Tuesday, March 12, 2019

WHR Big Call Income

This call is hard to beat.  Expiration is out a little further than I would like but it captures the hefty dividend if this call like 90% of them ends up expiring. 

Whirlpool, symbol WHR, has a lot of hair.  Earnings are challenged and they have quite a bit of debt. 

On the positive side, they pay a good dividend.  WHR increases the dividend and their revenues are hanging in there despite international issues such as currency.

Look at the income from this call.  The premium alone is over 3% nearly doubling the amount you pocket when you include a full year of dividends.  If they take the call so be it.  We book a gain and get out of stock that has its issues.

I don't think WHR will go belly up but it could with all the challenges in the world.  However, I am going to continue to agitate for income by selling calls against low buys.

M* MoneyMadam

Disclosure:  I am long WHR and a bit underwater.  I have sold a lot of calls particularly when I add very low. 
Read more »

Monday, March 11, 2019

COP an opportunistic call

Energy is always an interesting area for income investors.  Opportunities for good yields are abundant.  The other side of that coin is the volatility of these stocks.  They are so prone to headline news on both the up and down side.  In this post I explore a call opportunity on Conoco Phillips, symbol COP.

  • Quality Fundamentals
  • Low dividend yield requiring income investors to sell calls to boost income
  • Dividend growth adequate to beat inflation
  • Call opportunities that provide good capital gain potential and high premiums

If I am going to risk my money in the stock market, I have to get income.  I prefer 4% annual yields.  These are stocks that tend to be mature.  You are pretty sure they are safe but innovation has captured more than one "orphan and widow" stock.   I count on these four percent yielders but I do not want to overload my portfolio with them.  I am looking beyond  that universe of stocks by looking for a stock with solid fundamentals and with call opportunities.  

Quality Fundamentals:

All income investors are by nature conservative investors.  Our number one goal is to create enough income from our portfolio to live nicely and to have a portfolio so fundamentally solid that we can sleep at night.   You will not be right all the time but most of the time:  90/10.

My four basic fundamental criteria are a dividend yield, earnings per share that are greater than the dividend, dividend growth, and debt to equity ratio 1 or less or within industry standard.  

Conoco Phillips passes on all metrics.  Take a look at the chart below.

COP E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$65.43         $5.32         $1.22        1.86%        7.33%               0.47

Earnings are greater than dividend and D/E ratio is quite good.  I usually go deeper into the income and balance sheet.  I might discover negative revenue growth or an oddity in the free cash flow.  However, the criteria noted above are a good place to start.

Low Yield:

The problem with this is stock is the low yield; under 2%.  Who can live on that.  However, COP has some good growth potential and that suggests the yield is not the only way to make money on COP.

Below is a chart of the revenue trend for COP.  Revenue drives cash flow and earnings.  I like to see this type of revenue growth if I am starting or adding to a position.

Dividend Growth:

Another piece of the puzzle for income investors is dealing with rising costs of living.  You cannot use the official measures of inflation. If you did, you would be happy to keep your income flat.

However, go back 20 years and look at your basic bills and you will see they have doubled.   Therefore, your income has to keep up.  Dividend growth can help with this conundrum called "fixed income."

You cannot live the same lifestyle in 20 years on a fixed income.  You have to invest for income growth and dividends are one of the best places to find income growth particularly when you no longer work.

When you go to your favorite site to review COP's dividend history, you will notice that prior to 2016 the quarter dividend was $.75.  This dividend reduction is worrisome.  These factors will play into how I determine the best call for me.

Call Opportunity:

Picking the strike price, picking the expiration date and accepting the premium bid are all factors call sellers must consider.  As I always say, if you don't want to lose your precious shares to a call buyer, don't sell calls.  COP is a stock I like owning because of the call options I have been able to sell.  But, if I lose it, that is o.k. by me.  It is not a core holding.  It is an opportunistic holding.

ConocoPhillips is in the business of finding and producing oil and gas.  I am not an oil and gas analyst and surely not an expert.  I don't write about the catalysts that cause stocks to move.  For those interested in exploring those factors, you might consider reviewing what is occurring at the oil and gas confab in Houston this week.  Here is a link to COP's role:  CERAWeek Conference Houston, TX 2019.

With that in mind, here is the call I picked today.  I explain my call below.

When I pick a strike price I like to get more than I paid for the stock.  How much more is the question.  When I use calls on dividend stocks, I like to receive between 8 and 10% gain on my basis.  When my basis is much less than current trading price, I still go for the 8-10% range.  Today COP is trading about $65.50 so I am looking for a strike between  $70 and $72.50.

Another data point to help is the 52 week high.   COP's 52 week high is $80.24.  I don't see COP on such a roll that some catalyst will push it up beyond the 52 week high.  If I am wrong, they will take my COP and that is a good trade provided I get my 8-10% gain and I get to pocket the premium plus the dividend.

The expiration date is important as well when selling calls on dividend stocks, I try to time the call expiration so I get the next quarterly dividend.  But I don't want to go out too far because of the twin  risks of either lost opportunity if the stock soars past my strike price and locked in losses if I am stuck with a stock that sinks and I can't get out of the call option contract.

The next expected ex-dividend date for COP is May 8, 2019. I looked at the May 17, 2019 expiration dates and picked the $70 call that expires in May.

An acceptable premium to me is 1% of the strike price.  With a low yielder like COP, you need to sell three 1% calls and pocket the dividend to make that stock deliver a sum total of greater than 4% per year.  You can see with this call, income is everything to me.  I am going for a premium that yields 2.09%.  Already, if I hold the stock a whole year, I will have generated more than 3% already.  Perhaps I can sell one or two more calls and will make this a greater than 4% yielding stock.

If you are willing to go out further, you might consider this June Expiration with a $75 strike price.  This call is for investors who don't need as much income but think COP will go above $70 and you want to capture that gain.

COP to me is a solid stock with a recent record for dividend growth and for call opportunities that boost the current yield.  For investors who like the space but do not like the low yield or the risk that COP could reduce the dividend during bad times, you might consider another stock for your portfolio.  For me the income potential is worth the risk at this time.

Good Income Investing.

M* MoneyMadam

Disclosure:  Long COP with calls

Read more »

Friday, March 8, 2019

The Christmas Correction helped seniors

Economic reports are coming in as we try to measure where we have been and use that to help determine where we are going.   Today the Wall Street Journal reported  "Household Net Worth Fell Late Last Year."

Here is my take on that headline. Yes Net Worth fell if you are measuring the value of retirement holdings in stocks.  Even if you think you are not in the stock market you are.  Every teacher's pension plan or state retirement plan is invested in "the market."

Without any action on your part, you got a gift when the market tanked at the end of 2018 if you are over 70 and 1/2 years of age.  Seventy and a half is when you have to pay the piper for all the money you saved in a qualified retirement account without paying tax on it.

Regulations demand Required Minimal Distributions from individual retirement accounts to make sure you pay tax on the money you saved for your retirement and which you must then distribute to youself as income.  Regulations allow you to save money on which you didn't pay tax and now you must pay tax on the distribution.

As you age the percent you are required to distribute to yourself goes up and therefore your taxable income goes up.

The market tanked at the end of the year which means that:

  • Retirement Account Values used to determine the income you must distribute lost value.
  • Taxable income as a percent of the retirement account value is less.
  • Combined with charitable giving, your 2019 tax bill can be positively affected.

Reducing the size of your portfolio is hardly considered a good thing but there are exceptions.  When you fund a charity with a gift from your qualified retirement, you reduce the value of your retirement plan.  Sending money directly to one or more charities of your choice means the value of your retirement plan goes down by the amount you sent to charity.  And therefore, the amount of money you must distribute as income would be less.

Since your income tax rate is determined by the amount of taxable income, you can see using charitable giving to reduce the value of your account and therefore the amount you are taxed will affect your tax rate.

This year we had an anomaly.  The market tanked just before the date at which we value our retirement funds.  With stock market values going down at the end of the year we will have to distribute less as income during 2019 than we would with the normal "Santa Claus" rally.

Charitable transfers are an active process but this little gift required no work.  We income investors know that long term, the market will come back and indeed the market has recovered much of that odd sell off.

If you were clever enough to fund your charitable obligations through Retirement distributions, you got a double holiday gift:  a market swoon just when we could use it that reduces your account value and next year's taxable income and decrease in your account value from the charitable gift.

M* Money Madam 
Read more »

Just too expensive

A follower asked, where are your posts?  I only write when I have a brilliant idea or I make a trade.  Stay tuned for the brilliant idea.  Regarding trades, stuff is too expensive.   Dividend stocks, corporate bonds, utilities are all too expensive.  The only value is very short term CD's (certificates of deposit.)  2.2% for a 35 day CD insured by FDIC. 

This little market swoon may suggest I am not alone in this concern.

M* MoneyMadam
Read more »