Monday, April 18, 2016

Model Portfolios Updates

Welcome back!

A lot has happened during the past few weeks including the WSO call in the 2016 portfolio being exercised early and the ETN exercised as expected.  I will write more about that this week.  As of this time the portfolio results to date are updated.

M* TheMoneyMadam
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Monday, April 4, 2016

Gone Fishin'

Monday April 4, 2016

I will be on vacation during the next couple of weeks.  If some compelling idea emerges I promise to share.  Other than that, I will wait to see what happens with April's call option expirations.

Good luck with your income investing.

M* TheMoneyMadam

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Friday, April 1, 2016

WSO Dividend

We will bank the Watsco dividend before our $130 call expires or more probably assigned. M*

Watsco declares $0.85 dividend $WSO

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Monday, March 28, 2016

Four Bonds for your consideration

Tuesday, March 29 update:   I did buy the Boise Cascade bond at par but in order to obtain a competitive bid minimum number of bonds is 50.

Original Post:

In this post I discuss four bonds for the average income investor to consider.

Interest rates are tough to predict.  Far smarter people than I have made fools of themselves trying to predict interest rates.  As you know bond values vary as interest rates vary.  When interest rates go up the value of a bond goes down and vice versa.  Provided that you buy your bonds at par or less, and hold them to maturity, these price variations are insignificant.

If you trade bonds, opportunities are abundant when interest rates are volatile, but we income investors do not trade bonds.  We invest in bonds to diversify our portfolio with an income instrument that is highly likely to deliver a steady source of income from interest and return our principle when the bond matures.  If you are a savvy bond investor you might even secure a capital gain if you bought your bond at a discount to par and receive par upon maturity or redemption.

Morningstar manages the bond data for Financial Industry Regulatory Authority (FINRA.)  I use their site to search for bonds and then I look to my broker, I use Charles Schwab, to actually find the bond's availability and trading price.

Bonds differ from stocks in that they are not as liquid.  You do not have a platform where you can place a limit order on a website and check in at the end of the day.  You need to have all your data at hand and make your decision to buy at the time the order is placed.  Schwab allows some bonds to be traded through their website but not all.  A call to the bond desk can provide better access to an acceptable trade.

Bonds also differ from stocks as you receive interest income for every day you own a bond.  Whereas with a dividend stock, you must own it on the ex-dividend date to receive the dividend.  You receive no income if you sell the stock prior to the ex-dividend date.
Interest Coverage Ratio

I have discussed D/E (debt to equity ratio) many times over the past years.  I have not discussed interest coverage ratio as much.   Interest coverage ratio is calculated by dividing EBIT which is earnings before interest and taxes by interest expense.   You can find this ratio already calculated for you on several websites but you can also go to the financial statements and find the data so that you can calculate it yourself. 

Interest coverage ratios of greater than 2 are what you want.

Four Interesting Bonds

ADT Corp, symbol ADT, has a bond that matures in 2023.  Alcoa, symbol AA, has a bond that matures in 2024. Boise Cascade, symbol BCC, has a bond that matures in 2020 and Embraer, symbol ERJ, has a bond that matures in 2022. 

I like to ladder my bonds by maturity.  The table below presents these bonds by maturity.  It includes the coupon, recent price, and yield to maturity.  Laddering takes some of the interest rate risk out of the equation.   These four bonds mature in 4 to 8 years.  Interest rates could be exactly the same or much higher in 8 years.    Although I would get my money back at maturity, I might have lost income opportunity if a 5 year U.S. Treasury is paying 6%.

A U.S. Treasury bond is safer than any of the four bonds profiled here.  So I would not want to commit my money for much more than 5-7 years.

The Table below lists these four bonds by maturity.

Issuer Fundamentals

A bond is only as good as the company that backs it.  I look for a stock with earnings, reasonable D/E ratio (debt to equity ratio), and decent interest coverage ratio.

The next table presents the issuer fundamentals including the CUSIP number for each of the bonds I may buy this week.

Further Discussion

ADT Corp. (ADT) has a thriving business.  They have earnings, pay a dividend and have revenues that are increasing; all good metrics.   However, their debt load is a bit heavy and that will way on my decision. 

Alcoa (AA) is in an industry that is under enormous pressure right now.  Although if you just look at D/E ratio, MSN Money ranks their D/E ratio at .75.   One of the peculiarities of their financial reporting is an interest coverage ratio of 1.5.  This is hard to believe as they had negative EPS during their latest quarter.  Looking back further earnings are all over the place.  Will commodity stocks like Alcoa come back?  Probably but the buyer of their bonds must understand there is risk and that is why the bond is trading at a discount.

Boise Cascade (BCC)  is the most solid of the stocks noted here.  Boise has solid revenue growth and reasonably good earnings although their most recent quarter showed some erosion in earnings.  The stock has a solid D/E ratio of .64 and interest coverage ratio of 4.58.  This is why BCC is trading right around par.   This is my favorite bond here, provided I can buy it at par or less. 

Embraer (ERJ) is a Brazilian company that trades in the US and follows most of our accounting rules.  D/E ratio of Embraer according to MSN Money is .94 which is respectable for a stock that requires a lot of capital.  Interest coverage ratio is hard to measure as their financials show no interest payments.   These facts may be suspicious and therefore I will probably not buy the Embraer bond unless I can get it at a significant discount. 

Consider one or more of these bonds for the income producing portion of your porftolio.

M* TheMoneyMadam

Disclosure:  May buy the ADT, AA, or BCC bond this week.

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Thursday, March 24, 2016

Corporate Bonds

I have found a number of bonds that I am considering.   The bond market closes today at 2PM and I will not make any trades before then as I have some research to complete.

To my readers, I bid you a happy long weekend.   I will write up any bonds that I find next week.

M* TheMoneyMadam
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Friday, March 18, 2016

Cummins Inc. CMI could be the next M* 2016 Dividend Stock but it is not

When I review my personal portfolio, which I do quite often, and compare it with the portfolios I wrote about, I always wish I had bought every stock I profiled especially in 2011.   In 2011 stocks were cheap compared with now.  That portfolio is up by over 60%.   On the other hand, had I bought every stock profiled in 2014 when the market was at a high, the results would not have been as good.  2014 is up 2% and 2015 is flat.  Perhaps in 4 or 5 years, these portfolios will be up like the early portfolios.

I made a change in 2016 and every stock I add to the portfolio I bought at the price profiled.  I also sold every call described.   The 2016 portfolio is not a model portfolio, it is reality.  So far so good as the combined return is up 15%.   This includes the cash generated from paid dividends, covered call option premiums and capital gains.

Adding Cummins Inc. symbol CMI

Today, I am adding to my stake in CMI but it fails to make the grade for the 2016 stable.  Cummins Inc. symbol CMI, has made quite a move since I added it to the 2015 portfolio.  Full disclosure, I bought it at that time with a cost basis of $105.20.   When CMI sunk to $79.88 a share in mid January, I looked like a fool. I liked it well enough personally to add to my personal position.   At that time, I did not add it to the 2016 portfolio because no covered calls were available and because revenue growth just misses my 4% hurdle.  More on that below.

Cummins Dividend Growth

I am adding to my CMI position again today at the elevated price of $108.90.  My reasons for adding CMI  is the dividend growth.   The next ex-dividend date is 5/19/2016; the quarterly dividend is $.975 for a yield of 3.58%.   The dividend growth over the past five years has averaged 60% per year.  Dividends paid in 2010 were $.875 for the year and in 2015 $3.51 for the year. That is phenomenal.  As an income investor, I really need robust dividend growth and CMI has it.

Revenue Growth

Revenue growth is the big change I made for 2016.  I added that metric to improve the chances that both dividends and price would go up.   Revenues drive earnings and earnings drive dividends and often times stock price.  This is not a perfect predictor, however, as noted above, CMI's stock price really suffered in mid January in spite of the revenue growth.  Yet, the stock price has returned to a more normal level recently. 


While I go back five years to compare dividends, I restrict revenue growth to three years.  I want to know what is happening now.   CMI's 2012 revenues were $17,334 (m) and in 2015 revenues were $19,110 (m).  That is a revenue growth rate of 3.42% per year.  Not quite the 4% I want.  Notice that dividend growth exceeds revenue growth.  Moreover, EPS is not parallel to either dividends or revenues.   Every investor needs to think about that.  EPS can be altered by efficiencies or factors such as currency exchanges.

Cummins Covered Call

Selling covered call options boosts income.  They can also help reduce the pain when a stock as good as CMI tanks like it did in January.   When the call expires and when the stock takes off again, you can sell more calls for more income.   A well structured call should provide at least 8.5% capital gain should the stock be called away.

Another metric, in addition to revenue growth, that I added in 2016 is the availability of covered calls.   Today, CMI has a call that expires in June, which means I will most likely receive the May dividend which will be paid before the call expires.  The strike price of $120 is 10.19% above my cost basis and the premium of $1.25 is another 1.147% of yield.

Balance Sheet

Just as important as finding a stock with a good yield, good growth, and covered call options, is finding a stock with a solid balance.  A solid balance sheet implies that even when the overall market tanks and takes down the prices of even the best stocks, the company will survive to pay the dividend.

I use debt to equity ratio (D/E) as the quickest way to determine if a stock has a strong enough balance sheet.   Again, it may not be a perfect measure but the data are readily available from MSN Money or YCharts.   For the purist, you can go to the company's website and peruse the financial statements to determine if you think the company is on solid financial footing.  Cummins carries a D/E ratio of .2213 and this is very good.  Anything below 1 is excellent.

CMI Fundamentals Table

The Table below presents all the data I used to make CMI my next 2016 stock.   Consider CMI for the income producing portion of your portfolio.

M* TheMoneyMadam

Disclosure:  Long CMI with calls
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