Thursday, January 7, 2016

Stash your Cash in Eaton, symbol ETN

In the past I wrote a post called "stash your cash in Eaton", symbol ETN. Today I screened for stocks that

    (1) Have little or no debt
    (2) A growing dividend
    (3) A PE ratio less than 15.

I found 20 stocks using my Schwab screening tool but when I drilled into the details, Eaton came up on top. Take a look at the 2016 Stock Table below to view ETN's fundamentals.

Eaton is close to its 52 week low.   The range is $73.82 to $49.21.   I am buying today at about $49.60.    This stellar company has all the fundamentals of Dividend Machine and meets the criteria for my 2016 portfolio.  

Price to earnings ratio of 13.54 and a low D/E (debt to equity) ratio of .51 make it a compelling buy for me.   Moreover, a nice April $52.50 call is available for $1.65.  The expiration date is after the next expected ex-dividend of March 5, 2016.

I am going to stash more cash in Eaton, symbol ETN.

M* TheMoneyMadam 

Disclosure:  Long ETN with calls

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Tuesday, January 5, 2016

Watsco WSO first 2016 Money Madam Stock Pick

This after Christmas Sale on stocks provides opportunity.  Volatility benefits the disciplined income investor who always has extra cash on hand because we like to have a couple a years of expenses in cash and can jump on an opportunity.  Disciplined investors reduce the emotional impulses that can lead to poor investment returns.

I continue to emphasize how important it is to secure a growing source of income.  Dividend stocks play a big part of that goal for me.  With that in mind, I am going to begin my 2016 portfolio with Watsco, symbol WSO.

Watsco WSO

Watsco is a very large HVAC company. Much, but not all of its business is in the US.   They also serve markets in Canada, Mexico and the Caribbean.   Note here that WSO should not suffer from Asian and European slow growth problems.

2016 Portfolio Fundamentals

This morning Wednesday 1/6/2016 WSO is trading around $115 which is well below the 52 week high of 133 but up from the low of $103.  WSO just declared their next quarterly dividend of $.85 and will be ex dividend on January 13.   Forward annualized dividend yield is 2.95% at $115.   This yield meets one of my 2016 criteria.  My first post this year defined the criteria I will use for stocks that go into the 2016 model portfolio; the minimum yield is to be 2.75%.

WSO Income Stock

Watsco is an interesting income stock.  WSO paid a regular, and increasing dividend and when in 2012 it appeared tax on dividends would be lower in 2012 than in 2013, WSO paid out a whopping $5.00 per share in addition to its quarterly dividend of $.62 per share in 2012.  They paid several quarters ahead and then resumed regular dividends at $.25.   Since then, dividend growth has been stellar with a recently announced increase to $.85 per share that averages out to 8.9% per year average dividend growth. Clearly WSO meets my primary goal of “retiring with income that grows.”  Dividend growth minimum is 4% per year for 5 years.

WSO Revenue Growth

Revenue growth has exceeded expectations growing over 30% per year over the past four years which settles a third criteria which is a minimum revenue growth of 4% per year for at least three years.  I think you need revenue growth to feel comfortable about dividend growth.

WSO Debt to Equity Ratio

Debt to equity ratio is probably more important than income growth as we always want to be as risk averse as we can while securing a solid source of growing income.  D/E ratio is the measure I use.   WSO sports a low D/E ratio of .32 which is well below the maximum of 1 that is part of my 2016 criteria.

WSO Covered Call Options

WSO has no covered calls as of this writing.   However, WSO has in the past had some very good calls and I am hoping that during 2016 I will be able sell at least one call to add at least 1% additional income from the call premium.

History is on my side.  WSO was a 2011 and 2012 Money Madam Dividend Machine.  I bought at that time.  I held WSO from October 4, 2012 through August 18, 2013.   The table below shows you how I did.   During the time I was long WSO I received a special dividend of $5.00 as well as three quarterly dividends and a whopping $3.32 premium from a covered call.   

If revenues continue to grow, I believe a call opportunity may emerge.  If not, I am stuck with a good income stock with little risk.

I think it is time to reestablish a position in WSO.  The strengths of serious devotion to dividend distributions to the shareholders, vigorous revenue growth and low D/E ratio outweigh, in my mind, the slightly hi PE ratio (price to earnings ratio) of 20.

M* TheMoneyMadam
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Monday, January 4, 2016

M* 2016 Stock Picking Criteria

Happy New Year everyone.  Let's make this a prosperous year for income investors.  Interest rates increased a touch last year but not enough to make me recommend bonds.  If I find one that looks compelling, I will write about it but for now I will concentrate on stocks.  As you know, I do not write about preferred stock, municipal bonds, or real estate in this blog.

Debt to Equity (D/E) ratio

Stocks that I buy and that I write about need to be safe so I still place significant emphasis on D/E ratio.   D/E ratios are easy to find.   Click on any of the symbols in my ticker and you will go to MacroAxis where you can get D/E ratios for free.  Here is a link.    MSN money also provides the data for free or you can go to other proprietary sites that charge for that information.  

I like D/E ratios to be as low as possible.  Zero debt is always nice but that metric would be too limiting.   If a company does not have to service debt, they are more likely to be able to fund a dividend.   Moreover, low debt suggests a company will be less likely to go bankrupt.

Some debt is okay. Generally, a ratio of 1 or less is desirable.  Industries that are capital intensive require more debt and thereby a higher D/E ratio.   If I like a stock in one of these industries, I look for the D/E ratio to be the lowest of the industry.

Dividend Yield

The 2015 M* model portfolio suffers from too many energy stocks.   Energy stocks, as you know are in a terrible spot.   I have confidence that energy holdings will regain some mojo in the future and are not likely to go bankrupt, but the fundamentals of the energy sector could see flattening of dividend increases or even dividend cuts or suspensions.    The reason, I think, that so many energy stocks are part of the 2015 portfolio is due to my requirement for a 3.5% dividend yield.   The first stocks I would come to when I did my screens tended to be energy stocks.

This year I will pick stocks that have at least a 2.75% dividend yield so that I know we are beating the 10 year U.S. Treasury.   This will also increase the number of stocks for consideration.  

Income is still the major focus of this blog and income that grows is essential for retirees of which I am one.   Dividend yield increases of at least 4% per year for at least five years is a criteria I will use to select stocks to profile in this blog.

Revenue Growth

I have thought carefully about what additional criteria I would use to select stocks that deliver growing income.  In 2011, the four criteria I used to pick stocks, produced a portfolio that has over the past five years delivered a total of 60% capital gain and over 26% dividend increase.

Revenue drives earnings and earnings drive dividends.  Therefore, this year I will pick stocks with revenue growth over the past 3 years of at least 4%.    This will shrink the universe of stocks from which to pick, but should help to weed out those stocks that might limit their dividend increases.

Covered Call Opportunities

Since my emphasis is on income that grows and I am lowering the dividend yield bar to 2.75%, I need to boost basic income and I will do that by selling covered calls.

The premium from selling covered calls, can double your income.  Call buyers expect the stock they seek to buy to deliver capital gains.  We, therefore, need to pick stocks that have the potential for capital gains, and that pay us a dividend while we wait for those gains.   By selling covered calls into that expectation, we can get paid the dividend while we wait and bank the call premium.

I want to sell at least one call per year on the stock I pick.   I may sell the call on the day I buy the stock or I may wait for a later time.   Call premiums need to be at least 1% on the basis.   That means if I pay $50 for a stock, the call premium needs to be no less than $.50.

I always want to secure a capital gain on my shares should they be assigned and therefore, I look for a strike price at least 8% above my basis.

You are fooling yourself about income from a stock if you sell a call with an expiration that does not include the next dividend.    Dividends are not like bond interest.  With a bond, you earn interest on every day you own the bond.   With a stock you only get the dividend if you own it on the ex-dividend date.   When you sell a covered call, pick an expiration that is later than the next ex-dividend date.   For instance if you buy a stock on January 4, 2016 and their next ex dividend date is March 15, 2016, your call should not expire until after March 15, 2016.  

M* 2016 Portfolio

In 2016 I will monitor the stocks that I pick for income.  I will report on each position profiled including the income from dividends and the income from covered calls.   I will track the capital gains from calls being assigned and the capital gains or losses from those position we hold.   The rules will be that in this portfolio, like the past portfolios, I will not sell a stock unless it is assigned.  Since assignment cannot be theoretical, you know I hold each position about which I write.

Summary of 2016 Criteria

Listed in the table below are the criteria I will use to pick stocks for 2016.

Good income investing.  Let the trading begin.  May your selections deliver ever increasing income and good capital gains.

M*  TheMoneyMadam
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