income Investing.

M* MoneyMadam

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