Wednesday, November 20, 2013

Small Cap Dividends for Income

Income investors look at many factors as they build their portfolios.  I encourage a disciplined, systematic approach.    As you know I use four criteria to screen for stocks to buy for income. 

Periodically, I evaluate my results and today’s post evaluates a microcap stock that I profiled in 2011 as a dividend machine.

Does Market Capitalization Matter?

This questions comes up all the time.   You will find expert investors who encourage small capitalization stocks at various times.   They will tell you these stocks do better than the big boys.   

What is a small cap stock?  What is a microcap stock?    Investopedia defines small cap. stocks as those with a market capitalization of between $300 million and $2 billion. Microcap stocks are less than $300 million.   By the way, to determine a stocks’ capitalization multiply the number of outstanding shares by the share price. 

Perils & Advantages of Microcap Stocks:

The factors that affect small companies include the fact that they tend to be thinly traded; they do not get attention from big Wall Street Investors; their revenues and sales may be linked to very few customers.    

These factors suggest that if you really need to sell a company that is thinly traded you may not get the price you need.    Because big investors like mutual funds have limits on how much an individual stock they are allowed to own, you do not get the advantage of the price increases related to mutual fund activity.   The loss of just one customer can ruin a small company.

However, history shows that smaller cap companies have better growth rates year over year:  Ibbotson reports small caps increase by 12% versus 10% for the big boys.  Moreover, these companies can operate under the radar and you can get a disconnect between stock price and company fundamentals providing an investment opportunity.

Microcap stocks tend to be associated with the phrase “penny stocks.”   Traded on the Bulletin Board or Pink Sheets, these stocks are usually stocks for trading.  I do not buy these stocks.  The only small or microcap stocks I buy are those that provide income.

The stock I am going to write about today is a microcap that has excellent fundamentals and an excellent history.

Espey Manufacturing & Electronics (ESP)

This company is a dividend machine.   It has been in business since 1928.  They are an original equipment manufacturer of very precise components for military and severe environmental applications. The market capitalization is a mere $77 million. 

ESP dividend machine fundamentals

The table at left presents ESP’s dividend fundamentals including their earnings per share, dividend, yield, number of years of dividend increases and debt to equity ratio.

ESP’s stock price history is interesting.   If you go back to before the financial crisis of 2009, ESP traded around $18.   The price suffered during the crises and retreated to $13.31 in March of 2009.   

 Since then, the stock price has clawed its way back to more than double to close at $33.08 on November 19, 2013.  When I profiled this stock in 2011 the price was $26.00 per share.

ESP Dividend History

The reason I have invested in ESP and included ESP in the 2011 dividend machine portfolio, is the dividend.   This company lives to pay its investors.   Every year since 2008 the company pays a quarter dividend that is increased annually and pays a special extra dividend.

2013 is no exception.   ESP just declared another $1.00 special dividend to be paid on Dec. 19, 2013 to owners of record on Dec. 12, 2013.


This is a well managed company.  ESP has a proven history.  It is financially solid and has delivered excellent price increases.    Although it is a microcap stock, you should consider it for the income producing portion of your investment portfolio.

The Money Madam

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Wednesday, November 13, 2013

Dividend Champions and Dividend Machines - four good values

Seeking Alpha published a terrific article that provided an extensive review of dividend champions at sound valuations.   The article is very thorough and I read it with interest.  I always like to compare my dividend machine strategy with other professionals.  My post looks at the four companies these two strategies have in common.  Here is the link to the Seeking Alpha article.

Difference between Dividend champions and Dividend Machines

Dividend champions have increased the dividend for 25 years.   My dividend machines have increased the dividend for more than 5 years (7 years in 2013.)

Dividend machines have to pay at least three percent and in 2013 we want closer to four percent.  Dividend champions do not have to meet that hurdle.

Four Stocks common to both strategies:  KMB, MCD, SYY, CVX

Of the many stocks profiled in the Seeking Alpha article, I found four that meet the four criteria I use to call a stock a dividend machine.   Incidentally, the author, Chuck Carnevale states he is long all four of these stocks. 

I have been trying to make sense of my historical data on these four stocks and Mr. Carnevale nailed it. Of the four stocks we both agree that KMB is pricey, MCD and SYY fully valued, and CVX a potential buy. 

Let’s look at each company’s dividend machine fundamentals; the data are presented in the tables below.  I have grouped McDonald’s (MCD) and Sysco (SYY) together as they are considered fairly valued; then Kimberly Clark (KMB) which is overpriced and Chevron (CVX) which seems to be the best value.

Dividend Machine Fundamentals of MCD & SYY

Kimberly Clark (KMB), considered a bit pricey at the time I conceived this article, broached the three percent dividend yield minimum today when it closed above $108.   I guess we were right; KMB’s dividend machine fundamentals are presented below along with Chevron (CVX.)  

Dividend Machine Fundamentals of KMB & CVX

My take is that when you can acquire stocks like KMB and CVX with yields greater than three percent do it because their dividend increase potential makes them better investments for income investors than a slow growth four percent yielding stock.

The Money Madam
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Thursday, November 7, 2013

Dividends & Income - QCOM yields dividends and covered calls

This is a fast moving situation this morning.   I love it when a company has improved fundamentals but guides lower and gets slammed in the market.

Within the last few minutes I was able to buy Qualcomm (QCOM) at just under $67.  Then I sold January $72.50 calls on that position.    The tables below show the fundamentals of QCOM as a dividend company and the gain from the covered calls.

Qualcomm (QCOM) Dividend Fundamentals

QCOM is not a dividend machine because the yield is under three percent.   However, I have been able to produce more than four percent yields using a combination of dividends and covered call premiums.   Add to that the capital gain if the call is exercised and you have a winner.    Now we just need history to repeat itself.

Qualcomm (QCOM) Covered Call Yields

Good dividend and income investing ... The Money Madam

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