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Engineering Dividends by Engineering Dividends - 4d ago

Time for another Monthly Options Income post.  This past month saw some wild market swings, especially to the downside.  With nothing but put options open, I was watching my options fairly closely.  At one point, 3 of my 4 open put options were considerably “in the money”.  However, the recovery over the past week helped.  All in all, this month saw an increase in activity on my part, so there’s plenty to cover.  Let’s get to it.

Background

Last year I decided I’d try to generate some additional income by writing options contracts.  The plan is to use any options income I realize to help make additional purchases in my dividend Portfolio.

I write covered calls for a stock that I own and don’t mind selling at a selected strike price.

I write cash-secured puts for stock positions that I don’t own and wouldn’t mind buying at a selected strike price.  I also write cash-secured puts for stocks that I already own but want to add more of at that price.

Ideally, the contracts I write will expire “out of the money”, my gain being the collected premium for writing the contract.  Alternatively, I may buy the contract to close it prior to expiration.  This might be done if I can capture the majority of the premium prior to expiration, or to avoid having the option be assigned to me.  In the case of Assignment, the option holders end up exercising their right to buy the underlying stock (in the case of a call) or sell the underlying stock (in the case of a put) at the strike price should it move “in the money” prior to expiration.  As the option writer, an assigned call means I sell the shares, and an assigned put means I buy the shares.

Options Activity

Below is a snapshot of my options spreadsheet, which I use to help keep track of the options activity.  The entire spreadsheet is not shown, just the options that had activity this past month.

Since my last options post, I wrote 2 new put options, adding to the other 2 that I already had open.  Of these 4 put options, 2 expired and 2 were assigned.

More details on these options are in the sections that follow.  Note – the options #s in the sections below correspond to the numbers in the table.

Notes: Open DTE = Days To Expiration at the time the contract was opened, DOC Price = stock price on Date Opening Contract

Even though I collect the premium for writing the contract up front, I don’t realize the income until the contract is Closed or Expired.

If a put option is Assigned, the premium decreases the cost basis of the purchase.  If a call option is Assigned, the premium will increase the amount realized in the sale.

Opened Options

Since last month’s post, I wrote 2 new options:  a put option on Celgene (CELG), and a put option on HanesBrands (HBI).

Option #5 – PUT CELG (CELGENE CORP) $95 EXP 02/16/18, premium = $120

I had a put option on biotech company CELG successfully expire in January.  I went back to the well for this month, too.  This time I got a better premium at a lower strike price, mainly due to the volatility expected around their earnings report, but also due to the additional time to expiration.  CELG was trading at about $102 at the time I wrote the contract.    The $120 premium would reduce by cost basis on the shares to $93.80 should the option be assigned to me.

Option #6 – PUT HBI (HANDSBRANDS INC) $21 EXP 02/16/18, premium = $40

I already have a position in HBI (200 shares), but it’s one of my smaller positions from a $$$ perspective.  I was open to adding to it, despite it raising my cost basis.  At the time I wrote the contract, HBI was trading just south of $23 per share.  With the $40 premium, my cost basis would be $20.60 in the event of assignment.

Closed Options

In contrast to last month, I did not close any options.  I thought about closing a contract or two, but in the end decided to let the options either expire or be assigned.

Expired Options

Two of my put options expired this month.  Each allowed me to realize over $100 in options income.  It was just the way I planned it (if only it were that easy!).

Option #4 – PUT FRC (FIRST REPUBLIC BANK) $85 EXP 02/16/18, premium = $135

My put option on FRC was out of the money the entire time until expiration… just how I like it.  Rising inflation and interest rate fears didn’t punish the bank stocks too much during the market decline.  FRC rose to over $95 by the time the expiration date came around.  I was happy to realize the $135 option premium.

Option #5 – PUT CELG (CELGENE CORP) $95 EXP 02/16/18, premium = $120

This was an option I wrote earlier in the month (as noted above).  CELG made it through their earnings announcement without much of a price swing, but then dipped noticeably with the overall market decline.  CELG actually closed at $91.02 one day early in February, no doubt “in the money” at that point.  However, a price recovery took place over the past week, putting the option back out of the money just prior to expiration.  Thus, I realized the $120 option premium.  CELG continues to look undervalued to me right now, so buying shares at $93.80 would have been just fine with me.  I suspect I’ll write another put option on CELG this coming month.

If the option had been assigned, CELG would not have been added to my dividend Portfolio, as it doesn’t currently pay a dividend.  Instead, I would have held the shares looking for an increase in stock price, and written covered calls with my position until I was able to realize an acceptable sales price.

Assigned Options

Two options were assigned to me this month: a put option on Southern Co (SO), and a put option on HanesBrands Inc (HBI).

Option #3 – PUT SO (SOUTHERN CO) $45 EXP 02/16/18, premium = $100

I had a feeling this option might get assigned.  At the time the option was opened, SO was just $0.25 out of the money (at $45.25).  As utilities continued to decline, SO dropped with them and was soon in the money, staying there most of the time leading to expiration.  SO nearly reached $42.60 at one point.

I considered closing this option prior to expiration, but as the days went by, I didn’t think $44/sh. would be a bad cost basis, so I let it play out.  Seeing others in the DGI community add shares around this price solidified my thinking.  I still think SO may drift lower in the near-term.

In the end, SO reached expiration trading below the $45 strike price at $43.93.  Given the $100 premium I collected, my cost basis for the 100 shares of SO is reduced to $44.00.

With earnings being released this week, I may write a call option against these shares.  If SO heads lower, I’ll at least add some additional income, and if SO heads higher, I could exit the position with some profit.  I could also just sell shares outright.  We’ll see.  Should I still own the shares at the end of February, SO will become part of my dividend Portfolio.  In that case, SO will add $232 to my forward dividend income.

Option #6 – PUT HBI (HANDSBRANDS INC) $21 EXP 02/16/18, premium = $40

This was an option I wrote earlier in the month (as noted above).  The earnings report released from HBI a week or so ago sent the stock sliding, and well into the money.  HBI regained some of the lost ground over the past week, but not enough to get it back over the $21 strike price.  Thus, I’m now the owner of another 100 shares of HBI, giving me 300 shares in total.

HBI reached the expiration date trading below the $21 strike price at $20.49.  Given the $40 premium I collected, my cost basis for these 100 shares of HBI becomes $20.60.

This purchase will result in another $60 of forward dividend income.

Options Income

As a result of my two expired contracts, February saw me realize $255.00 in income, bringing my yearly total to $356.00  The monthly average is above the $150/mo. pace needed to achieve my 2018 goal.  The $255.00 realized this past month was the most options income I’ve secured in a single month.

Since I don’t currently have any open options, I don’t have any expected income for next month.  Thus, I have some work to do to get something in place.  Writing call options on my newly acquired SO and HBI shares are a strong possibility here.  Another put option on CELG could be in the cards, too.

Here’s a breakdown of the 2018 options income by month… so far so good.

Summary

I’m happy to see a record month for options income, securing $255.00 in total.  This provides me a little cushion with regard to staying on pace to hit my annual options income goal of $1,800.  With no open options at this time, the income total for the March post is not looking promising, but I can rectify that.  Now that I’ve been assigned some shares, writing some call options will most likely occur – up to this point, it’s been only put options that have been written.  The nice thing about call options is that I don’t have to set aside any cash.

Any thoughts regarding my options activity?  Do you like the price paid for either of the assigned stocks from this month?  Please let me know in the comments.

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Early in 2018, I was reading a post about a Dividend Growth Checkup by JC over at Passive Income Pursuit.  That post was part of a year-end review of his dividend growth portfolio, and had multiple ways to look at the dividends being paid by his portfolio of stocks.  One particular section of the post discussed the weighted dividend growth for his entire dividend portfolio.  I was rather intrigued by this, as I long had a desire to calculate this for my portfolio.  Suffice it to say that his post motivated me to figure out how my portfolio was performing with regard to portfolio-wide dividend growth.

In my annual projections, I’d often use 6% as a dividend growth number for my entire portfolio, with a hope that I could do better and perhaps achieve 7%.  The 6% number I used was one I had seen as an achievable number after reading various posts about dividend growth.  It also seemed to be appropriate in my mind based on the dividend raises I was getting for the stocks in my Portfolio.  Well, I’ll wonder about my actual percentage no more, as I’ve gone back and calculated my weighted dividend growth for my Portfolio, not only for 2017, but for the previous 2 years as well.  The results were very encouraging, and will give me better estimates to use in any future projections I might make.

Weighted Dividend Growth for the Portfolio

To determine the weighted growth percentage contributed by an individual stock, its dividend growth percentage for the year is multiplied times the dividend amount that company paid me for the year, divided by the total dividends for the portfolio for the year, or…

Div Growth % for Stock * (Div Paid by Stock / Div Paid by Portfolio)

Each of these individual dividend growth percentages is then added up to obtain the weighted dividend growth percentage for the entire portfolio of stocks.

First, here’s some info to help understand what you see in the table below.  Tickers in blue are for stocks that I no longer own.  These stocks have weighted dividend growth cells that are empty and shaded blue once they no longer contributed to my results.  Cells that are empty and shaded gray are for stocks that I didn’t own at the time, and thus did not contribute to the weighted dividend growth calculation in that year.

Note – I did not include special dividends in the weighted dividend growth calculations, as these are usually a one-time occurrence, and they skew the percentages up and then down from year-to-year.  Also, in the review section below, I’ll try to explain some of the commented cells in the table (red triangle in upper right of cell), along with any other details that might be worth mentioning.

Let’s see how the Portfolio performed in each of the past 3 years…

Review of Results

Looking at the totals, the dividend growth for my Portfolio came in at 10.24% in 2015, 6.94% in 2016, and 8.64% in 2017.  As you can see, on average this is much better than the 6% number I was using for my projections, and even better than the 7% number I was hoping for.

In 2015, my best contributor was Pepsico (PEP), providing 0.90% of the total for the year.  The primary factors for its significant contribution were its large dividend contribution for my Portfolio that year, and its healthy 11.04% increase in the dividend.  The contributions from Quest Diagnostics (DGX) and Western Digital (WDC) were 0%, as I purchased these stocks late in 2015, and did not receive any dividends from them before year’s end.  Also of interest in 2015, Union Pacific (UNP) changed its payment date for dividends, resulting in 5 payments in 2015 before returning to the normal 4 in 2016.  This resulted in a higher than normal percentage in 2015, followed by a negative contribution in 2016.  Note – special dividends from Franklin Resources (BEN), Main Street Capital (MAIN) and T. Rowe Price (TROW) were delivered in 2015, but were not a factor in the calculations (as noted earlier).

In 2016, my best contributor was Skyworks Solutions (SWKS), providing 1.11% weighted dividend growth for the year.  SWKS had an impressive 50% dividend increase midway through the prior year that helped here, as well as it providing a good dividend total for the year.  The contribution from HCP was negative in 2016 thanks to cutting its dividend after the spinoff of Manorcare (under the flag of QCP) later in the year.  Also affecting my weighted dividend growth was UNP’s negative contribution as previously noted.  Note – special dividends from L Brands (LB), Main Street Capital (MAIN) and Nike (NKE) were delivered in 2016, but were not a factor in the calculations.

In 2017, my best contributor was Air Lease (AL), providing 0.85% for the year.  AL was able to reach the top spot even though their dividend yield was less than 1%.  This was possible as a result of it providing a modest dividend total thanks to being my largest holding, but mostly due to its massive 50% dividend increase in 2017.  The contribution from HanesBrands (HBI) was 0%, as I purchased this stock late in 2017, and did not receive any dividends from them before year’s end.  The contribution from Financial Engines (FNGN) was 0% since they did not raise their dividend payment from 2016 to 2017.  On the other hand, I show the contribution from Cognizant Technology Solutions (CTSH) as 0% since CTSH didn’t start paying a dividend until Q2’17, and thus paid $0 in 2016, leading to an infinite result for dividend growth percentage for the year (using 0% is no doubt a conservative adjustment).  Finally, Linear Technology (LLTC) only paid one dividend in 2017 prior to the completion of their merger with Analog Devices (ADI).  In my calculations, I assumed LLTC would have continued to pay that same dividend for the remainder of the year, which resulted in a small positive dividend growth being reflected, as opposed to a negative growth rate being shown due to no other dividend payments for the year.  Note – special dividends from Main Street Capital (MAIN) were delivered in 2017, but were not a factor in the calculations.

You may notice that the individual percentages tend get smaller at the years progress, even though the dividend percentage increase for an individual company may have held roughly steady.  This is a result of more companies being added to the Portfolio each year, and thus the dividend weight for an individual company declining as a percentage of the entire portfolio.  Aflac (AFL) is a good example of this.

My 2016 total differs from the number I left in my comment over at Passive Income Pursuit, as I made an adjustment to the weighted dividend growth percentage for Gilead Sciences (GILD) that I believe more accurately reflects the dividend growth.  The adjustment brought the total down from 7.99% to 6.94%, and stemmed from the fact that GILD only starting paying dividends in Q2’15, and thus the growth from 2015 to 2016 appeared exaggerated if left alone.

Summary

A few things came out of this exercise for me…

First, I was pleasantly surprised by the weighted dividend growth my portfolio achieved.  Rather than the 6%-7% I was thinking I might see, I instead saw a range of 7%-10%, with what looks to be an average north of 8%.  Time will tell if this level of growth can be sustained.  Any dividend cut from one of my larger dividend payers could easily dent my performance for a single year.

My portfolio leans a bit more toward growth than yield, and thus the companies in my Portfolio tend to offer more aggressive dividend growth increases than say a slower growing company offering a high yield in exchange.  I believe this is a factor in my better-than-expected weighted dividend growth.

Second, even low yielding stocks can have a significant contribution to your portfolio’s overall dividend growth if they can offer large dividend growth, and they provide a decent portion of your overall dividend income due to their large weighting in your portfolio.

Third, I now have the ability to quickly ascertain the weighted dividend growth percentage that any stock is contributing to my entire portfolio’s performance.  This could be helpful to know prior to removing a stock from the Portfolio, or deciding if I want to over or under weight a position within the Portfolio.

Fourth, I like this calculation enough that I’ll plan to show the weighted dividend growth for my Portfolio as part of my Annual Performance Review moving forward.

Would you find individual weighted dividend growth percentages helpful to know for your portfolio stocks?  Do you already calculate the weighted dividend growth for your portfolio?  If so, please share in the comments!

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Engineering Dividends by Engineering Dividends - 2w ago

Well, that didn’t take very long.  A couple of days go by, and another purchase for the Portfolio has occurred.  This time it was Exxon Mobil (XOM).

As you probably know, XOM is an integrated oil and gas company engaged in the exploration of, and production of, crude oil and natural gas.  It is also engaged in the manufacturing, transportation and sale of crude oil, natural gas and petroleum products.

Similar to my purchase of Realty Income (O) a couple of days ago, this was a small add to an existing position.

XOM recently released their quarterly earnings report, and it wasn’t viewed favorably as the company missed revenue and earnings expectations.  Combine that with the recent downward movement of the energy sector, and market as a whole, and XOM had a swift plunge in price.  A decline from $89 to $76 in six trading days!  It was a move from the 52-week high to the 52-week low.

Here are my purchase details…

XOM

On 2/8/18, I purchased 20 shares at $76.25/sh, for a total of $1,525.00.

The yield on these additional shares is just north of 4.0%, which is about as high as XOM’s yield has been in the past 20 years.

I now hold 100.475 shares of XOM.  This purchase results in an additional $61.60 in annual forward dividend income, bringing my forward dividend total for XOM to $309.46.  This means I can expect over $77 every quarter from XOM.  Reaching the 100 share total allows me to sell covered calls on XOM in the future, if desired.

XOM is the only energy company in my Portfolio.

While XOM did disappoint this quarter, I remain optimistic that the pick up in oil prices in the past year with help them in 2018.  XOM did have a much better year in 2017 than in 2016 with regard to revenue and earnings.  They also increased their expenditures this past year as they invest for the future (although this had a negative impact on 2017 results).  So, I think better times may be ahead for XOM.  They should benefit from the recent tax cuts as well.  While I wait for the business to improve, I’ll continue to collect and reinvest the dividends.

What do you think of XOM as this level?  What’s the outlook for XOM in your mind?  I’m sure you’ve had some portfolio stocks get walloped recently.  Which ones look oversold to you?   Please feel free to share in the comments!

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Engineering Dividends by Engineering Dividends - 2w ago

A new month, a new purchase.

REITs have been on the decline for months, but I wasn’t really looking to add to my REIT holdings unless the price was right.  With the recent market declines in this first week of February, one REIT I hold dipped low enough for me to want to add more shares.  Like my previous stock purchase in January, this one wasn’t large, but it brings more dividend income into the Portfolio, and monthly dividend income at that.

Today, I added to my existing position in Realty Income. (O).  O is known as The Monthly Dividend Company.  Many dividend growth investors are familiar with O, so I won’t go into all the details here.  Just know that O is a commercial retail REIT that generates rental income from its 5,000+ freestanding commercial properties thanks to long-term net lease agreements it has negotiated with its tenants.

O has been the purchase target of many dividend growth investors in the past few weeks as the price has declined.  In fact, O started the year at a shade over $57/share, and has dropped ~13% in 5 weeks.  Shares of O haven’t traded this low since the end of 2015.

Here are my purchase details…

O

On 2/6/18, I purchased 32 shares at $49.639/sh, for a total of $1,588.45.

The yield on these additional shares is nearly 5.3%.

I now hold 115.014 shares of O.  This purchase results in an additional $84.10 in annual forward dividend income, bringing my forward dividend total for O to $302.26.  Thus, I’m now looking at $25/mo. in dividends from O.

O now sits side-by-side with Crown Castle International (CCI) as the largest REIT position in my Portfolio.

While O’s price may remain depressed in the near-term thanks to concerns about rising interest rates and their impact on REITs, long-term I think O can deliver 5% growth.  Couple that with the nice 5% yield, and the total return looks terrific to me.

Any thoughts on my O purchase price?  If you already bought O recently, are you looking at possibly adding more?  Are there other REITs you like more at this time?  Are you looking at additions in other sectors instead?  Utilities perhaps?  Please comment!

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Wow, just like that… 1 month down in 2018.  The markets stayed red hot to start 2018 before cooling off a bit the final week of January.  Perhaps we’re due for some additional volatility in 2018.  It’s always nice to get off to a good start, but it’s a long year.  With the impressive returns that 2017 brought, 2018 Portfolio performance will have a high bar to jump.  Luckily, dividend income doesn’t fluctuate anywhere near as much as portfolio value.  Hopefully, I’ll have a nice steady climb to new dividend income records by year’s end.

For 2018, I decided to enhance these dividend income reports just a bit… more on that below.  I hope you find it interesting.

Let’s check out the dividend income I collected in January.

Dividend Income

January’s dividend income total came in at $541.98… a solid 6.88% increase compared to Jan. 2017.  This is slower than the average growth exhibited last year, but I expect to pick up the slack next month.

A total of 14 companies paid me a dividend this month.  The largest amount came from RPM International (RPM), ringing in the new year with over $73.  The least came from Ensign Group (ENSG), at a hair above $9.

The dividend amounts from CAH, OZRK, NKE and O mainly increased thanks to additional purchases over the past year.

Increased amounts for other companies were a result of dividend increases and reinvested dividends over the past year.

The decrease from WPC was a result of partial sale during the past year.

Air Lease (AL) was a special case.  I had a partial sale of AL during the past year, but this was offset by a healthy dividend increase.

Only one new January payer popped up, and that was ENSG.  ENSG is one of my higher growth, lower yield companies in the portfolio.

My FNGN position was closed out early last year, and thus provided no dividend income.  FNGN will fall off the list by the time April’s report comes around.

You may notice that I added a new column to the table.  In the “Add’l Fwd Inc” column, I show the amount of additional annual forward dividend income that resulted from reinvesting each of this month’s paid dividends.  January saw an addition of $17.03 from this category.

Dividend Raises

Last Oct. & Nov. I had some terrific dividend raises by various companies in my Portfolio.  I came oh so close to having those dividend raises boost my annual forward dividend income by $100 for a single month, but came up short.  I was hoping that in 2018 I’d finally be able to reach that mark.  January brought some strong dividend raises, and things were looking good to reach the $100 mark.  However, late in the month, an expected raise from HanesBrands (HBI) didn’t look like it was going to materialize (HBI perhaps pushed it into Feb. to coincide with their earnings report). I thought I would fall short again.  Then, the unexpected happened, and Aflac (AFL) delivered a surprise dividend raise on the last day of the month, after raising their dividend just last quarter!  It was not only a raise, but the biggest of the month in terms of dollar amount, and this allowed me to eclipse $100.  Sweet!

All in all, I had 7 companies raise their dividend, and the majority were quite healthy.  I received 15+% dividend raises from BLK, FAST, APD & AFL.  The raises from OZRK, O & OHI were much smaller, but since they tend to raise quarterly, the annualized amounts end up being more impressive than they look.

These raises contributed a total of $123.41 to my annual forward dividend income!  Not only did I cross the $100 mark, I blew through it… incredible.

I’d have to invest $5,016.67 at my portfolio’s average yield of 2.46% in order to equal the same boost to my annual forward dividend income that these dividend raises provide.  Whoa!

Dividends Due To New Investment

I had one purchase in January.  I established a small position in Texas Instruments (TXN).  Details on this buy can be found in my Recent Buy – TXN post.  This purchase added $62.00 in additional forward dividend income.

Summary

I certainly feel like I got off to a good start to 2018.  Dividend income increased nearly 7% compared to last January.  In addition, the forward dividend income total was boosted by 3 sources:  reinvested dividends, dividend raises, and investment of new capital.

I’ll be tracking this trifecta of income boosters each month this year, in a new table.  Each month could easily provide a different leader.  It will be interesting to see how things end up at year’s end.  Here’s what I’ve got after January….

As you can see, the most impressive item from January was certainly the dividend raises.  But the other sources contributed good amounts as well.

All this gave me an outstanding start in terms of meeting my 2018 goal of reaching $8,700 in annual forward dividend income by year’s end.  I need to average roughly $115.25 per month in new forward dividend income in order to reach my goal.  So, with $202.44 for January , it was definitely a strong start to the year.

How did January deliver for you?  Did you have a solid YoY gain in dividend income?  Did the year start strong, or were you slow to get out of the gates?  Please share in the comments…

I have updated the Portfolio & Dividends pages in conjunction with this monthly update.

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Engineering Dividends by Engineering Dividends - 2w ago

A new year has arrived, but having thoughts about how to improve the Portfolio still exist.  The stock market continues its move higher, so good values are harder to find.  However, it appears relative value may exist in the Utilities and REIT sectors.  As for my portfolio, it’s done well, but as always it continues to evolve.  Let’s find out what’s working, what’s not, and what stocks I might be looking to purchase.

Transactions

For the first time in nearly 2 months I made a purchase, and it happened this past week.  After months of pondering an addition to my tech holdings, I finally added to it with a small purchase of Texas Instruments (TXN).  You can read my thoughts about this in my Recent Buy – TXN post.  Other than this, it’s been quiet on the purchase front, although I do have 4 open put options which could result in more purchase activity – more on this below.

Price Movement

Portfolio stocks on the rise this past month have been financials T. Rowe Price (TROW) & Blackrock (BLK), biotechs Gilead Sciences (GILD) & Abbvie (ABBV), and healthcare companies CVS Healthcare (CVS) & Cardinal Health (CAH).  TROW rose from about $105 to $120, becoming the 2nd largest portfolio position, passing QCOM.  Wow!  It’s been a nice run for TROW over the past month, and past year for that matter.  Another investment related company, BLK, jumped from $515 to $586.  BLK also offered up a nice 15.2% dividend raise in January, too.  Meanwhile, biotechs GILD and ABBV have powered higher as well.  GILD has risen from $72 to $85 in the past month, while ABBV has continued its run, rocketing from $97 to $123.  Also, delivering healthy gains this past month were CVS and CAH, as perhaps there’s less of a perceived threat to their businesses from Amazon.  CVS progressed from $72 to $82… just a nice steady move.  CAH continued its ascent, too, moving from $62 to $75.  It’s been a mighty price recovery for CAH over the past two months.  There were outstanding gains from other stocks in my portfolio, too, but the group noted above really got my attention.  Overall, the past month was outstanding – I won’t expect to see gains like that again anytime soon.

The laggards this past month were consumer staples Procter & Gamble (PG) & Hormel Foods (HRL), and REITs Realty Income (O) & W. P. Carey (WPC).  None of these were big moves down, but compared to the gains from other portfolio stocks, these appeared to disappoint.  PG dropped from $92 to $88 as they continue to work through a business turnaround.  The recent earnings report suggests that more time is needed.  My faith in PG is starting to waver though, as its seems they’ve had ample time to work through the issues.  I may start evaluating possible alternatives for PG.  This is sad to consider given that I’m a long-term shareholder, but performance is key.  Maybe PG can still make it happen.  HRL has drifted lower, too, from ~$36 to ~$34.  I’m not concerned here.  As for O and WPC, the rising interest rate environment seems to be weighing on them.  O descended from $57 to $54, while WPC fell from $69 to $66.

Watch List

As for adding to my existing positions, Skyworks Solutions (SWKS) is still on my radar from last month.  SWKS moved higher over the past month, only to return to where it started.  Just like last month, if it reached the low $90s I’d consider adding more.  Although I’m happy with the size of my current REIT position, if O continued to move lower and dipped below $50, I’d most likely add some.  I’m also looking to add to my HanesBrands (HBI) position if it drops below $21.  I’ve got an open HBI put option (expires 2/16/18) to do just that.

The non-portfolio stock that I was watching last month was Comcast (CMCSA).  It’s moved higher since last month.  However, if it can pull back to the $37-$38 range then I’m quite interested in initiating a position.  Another stock I’ve added to my watch list is Dominion Energy (D).  This was motivated by Dominion’s offer to merge with SCANA (SCG) in a stock-for-stock deal.  SCG is currently my only utility stock in the Portfolio.  There’s a considerable amount of uncertainty regarding whether this deal closes, but if it does, my SCG shares will get exchanged for D (0.669 D shares for each share of SCG).  I have 3 other stocks on my purchase radar all as a result of open put options I recently sold.  The stocks in question are biotech Celgene (CELG), First Republic Bank (FRC), and utility Southern Co. (SO).  You can read more about my thoughts on these stocks and options by checking my most recent Monthly Options Income (Jan. 2018) post.

Thoughts?

What’s going on with your portfolio?  Big price movements either way?  What’s on your purchase radar?  Any companies disappointing you with their performance?  Please share your thoughts!

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Engineering Dividends by Engineering Dividends - 1M ago

For the past few months, I’ve mentioned wanting to increase my investment in the technology sector.  Well, today I did just that.  It wasn’t a big splash, but it adds another terrific company to the Portfolio, and adds some additional dividends to the annual dividend income stream.

Today, I initiated a position in Texas Instruments, Inc. (TXN).  TXN designs, manufactures, markets and sells semiconductors to various designers and manufacturers around the world.  The company operates in two segments: Analog and Embedded Processing.  Analog includes logic, power products, converters, amplifiers, sensors, etc.  Embedded Processing includes microcontrollers and digital signal processors (DSPs).

My purchase came just a day after the market was apparently disappointed with TXN’s Q4 earnings report.  It wasn’t that the earnings were poor, but TXN’s outlook was just not good enough to live up to the heightened expectations that came with a strong run up in the stock price in recent months.

TXN had been on a strong upward trajectory since last September, after hovering around the $80 mark for most of the first 8 months of 2017.  Recently, TXN was at a 52-week high, at slightly over $120.

Here are my purchase details…

TXN

On 1/25/18, I purchased 25 shares at $110.40/sh, for a total of $2,760.00.

This purchase results in an additional $62 in annual forward dividend income, bringing the annual forward dividend total to just over $7,463.

TXN enters the Portfolio as the smallest position by a good margin.  It also joins SWKS as another semiconductor company in the Portfolio.

I can easily see that TXN may be overvalued at my purchase level, as the price had risen about 50% in the last 4-5 months, and it trades at a higher than normal P/E ratio compared to the past few years.  However, I decided to establish a small position (a little less than 1% of the portfolio), as I’m certainly more engaged following a stock I own compared to one I don’t, even if it’s a small position.

On the plus side, over the past 5 years, management has steadily increased both pre-tax profit margin and return on equity percentages, which I like.  In addition, TXN has been aggressively increasing the dividend, especially over the past couple of years.  The payout ratio is currently a bit over 50%, so there’s room for more healthy increases, especially if TXN can keep improving its cash flow.

Should TXN continue to fall, I’ll strongly consider averaging down.  I could see making two or three similarly-sized purchases before concluding that I had a full position.

Over the next 5 years, I’m estimating that TXN may only grow annual sales at 4%, but can grow annual earnings at about a 10%-11% clip.  At my purchase price, TXN has a 2.25% yield.  This is a tad lower than my portfolio yield, but I expect TXN to offer above-average growth, and correspondingly above-average price appreciation.

Any thoughts on my TXN purchase price?  Would you have held out for a lower entry point?  Are there other tech names you would prefer at this time?  Please share your thoughts in the Comments!

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Engineering Dividends by Engineering Dividends - 1M ago

Welcome to my first Monthly Options Income post.  Last year I decided I’d try to generate some additional income by writing options contracts.  The plan is to use any options income I realize to help make additional purchases in my dividend Portfolio.

I’ll most likely publish each Monthly Options Income post soon after the 3rd Friday of the month, as most option expirations occur then.

For some additional detail on how I did last year, and some background on my options trading, please see this options post.

I write covered calls for a stock that I own and don’t mind selling at a selected strike price.

I write cash-secured puts for stock positions that I don’t own and wouldn’t mind buying at a selected strike price.  I also write cash-secured puts for stocks that I already own but want to add more of at that price.

Ideally, the contracts I write will expire “out of the money”, my gain being the collected premium for writing the contract.  Alternatively, I may buy the contract to close it prior to expiration.  This might be done if I can capture the majority of the premium prior to expiration, or to avoid having the option being assigned.  In the case of Assignment, the option holders end up exercising their right to buy the underlying stock (in the case of a call) or sell the underlying stock (in the case of a put) at the strike price should it move “in the money” prior to expiration.  As the option writer, an assigned call means I sell the shares, and an assigned put means I buy the shares.

At the end of 2017, I laid out my goals for 2018, and one of them was to generate $1,800 in options income, or $150/mo.  Let’s check out how I started the year…

Options Activity

Below is a snapshot of my options spreadsheet, which I use to help keep track of the options activity.

This month, I’ve written 4 put options, with 2 having already Expired, and the other 2 still being Open.

Notes: Open DTE = Days To Expiration at the time the contract was opened, DOC Price = stock price on Date Opening Contract

Even though I collect the premium for writing the contract up front, I don’t realize the income until the contract is Closed or Expired.  If a put option is Assigned, the premium decreases the cost basis of the purchase.  If a call option is Assigned, the premium will increase the amount realized in the sale.

Option #1 – PUT CAH (CARDINAL HEALTH INC) $60 EXP 01/19/18, premium = $40

CAH is a stock I already own, but I purchased it at a higher price, and thus would be happy to add more shares at $60 to bring my cost basis down.  At the time the option was opened, CAH traded at ~$63.50.  However, over the course of 15 days to expiration the stock seemingly climbed every day, from $63 to over $71.  This option wasn’t close to being assigned.  It recently expired, and I realized the $40 option premium.

Option #2 – PUT CELG (CELGENE CORP) $100 EXP 01/19/18, premium = $61

I’ve had my eye on CELG ever since the price dropped significantly last October.  CELG traded under $100 for a bit before settling in the $100 to $110 range over the past 2.5 months.  CELG looks undervalued to me right now, so buying shares at $100 would have been acceptable to me.  At option opening, CELG traded at ~$107, and while CELG did test the $100 mark during the 15 days to expiration, it never quite made it.  Thus, the put option expired, and I realized the $61 option premium.

If the option had been assigned, CELG wouldn’t have been added to my dividend Portfolio, as it doesn’t currently pay a dividend.  Instead, I would have held the shares looking for an increase in stock price, and written covered calls with my position until I was able to realize an acceptable sales price.

Option #3 – PUT SO (SOUTHERN CO) $45 EXP 02/16/18, premium = $100

Utilities are one of the two sectors that didn’t get off of a good start in 2018 like the rest of the market.  While I’m not a big fan of utilities in general, I might be a bit underweight in this sector.  So, I wrote a put for SO with a $45 strike price.  At the time the option was opened, SO was just barely out of the money (by $0.25), which is partly why I got $100 premium.  Given the $100 premium, my cost basis for the 100 shares of SO would be $44 should the option get assigned.

I have a feeling this option might get assigned, as utilities seem to be drifting lower as the days go by.  If this trend continues over the next month, assignment will be a foregone conclusion at the time of expiration.  Thus, I need to keep thinking about if I want to own SO or not.  If not, I need to consider ‘buying to close’ the option, which would result in a loss on my put option.  I haven’t realized any losses yet in my options trading experience, so we’ll see how things play out.

Option #4 – PUT FRC (FIRST REPUBLIC BANK) $85 EXP 02/16/18, premium = $135

FRC has been drifting lower over the past 6 months, low enough to interest me.  Banks should benefit from the rising interest rate environment, and it doesn’t appear that got baked into FRC’s stock price.  With the $85 strike price and the $135 premium for writing the put, my cost basis would be $83.65 should the option be assigned to me.  That price would be a 52-week low for the stock.

While FRC’s yield is under 1%, I’d most likely add the stock to my dividend Portfolio, making it the 2nd bank I hold, along with Bank of the Ozarks (OZRK).

Options Income

So, I’m off and running for 2018 with regards to options income.  As a result of my two expired contracts, January saw me realize $101.00 in income.  This is below the $150/mo. pace needed to achieve my 2018 goal, but the year is young, and there’s plenty of time to make up ground.  There’s the potential to realize $235.00 by next month if my existing open contracts expire.

Here’s a breakdown of the 2018 options income by month.  Not too exciting yet, but it should get more interesting as the year progresses.

Summary

I’m still looking for my first purchase of 2018 for my dividend Portfolio.  Thus, I’ve been writing nothing but put options so far this year.  This way I buy stock at prices I like, and if they don’t reach that price, I collect a premium.  Since no options have been assigned to me thus far, I’m off to a decent start with regard to options income for 2018, as I’ve collected $101 for the 2 options that expired.  In addition, I have a couple other options still open and set to expire next month.

Any thoughts on my options trades?  Do you like the underlying stocks in these puts?  Would you have set a lower strike price?  Please let me know in the comments.

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Engineering Dividends by Engineering Dividends - 1M ago
Time for a Performance Check

For some background on the idea behind the Performance Check, and the XIRR function used for the calculations, please see my first post in this series – Performance Check – PG

I’m continuing my performance check series with a look at the fifth dividend paying stock I ever purchased for my Portfolio.  The stock is Johnson & Johnson (JNJ), which is part of the Healthcare sector.

JNJ is another stock that doesn’t need much of an introduction since it’s familiar to so many, however here are some company details.  Johnson & Johnson is an American healthcare company that was founded over 120 years ago.  It operates worldwide through 3 segments: Consumer, Pharmaceutical, and Medical Devices.  From Wikipedia… the corporation includes some 250 subsidiary companies with operations in 60 countries and products sold in over 175 countries.  Most people know JNJ for their consumer products.  JNJ brands include numerous household names such as Band-Aid bandages, Tylenol medications, Johnson’s baby products, Neutrogena skin/beauty projects, and Acuvue contact lenses.

JNJ has a long history of increasing its dividend, having done so for the past 55 years (a Dividend King!), including an annual increase announced last April of 5.0%.

Just like the previous 4 stocks I reviewed, my JNJ position is one I initiated many years ago.  Thus, I have lots of data/time to factor into the return calculated in this Performance Check.

My Personal Performance for JNJ

My initial purchase of JNJ came at the end of Q1 1998 in a Dividend Reinvestment Plan, or DRiP, that I opened at the same time.

Below is a capture of the spreadsheet I keep with the JNJ cash flows, and the calculated XIRR.  Once again, the table is a bit long for this post due to all the entries, so I broke it up into 2 pieces, duplicating the header each time.

Here are some notes with regard to the ‘Type’ column entries:

OCP = Optional Cash Purchase;  EOY Value = End Of Year Value

Note – the prices account for a 2:1 stock split back in 2001.

The duplicate EOY Value entries at the end of each year (one negative, one positive) do not affect the cash flow, and can be thought of as boundary markers, allowing me to make the individual yearly return, and the annualized total return calculations.

You’ll notice there has been only one withdrawal over the nearly 20 years I’ve had JNJ.  This came in 2016 when I had to sell the fractional shares as a result of closing my DRiP account and transferring the shares to my brokerage account (I was only allowed to transfer whole shares).

Otherwise, it’s been only small OCPs here and there… always $100 or less, except for one contribution of ~$167.  My last OCP was in 2011.  Thus, the reinvested dividends have been doing the majority of the work.

The net investment into JNJ over the years has been $3,058.72.  This is not my cost basis though, as this net investment does not include reinvested dividends.  Reinvested dividends have been $2,244.19.  Thus, I’ve had a 73.37% payback of my net investment!

Meanwhile, the current value is $12,659.98.

The annualized total return ends up being 10.24%, covering my initial purchase on 3/30/1998, all the way through 1/12/2018.

As with PG, RPM, AFL & PEP my investment timeframe for JNJ includes two significant bear markets.

Summary

JNJ’s price performance in 2017 was superb at over 24%, more than 2% higher than the S&P 500.  In fact, 2017 just continues a nice price run that started in 2011, after several years of sideways movement prior to that.

This great 2017 return boosted my nearly 20-year annualized return over the 10% mark… a fabulous long-term track record.  The 10.24% annualized return for JNJ is right in my desired target return range of 9% to 11% for a company of its size.

Also, this performance is right in the middle of the reported 9.41%, 10.79%, 12.73% and 9.23% annualized returns for my Procter & Gamble (PG), RPM International (RPM), Aflac (AFL) and Pepsico (PEP) positions that I reviewed in my previous four performance checks.  These are all terrific results from a great group of stocks that have been held for a long time.

Bringing my returns for PG, RPM, AFL & PEP up-to-date allows for the following comparison.  As you can see, despite recent price changes since each individual review, JNJ still falls in the middle of the pack.

This is the 5th of the 5 performance checks I had planned.  I’m sure I’ll have more in the future, but I’ll allow for more time to pass before the next selection, as I haven’t held my remaining portfolio stocks for nearly as long.  I suspect the next performance check will be for Air Lease (AL) or Gilead Sciences (GILD).  Let me know if you have any questions about what you see in the spreadsheet snips.

Do you have similar performance checks for stocks in your portfolio?  If so, please share some of your annualized return numbers!  Let me know what criteria you have for acceptable performance.

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Engineering Dividends by Engineering Dividends - 1M ago

Welcome to the first annual performance review of my dividend Portfolio.  I’ve actually kept track of my portfolio performance over the past 3 years, which I’ll share with you shortly, but since the blog was only created 6 months ago this will be my first opportunity to post about annual performance as a calendar year comes to a close.

I feel it’s important to evaluate the portfolio as a whole, comparing it to a reference to gauge its performance.  In this case, the reference is an index, the S&P 500 stock index.  Since most stocks with long dividend histories tend to be large cap stocks, using the S&P 500 index seems appropriate.  If my portfolio is lagging the index, I might examine my holdings further, looking for the cause of the under-performance.  Is it an individual stock or two facing a significant temporary setback, or a fundamental issue with my overall stock selection?  Could it be that I’m underweight in the best performing sectors?  Maybe I’m beating the index, and I determine I want to stay the course.  In any case, having the performance data can help me to steer the portfolio in the right direction.

Of course, I want to beat the index over time, otherwise one could argue that I’d be better off just investing in the index.  However, even if I don’t beat the index, I like the control I get with building my own portfolio and thus controlling which stocks are part of it.  I can decide if I want to skew the portfolio for growth instead of income, or vice versa.  I can also overweight sectors that I like (tech, healthcare, financials, industrials), and underweight those I don’t (utilities, telecom, energy).

I’ve also tracked the performance of the individual stocks for 2017.  This way I can potentially feed the strongest stocks if their prospects are still bright, and perhaps weed out the weaker ones by replacing them with better alternatives.

2017 Portfolio Performance

Let’s start by looking at the performance of my entire portfolio for 2017.  I’ve calculated the Internal Rate of Return (IRR) by keeping track of all cash inflows and outflows from the portfolio.  Inflows are essentially fresh capital I’ve invested, while outflows are proceeds from stock sales, or dividends that are not re-invested.  The IRR takes into account the timing of my inflows and outflows, as well as the re-invested dividends.

For 2017 my portfolio return was 18.79%.  Not too shabby, right?  Unfortunately, this lagged behind the S&P 500 Index, which posted a 2017 return of 21.93% including dividends.

Note – I’ve obtained my S&P 500 return numbers from here.

In fact, for 2 of the past 3 individual years, I’ve trailed the index, as you can see in the table below.  However, I’m beating the index over the entire 3-year period.  The difference over the 3-year period (0.43%) doesn’t look like much, but the overall number is an annualized rate or compound annual growth rate (CAGR), so those small differences can actually result in large $ deltas if I can maintain the advantage over many years.

2017 Individual Stock Performances

In the table that follows, stocks that aren’t shaded at all were in the portfolio at both the start and end of the year.  I expect this to be the norm for most of the portfolio stocks.

Stocks shaded in blue were sold in their entirety during 2017, and thus no longer part of my portfolio.  Most of these stocks were in the portfolio to start the year.  However, that’s not always the case.  For instance, LB and GWW were both purchased, and sold, in 2017.

Stocks shaded in red were new additions to the portfolio in 2017 that remained in as the year came to an end.

As you can see, I added 7 stocks to the portfolio, while removing 5 stocks.

I calculated the IRR for each stock (see “+ reinv. div.” column) and ranked them from highest to lowest based on this column.  For those stocks that weren’t in the portfolio for the entire year (i.e. those shaded in blue or red), I use a simple return.  If I had used the IRR calculation in these cases the percentage returned would have been noticeably incorrect, especially for those stocks with short holding periods.

There are percentages in two columns.  The first column (price appreciation only), shows the return of the stock from the beginning of the year (or the first day I held the stock in 2017), to the last day of the year (or the last day I held the stock in 2017).  This just shows how the stock performed price-wise over the time period I owned it.  The second column (+ reinvested dividends) shows the percentage return given price appreciation, plus the timing of reinvested dividends, plus the timing of any buys and sells during the year.

In most cases, when I don’t make additional buys or sells of the stock during the year, the second column percentage will be slightly higher than the first column by the stock yield (+ or – a bit given the timing of the reinvested dividends).  However, in those cases where I did make additional buys or sells of the stock during the year, the return can be affected rather dramatically, based on the size & timing of my transaction.  Thus, I wanted to highlight those stocks, as it can help explain some of the larger than normal differences in my return versus that of just the stock price return.

A few stocks in which I made timely transactions included SWKS, WPC, QCOM, TGT, HRL & O.  In three of these cases, I turned a negative return into a positive one.  With TROW, I actually reduced my return percentage a bit with an untimely transaction.

From the table you can see I had 11 stocks with at least a 30% return, led by a 60.07% return from ABBV.  I also had 8 stocks with a negative return, with SCG being the worst by far at -43.57%.

Recall the total portfolio return was 18.79%.  So, 19 of the stocks finished with a better individual return, and the other 24 finished with a lower return.

Here are the return percentages for the individual holdings in chart form, offering a different way to look at the data…

Summary

Despite trailing the S&P 500 for 2017, I was certainly happy with my Portfolio return.  Additionally, I kept my lead since the beginning of 2015 with respect to CAGR when comparing to the S&P 500.

Most of my transactions involving existing positions during the year led to improvements to my return, so I’m also happy with that.  If transaction decisions were leading to poorer performance, then I’d have to question my methodology.

I’d expect some of the best stocks from 2017 to potentially cool off in 2018, while some of the worst performers might be poised for a better 2018.  In fact, some my 2017 laggards are already off to a good start after the first week of trading in 2018.

As I continue to hold many of these stocks over time, you’ll see occasional Performance Check posts on them, detailing their returns for me over longer periods of time than just a single year.  So, keep your eyes peeled for those.  I’ve already offered up 4 of those in the past few months for these stocks: PG, AFL, RPM & PEP.

I’d love to get your feedback on the annual review… Too much info?  Need more?  Do any stock performances stand out to you?  Also, let me know if you keep track of your portfolio in a similar manner, and if so, how did your portfolio performance end up in 2017?

  Bonus Section

(Added in response to a comment from Dividend Dozer!  Thanks for inquiring.)

For interested readers, this section shows my table of spreadsheet data (inflows & outflows) used for the IRR calculation for my entire dividend Portfolio in 2017.  The IRR formula used is also below.

The only data needed for the calculation is in columns A & B, which is the transaction date, and the dollar amount of the transaction, respectively.  Buys are inflows to the portfolio, while sells, and paid dividends that are not re-invested, are shown as portfolio outflows.

The info in columns C & D is not needed, but I keep it to help me recollect what the transaction was.

As for the formula, it’s this simple: =XIRR(B97:B136,A97:A136,0.1), which I paste into a cell where I want to show the portfolio return.  One must alter the cell locations in the formula to match those where your data is contained in your spreadsheet.

For the data in my table, you should get 18.79%, assuming your ‘portfolio return’ cell is formatted to be a percentage with 2 decimal places.

If you end up calculating your 2017 portfolio return, I’d love to hear how you did.

Enjoy!

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