Monday, January 14, 2013

How to pick a dividend stock in 2013

Dividend stocks will again make up a large portion of investment income for 2013, as few other income investment alternatives exist.  All bonds, municipal, corporate, and high yield remain very expensive.  I do not cover preferred stock or real estate investments in this blog.  Dividends may not be and should not be your only source of investment income, but in 2013, they will provide significant retirement cash flow.  How should you pick a dividend stock in 2013?

Dividend stocks come in two flavors.   One group of stocks pay less than 3% but are active enough to provide additional income in the form of covered calls.   Caterpillar, CAT, and Qualcomm, QCOM are stocks that I have written about often in this blog.   I call the other group of dividend stocks  DIVIDEND MACHINES.  These stocks are less volatile but generate more dividend cash flow and are the subject of this post.

For 2013 my criteria for picking a dividend machine has changed just a little from 2012 and 2011.   I still require a company to pay me at least a three percent yield at the price I buy it.  In 2013, I will stick with the requirement that earnings per share (EPS) for the previous four quarters must be greater than the dividend payout.    In 2011, I required only the current quarter’s EPS to be greater than the dividend payout.  In 2012, I raised the bar to make sure the last four quarters of earnings was greater than the last four quarters of dividends.   In 2013, I will maintain that benchmark.

Risk for any investor is important and I use two measures for dividend machines.   First, I expect a dividend machine company to do more than just continue to pay me the same dividend.   My expenses go up every year and I expect my income to go up as well.   If a company has increased the dividend during difficult times, I consider that to be a sign that I have invested in good company and it is a measure of low risk.

I looked back at my list of dividend machines and found that during the 2001 dot com crash, few of these companies reduced the dividend.   That is not surprising because most of the carnage in the 2001 stock market crash were high technology companies with low or no EPS.   Not very many of the companies that imploded paid dividends.   Only recently have companies like Intel (INTC) or Microsoft (MSFT) paid regular and increasing dividends. 

 However, during the 2008 market crash, dividend stocks did take quite a hit. In 2008, quality companies stopped or cut their dividends, i.e.  banks.   Many companies recovered and started to pay again.  However, I want to make sure any future investments I make in dividend machines are at a low risk of cutting my dividend.  Therefore, a company must have a history of steady and regular increases of dividends since 2007, or 6 years, to be considered a dividend machine.   In 2011 and 2012, I required a history of regular dividend increases for at least five years.   In 2013, I am raising that bar to six years.         

            My last dividend machine criterion, the last one, is debt to equity ratio (D/E) ratio.    If a company has a responsible history of managing their debt, they are more likely than not to stay in business and be able to pay a steady and ever increasing dividend.   D/E ratios vary a lot among industries.   Some businesses need more debt than others to conduct their business.   A D/E ratio of one or less or equal to industry standards will continue be the level that is acceptable for a company to be considered a dividend machine.

            I recommend DIVIDEND MACHINES periodically in this blog.  In 2011, I picked one every Monday for 52 weeks; in 2012, I picked 48 stocks randomly though 48 weeks.  In 2013, I am not going to pre define how many stocks I profile, we will just have to see what the market provides for us.   This week, I expect to share one or two stock picks with you so that you too can make steady, increasing retirement cash flow from dividend stocks.

            Study these criteria and add them to your dividend stock screens for 2013; I believe you will be pleased with the results.

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Thursday, January 10, 2013

Should you use or ETF's or buy your own stocks for retirement income

          TheMoneyMadam, spent two years researching dividend companies and found some very interesting facts.  This post comments on the first year of my study 2011.

          (1)  If you bought 100 share of a company that qualified as a dividend machine every week for 52 weeks during 2011, you would have invested about $200,000.
          (2) If you held all stocks for one full year, you would have received about $9,000 or 4.5% yield.
          (3) Your capital gain would be about $20,000 or 10% as measured on November, 7 2012.

Are you interested in continuing to invest this way?

          Consider this:   If you had invested in the ETF known as Spyder (an S&P 500 proxy) SPY, your income would have been only about 2.5% although your capital gain would have been closer to 15%.

          If you sold enough SPY to create the same income as from your own dividend machine companies, your capital gain would have been about 8%.

          The choice is yours.

          I like being able to manage my own money, at a low cost; and I know what I own!

          I have a lot of data on these years of investing in dividend machines and I will periodically share it with you.

VTR,  TheMoneyMadam
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Wednesday, January 9, 2013

AbbVie ABBV over 4% dividend yield

AbbVie - Abbott update.

AbbVie, ABBV,  the spin off company created by Abbott Laboratories has declared it's first dividend of $.40 per share.   Therefore, I will keep AbbVie and have an in the money call on ABT. 


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Monday, January 7, 2013

Microsoft MSFT - Buy, Sell or Hold?

Microsoft Corp. MSFT – off over 10% should you Buy, Sell or Hold?

MSFT is a solid dividend machine as noted in my post on October 8, 2012 you can read the original post by clicking on this link    However, Microsoft’s stock price is off over 10%.   MSFT traded at $29.85 when I first profiled it as a dividend machine and today it is trading at $26.74 a loss of 10.4%.

How should advanced, conservative income investors approach this dilemma?

The conservative part of the strategy is not difficult.  You could just hold MSFT and wait for the dividend to increase as it has done every year for about eight years.   You have to hold your nose and ignore the unrealized 10% loss.    I am confident MSFT will come back.  One of my reasons for being so confident is the traffic I get on this blog site.   Most of it comes via Microsoft related products.  Only a small portion comes through Apple/Mac projects.  

The advanced, income investor always looks for ways to squeeze income from our holdings provided we get our principle returned or we receive a capital gain.    Here is how I, an advanced educated income investor, am handling this MSFT conundrum.

I added to my position (I bought at $26.64) and then wrote a call on my added shares.   I continue to hold the original shares I bought in October.  These original shares are not on call.   The call on my new shares expires in March; the strike price is $28 and the premium I received is $.40.  Provided the call buyer does not exercise the call until the expiration date and I still own these shares on February 19, 2013, I will receive the dividend of $.23 on March 14, 2013.    My income on these additional shares is $.40 + $.23 for a total of $.63 or 2.35% in just 60 days.   If I can repeat this trade 3 times in a year, I have boosted my yield to over 6 percent.

Look at MSFT as a reliable income instrument if you HOLD, and an even better income machine, if you BUY shares then SELL a covered call.  


Microsoft Call
March $28

Strike Price

Cost Basis

Call Premium


Gain in $ if assigned

Call Yield

Gain Yield

Total Gain Yield

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Sunday, January 6, 2013

ABBOTT spins off AbbVie

ABT Abbott Laboratories revisited.

ABBOTT Labs has been an income machine.  When I first profiled ABT as my second dividend machine since publishing this income investing blog, the stock price was $48.40, the dividend was $.44 per quarter for an annualized yield of 3.65%.

ABT Abbott Laboratories.   2011 Dividend Machine profiled on December 19, 2010

ABBOTT, symbol ABT, showed up again as a 2012 dividend machine.  The stock price was up to $60.19; the dividend increased 16% to $.51 per quarter for an annualized yield of 3.39%.

ABT Abbott Laboratories.  2012 Dividend Machine profiled on March 22, 2012

ABT provided even more income through a covered call;   A November 2012 strike price of $67.50 fetched nearly a dollar a share of income.

ABBOTT has split into two companies.  Now ABBOTT is ABT and ABBV called AbbVie.  For every share of ABT you owned at the time of the split, you would have received an additional share of the new company ABBV.

Is ABT still a dividend machine?  Let’s look at the dividend machine fundamentals of ABT.   ABT shares closed at $33.07 on Jan 4, 2013.  The company has declared a quarterly dividend of $.14 per share for a yield of 1.7%.  On the yield basis alone, ABT is no longer a dividend machine. 

ABBV, the spin off,  is expected to declare a dividend of $.40 per share.  Trading at $34.39, that yield would be 4.65%.  However, since ABBV is a new company it does not meet the dividend machine criteria of increasing the dividend every year for five years.

What should I do?   I am going to sell my ABT either through an outright sell, or a covered call that is almost certain to be taken.  I get the immediate income and a significant capital gain.   However, I am going to hold onto ABBV unless the income does materialize as expected.  I could hold both.  The combined income is greater than the old ABT and the value of $67.46 is well above either buy ($48.40 and $60.19) but I think I can get more than 1.7% from another dividend machine.

I’ll keep you posted.

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Wednesday, January 2, 2013

2013 Earn Covered Call Income NOW!

Sell calls to make money before they figure out this fiscal cliff is not a real deal.
Here are some ideas.

Conagra (CAG)
March 31 call

Cost Basis

Strike Price

Call Premium


Gain in $ if assigned

Call Yield

Gain Yield

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