Wednesday, February 29, 2012

Dividend Update - February 2012

February was a better month than January but still nothing great. Unfortunately since I'm really gungho about paying off debt I haven't been able to add to my brokerage account to increase my dividend income. That on top of work being slow meaning lower take home pay has had a double effect on keeping me from investing more.
































Dividend Income 2012
CompanyDividend AmountShares Purchased
AT&T(T)$8.800.300
Proctor & Gamble (PG)$5.250.082
Alcoa (AA)$0.900.087
February Total$14.95


I've received a total of $15.59 in dividends this year so far. March will significantly increase that amount with a projected $70+.

Unfortunately no dividends were received in my Roth IRA, however I should get 2 payouts in March.

Selling Puts for Added Income

It's about time for another look at possible put option moves to get a better entry price or for added income. All calculations are based off of the close from February 28, 2012.

The current price for Waste Managerment is $35.20 giving a 4.03% current dividend yield.







































Waste Mangement (WM) 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal Return if ExpiresCAGR if ExpiresYOC if exercised
$34$0.23$33.860.32%7.47%4.19%
$35$0.57$34.521.04%26.51%4.11%
$36$1.20$34.892.32%68.77%4.07%


I currently own shares of WM and would like to add more. I like the potential of these puts. You can get a solid return on the $35 and $36 puts with good downside protection considering it the money would only be at risk for a little over 2 weeks. If I had the money in my account it would be tough to decide which is the best to go with. I think I would probably sell the $36 put to try and get more income since I don't expect a big runup in the market for the time being. I fully expect a pullback to rear its head sometime soon but there's no telling when that will happen. The $36 put gives you 1.14% of downside while returning 2.32% if it expires.

I feel that the elusive market pullback is still coming which means now isn't the best time to sell puts if you're looking to just get income. With a sharp pullback there's a good chance that the options would be exercised. While that might not be the best situation for everyone I always look for options that allow good entry price points as well as the possibility for a solid income return should the option expire.


*Assumed 25% tax bracket and the commission costs of $8.70 that I would pay.

Thursday, February 23, 2012

Another look at yield-on-cost

The conventional definition of yield-on-cost (YOC)is to take the current annual dividend payment from a company and divide that by the original purchase price, rather than the current price, to determine the yield-on-cost. As a company raises it's dividend your yield-on-cost would rise whether the stock price goes up or down. It's a good way to look at the actual yield that you are receiving on your money rather than the current market determined amount for the current yield.

Another way to calculate it that I like to use just as a reference is the total annual payout that you would receive divided by the original investment amount. I like to call this the YOP. While this sounds the same what I do is factor in dividends that have already been reinvested and count the dividends that those shares payout as additional yield on the original investment. You can see the divergence in the following chart.



This isn't useful for determining future purchases but I do like to look at it this way since I consider the original investment as my only cost basis. It's good to see the YOP that I'm receiving and helps to reinforce the slow process that is dividend growth investing.

Tuesday, February 21, 2012

Recent Buy

Today I purchased 50 shares of Tower Group, Inc. (TWGP) at $23.43 / share in my Roth IRA. I got a little impatient in waiting for my price and raised my target up a little bit which I shouldn't have done since the market would have given me the shares cheaper just a few hours later. Live and learn.

TWGP currently pays $0.75 / share per year in dividends. This will pay me $37.50 a year. TWGP is a dividend challenger with 5 years of dividend growth that has been rapid. The 5 yr dividend growth rate is 47% per year. While I don't expect that to continue I can foresee them continuing to raise around 20% per year. My current YOC is 3.18% and if they can keep something close to a 20% growth rate for another 5 years my YOC would jump to 7.91%. The most compelling reason that I bought in besides the potential for rapid dividend growth is the fact that the company is currently trading at a discount to book value and a 45% discount to the Graham number. They've grown revenue at 37.20% rate for the past 4 years with a 48% jump over the last year. They will have their 2011 year end results later this week. They're normalized PE for the last for years is currently 7.84. Unfortunately I'm getting involved with yet another financial stock. I just see too much value in some of the financials still. Of course I still have a long time frame seeing as how I'm only 28.

Payback Period

Another good thing to look at is the payback period which is how long it will take for the total dividends you've received to surpass the original investment amount. For the purposes of this exercise I've assumed a $5,000 initial investment. The stock will grow at 5% per annum. The dividends will grow at the following rates for 10 years and then 5% per year in perpetuity.




























Original YOC and Dividend Growth Rates
Original YOCAnnual Dividend Growth Rate
1.5%13%
3%10%
4%8%
6%3%

*The 6% YOC will grow at 3% for the whole period.

The quickest to payback the initial investment is the 6% YOC with the 3% growth rate right at year 10. The slowest which I expected was the 1.5% YOC with the 13% growth rate. I expected it to take longer to payback but not year 18. I was kind of surprised at how long it would for the 4% YOC to surpass the 6% in total dividends received. It won't pass it until year 20 which shocked me. But after that point the 4% YOC takes off and ends up paying over $8,000 extra in dividends for the 30 year period.



From looking at the above chart it seems like the best thing is the 3% or 4% if you have a long time horizon. It will maximize the income later if you have the time to continuously reinvest dividends for 30 years plus your payback period is only slightly longer than the 6% YOC with 3% growth.

Saturday, February 18, 2012

Targeting a 10% YOC

I like to try and target a 10% YOC in 10 years based on the previous 10-year annual dividend growth rate. For reference I've created some tables to show the required current dividends based off different dividend growth rates. I've cut the dividend growth rate off at 3% since the long term annual inflation rate is around 2.5% and I want my income to at least be slightly ahead of inflation.























































10% YOC in 10 years
10-yr Dividend Growth Rate (per year)Current Dividend
15%2.47%
13%2.95%
10%3.86%
9%4.22%
8%4.63%
7%5.08%
6%5.58%
5%6.14%
4%6.76%
3%7.44%
























































10% YOC in 12 years
10-yr Dividend Growth Rate (per year)Current Dividend
15%1.87%
13%2.31%
10%3.19%
9%3.56%
8%3.97%
7%4.44%
6%4.97%
5%5.57%
4%6.25%
3%7.01%
























































10% YOC in 15 years
10-yr Dividend Growth Rate (per year)Current Dividend
15%1.23%
13%1.60%
10%2.39%
9%2.75%
8%3.15%
7%3.62%
6%4.17%
5%4.81%
4%5.55%
3%6.42%


Due to the recent runup in the overall stock market there's very few consistent dividend payers that come close to meeting the stict 10% YOC in 10 years, but if you are early in your investment horizon you could use the 10% YOC in 12 or 15 years tables as another step in the filtering process of searching for dividend growth stocks.

Friday, February 17, 2012

Selling Puts for Added Income

It seems that the market is trying to decide whether it should have a pullback or not. This doesn't make for the best time to sell puts if you're looking to just collect the premium but if you want to get the stocks at a set price it could prove to be the right time. Of course by selling the puts you're locking yourself in to a certain entry point if the market does correct which might not be the best since you might be able to get the shares cheaper. All information is based off the closing values from February 16, 2012.

The current price for Illinois Tool Works is $56.42 giving a 2.55% current dividend yield.






























Illinois Tool Works (ITW) 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$52.50$0.47$52.120.55%7.38%2.76%
$55$0.95$54.141.18%16.49%2.66%


ITW is a solid company that has a current payout ratio of 36.18% meaning there's plenty of room to increase the dividend as a percent of earnings. It's five year annual dividend growth rate is 14.4% and it's ten year annual dividend growth rate is 12.9%. If you are put the shares then you would be getting a stellar company with the opportunity for above average dividend increases. You're given more downside protection before losing money with the $55 put to sacrifice a little bit of YOC should the put be exercised. I would prefer teh $55 put since you can get essentially the same entry yield but get a much better return on your money if the option doesn't get exercised.


The current price for Emerson Electric Company is $51.38 giving a 3.11% current dividend yield.







































Emerson Electric Company 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$49$0.65$48.350.86%11.85%3.30%
$50$0.90$49.10%1.2217.13%3.25%
$52.50$1.90$50.602.59%39.60%3.16%


The $52.50 put is intriguing to me considering you would get 1.52% of downside protection with the potential to return 2.59% in less than a month. It's a good risk reward ratio for my tastes. That 2.59% return equates to a 39.60% CAGR. There is a higher risk of having the shares put to you especially since I feel that the we're due for a bit of profit taking to pull the markets back down and since EMR is a higher beta stock. For the more conservative move the $49 and $50 puts make for better protection if you aren't looking to necessarily acquire the shares. Emerson is a good company but their 5 year dividend growth rate is 9.1% annually and the 10 year is only 6.4% which is not what I'm necessarily looking for.


*Assumed 25% tax bracket and the commission costs of $8.70 that I would pay.

Wednesday, February 15, 2012

Mutual Fund vs DIY

The common belief is that you should just park your money in index mutual funds and annually rebalance. While I believe that's probably good for anyone that doesn't want to take the time to select their own investments, if you are so inclined I'm going to show you how you can save yourself some extra money and end up with a bigger nest egg in the future.

These numbers will work as long as you are comparing the same accounts. I've assumed that you have a $30,000 initial investment amount and that you will contribute an extra $5,000 annually on January 1 of the year and make all mutual fund purchases or 2 invidividual stock purchases. Expenses for the mutual fund are assumed to be taken out at the end of the year with an expense ratio of 0.30% and the commission for the brokerage account is taken out at the time of the purchases. Commission costs are assumed to be $7.95 which is the amount that I pay, although there are cheaper alternatives. I've assumed that all mutual funds are no-load funds since that would be the best way to go, loads would obviously affect the final numbers. The initial $30,000 investment in the brokerage account is split between 4 purchases. The annual return for the calculations is 7%. Below are the results.


















































Mutual Fund
YearIntial AmountExpensesEnding AmountCummulative Expenses
1$30,000.00$96.30$32,003.70$96.30
2$37,003.70$118.78$39,475.18$215.08
10$112,778.97$362.02$120,311.47$2,177.72
20$283,330.49$909.49$302,254.13$8,519.03
30$608,900.93$1,954.57$649,569.42$22808.32



















































DIY Brokerage
YearIntial AmountExpensesEnding AmountCummulative Expenses
1$29,968.20$31.80$32,065.97$31.80
2$37,050.07$15.90$39,643.58$47.70
10$114,794.81$15.90$122,830.44$174.90
20$294,681.32$15.90$315,309.01$333.90
30$648,545.31$15.90$693,943.49$492.90


Your total expenses are significantly reduced by using a DIY approach and hand selecting stocks high quality stocks. Out of the $175,000 that you invested of your own hard-earned money by using mutual funds you'll pay $22,315.42 in total expenses. While that number sounds like a lot by itself looking at the percentage amount is even more shocking. Over the investing time horizon you would have contributed $175,000 of your money. With the DIY brokerage account you would pay a total of $492.90 in commission charges or 0.28% of your invested capital. The mutual funds would be $22,808.32 or 13.03% of your capital. The biggest drawback to mutual funds is that they will eat away extra capital that could be compounding. By losing that money your nest egg would be $44,374.07 less than the brokerage account.



This is why I've decided to go the brokerage account route. I currently still have some mutual funds in my Rollover IRA mainly because I haven't researched the process of swapping my account over and I don't normally have cell service where I work and errands are the last thing that I want to do whenever I get the chance to be home.

Tuesday, February 14, 2012

Happy Valentine's Day Everyone!!!

Hopefully you can spend it with the ones you love. I will unfortunately just on the phone and not in person. We'll be celebrating as soon as this job gets finished. Whenever that might be. Love you Lynsy.

Monday, February 13, 2012

Max out the 401k?

Today I read a post on TheSimpleDollar about "The Different Meanings of Saving for Retirement" which really got me thinking. Since my plans are to "retire" by 40 and live off of passive income things might need to change. For 2011 I maxed out my 401k and my roth ira and still got to start my brokerage account off. I'm currently planning on maxing out both yet again this year but I'm not so sure now. My 401k withholding is at 16% right now which would max me out for sure if I stay as busy as I was last year but it's not looking too good right now. Hopefully the E&P work here will pick back up.

What I'm thinking is possibly dropping my 401k contribution to 10% or lower but at least 6% so I can get the full employer match. With a 10% contribution on my part and the 5% match and 4% profit sharing I would essentially be saving 19% of my pay for retirement compared to the 24% that I averaged for 2011. I think dropping it to 10% is probably the way to go because that will give me almost an extra $200 post tax to my paycheck. That would be an extra $4,800 to save throughout the year for my FI brokerage account. The money would first be used to pay off my debt and would allow me to pay it off one month earlier. I think since my ultimate goal is to retire early this is the best route to go especially since I can still save 19% in my 401k, it's just strange to think of since everything you hear is to max out your 401k and roth. What do you think about it? Should I cut the 401k contribution to 10%?

Sunday, February 12, 2012

Selling Puts for Added Income

I've been looking around and have found some other potentially lucrative put option plays. All information is based off the closing values from February 10, 2012 and that the puts would be sold the morning of February 13, 2012.

The current price for Aflac is $48.33 giving a 2.73% current dividend yield.























































Aflac (AFL) 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$48$1.62$46.382.40%31.02%2.84%
$47$1.22$45.781.81%22.70%2.88%
$46$0.91$45.091.34%16.44%2.92%
$45$0.67$44.330.97%11.67%2.97%
$44$0.51$43.490.72%8.55%3.03%


Considering you can effectively get an 8.55% CAGR with 10% downside protection in stock price with the $44 put I find that to be a pretty good tradeoff since you would be risking the money for only 32 days. I don't think Aflac would be moving back down since the Japan issues seem to be behind them. Especially since you can get a 3.03% YOC should that option be exercised.


The current price for Target is $52.43 giving a 2.29% current dividend yield.







































Target (TGt) 20 Jul 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$50$2.22$47.783.20%7.55%2.51%
$55$4.65$50.356.22%14.98%2.38%
$57.50$6.40$51.108.23%20.07%2.34%


The $50 put is better if you don't really want the stock because the shares would have to decrease 8.87% before you would lose money on the option. Both the $55 and $57.50 puts will give you a higher return with the added chance that the option will be exercised since your effective cost basis is higher. You'll sacrifice a bit of YOC but can still get a good return should the option be exercised. The $57.50 put gives you 2.54% of downside protection while giving a 8.23% total return. Your upside is 3.25 times the downside risk which is an acceptable tradeoff for my tastes.


*Assumed 25% tax bracket and the commission costs of $8.70 that I would pay.

Thursday, February 9, 2012

Selling Puts for added income

I wish I had more capital to put to work right now because I've found some interesting put option moves that can give some solid return on otherwise idle capital. All information is based off the closing values from February 8, 2012.

The current price for AT&T is $30.03 giving a 5.85% current dividend yield.







































AT&T (T) 20 Apr 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$30$0.89$29.202.01%10.61%6.03%
$31$1.59$29.413.64%19.87%5.97%
$32$2.46$29.545.56%31.60%5.94%


All of these would give an improved cost basis should the stock be exercised and improve the YOC above the current yield. I don't foresee the stock to dip below the effective creation prices but if they were I would be a buyer anyways and would start adding to my position.


The current price for Nucor is $45.31 giving a 3.22% current dividend yield.















































Nucor (NUE) 20 Apr 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$45$2.05$42.953.27%17.74%3.39%
$44$1.63$42.372.63%14.08%3.44%
$43$1.29$41.712.10%11.11%3.49%
$41$0.79$40.211.29%6.70%3.62%


The Nucor options seem interesting to me. I know that Nucor has run up a lot since October but there seems to be a huge disconnect between the stock price and the put options market. The puts seem to be expecting the worst which I feel we will be treading water for the most part of this year. Once the global economy starts going again Nucor could be there to capitalize on a sudden increase in demand. The $45 put gives you 5.20% of downside protection before you would start losing money on the option and the $41 gives 11.26% of downside move in the stock.

Both of these make me yearn for more capital to deploy. You can get a 10%+ CAGR on your money on stocks that I would begin buying at the effective creation prices of the puts.



*Assumed 25% tax bracket and the commission costs of $8.70 that I would pay.

Wednesday, February 8, 2012

Cutting Bills

Our current cable bill was $156.22. My fiancee and I have been talking about getting rid of cable and adding Netflix to allow us to stream movies since we both enjoy watching movies together whenever I get a chance to be home. As of this past Monday we have reduced our cable service to basic cable with faster internet service to provide better streaming capabilities. Our bill for cable will be almost cut in half and will run us around $85 a month. With the Netflix subscription we will add another $10 to that bill bringing the total to about $95. This move alone will save us a total of around $730 a year.

We got rid of the cable mainly because I'm away from home for work and she doesn't watch enough tv to justify paying as much as we were. While it was nice to have and when I'm home I'll miss it since I won't be able to get my sports fix it feels good to save this extra money. I'll be looking into streaming possibilities for sports to see what options there are. When we first talked about this I was hoping we'd cut it out completely and can just increase the internet speed and getting 2 HD receiver antennas to get just the local channels. That didn't come to pass mainly because I'm not home enough to be able to fix any problems that arise since she doesn't like messing with electronics. This is at least a step in the right direction and can possibly be a baby step towards cutting it altogether. If that's the case we can cut our monthly bill from $156 to about $50 meaning over $1200 in savings each year.

I'm excited to get rid of the cable to save money but mainly because it will hopefully lead to us doing more things together and focusing on each other instead of just zoning out and watching tv.

Monday, February 6, 2012

Net Worth Update - January 2012

January was a good month with the stock market making a move upwards. I had my second largest monthly net worth gain with a $10,873.17 move upwards. I had a big move from my savings (~$2,600 and debt payment ($2,425). Another $800 came from my ESPP purchase since I get a 15% discount on the shares and another $1,128 was from my 401k contributions and match. So in total from my own doing I was able to increase my net worth by approximately $7,200 and the balance of the increase was from stock market moves. I’m looking forward to the time when I can have dividends and stock moves making the bulk of my net worth change with my savings just being icing on the cake.

Current Assets: $117,580.54
Current Liquid Assets: $103,010.14
Current Debts: -$37,943.42

My savings rate from my take home pay for January was 74.51%, including the extra debt payment that I made. This was a great start to the new year and is past my 70% savings rate target for the year. If work stays really busy again this year I might crush my savings goal. It's exciting to see the debt go down and assets move up.

Sunday, February 5, 2012

Selling Puts for Added Income

After running some numbers and making my first transaction in selling puts yesterday with my BAC Jan 17 2014 Put, I've come to believe that selling puts could prove profitable with certain moves. This strategy would require much more capital than buying the stocks outright but would work if like me you don't think now is the best time to be initiating new positions since I feel that the stock market is due for a pullback. Of course the future is completely unknown and Mr. Market likes to do crazy things.

Here's a few possible puts you could sell based off February 3, 2012's close.

KO Jan 18 2013 $70 for $6.05
Jan 18 2013 $72.50 for $7.65
Jan 18 2013 $75 for $9.55

All of these will give you a good entry yield on KO. The $70 put would give you a 8.91% CAGR on the capital that would be required to be kept in the account and a 2.94% YOC. The $75 put would give you a 13.20% CAGR and a 2.87% YOC. I like to look for a 3% initial YOC and this could be a way to get close to that since the current yield is 2.76%. The $75 put seems to be the best best if you have the $6,545 in capital and are interested in starting or adding to a position in KO.

PG Apr 20 2012 $65 for $2.90
Apr 20 2012 $62.50 for $1.44

The PG $65 put would give you a 4.33% return on your money between now and April which equates to a 22.26% CAGR and give you a YOC if exercised of 3.38% which is slightly higher than the 3.34% current yield. The $62.50 put would give you a better YOC entry but sacrifice the CAGR, of course a 10.69% growth rate is still good.

Personally of the puts I wrote about I'm most interested in the PG puts. If only I had the capital to get tied up. PG seems to be fairly range bound since October of 2012 ranging between $60 and $67.

Overall, I believe that you can get good entry points should the puts be exercised and if not at least get a solid CAGR on your money. I don't feel that we will have a pullback of the magnitude of last summer to give us great discounts but nothing would surprise me. Of course you need to do your homework on any stock before investing but by choosing solid companies such as these that you would be happy to own and most likely be a buyer at the effective cost basis then this is a way to go. Barring another collapse of the stock market these could be solid moves to earn a great yield on otherwise idle money.

I plan on starting a new series outlining potential option moves on solid dividend growth stocks.

Thursday, February 2, 2012

Recent Transactions

Today I sold 2 option contracts in an attempt to add some more income. The first contract that I sold was the BAC Jan 18 2014 $7 Put for $1.73. If the option gets exercised then my cost basis for this transaction will be $5.27. If the option expires then I will pocket the $173 less commission for the option. I figured that since I would be a buyer of BAC on a dip down into the $5 range it made sense to get paid to wait for that price. If put goes unexercised then I will earn $173 less commission on the $700 that is committed to this order which works out to a 23.47% total return in about 23 months. That gives me around an 11.37% CAGR on the money while I wait. Considering I'd be happy either way this trade works out it made sense to make the trade.

The other contract that I sold was the HAL Jul 21 2012 $42 Call for $1.60. Thanks to my ESPP I was able to purchase these shares for a cost basis of $29.33. There's 3 things that I look for when selling covered calls with a 4-6 month expiration. (1)Premium yield - the percentage of the amount you are paid divided by the option exercise price. I target a minimum of 1.5% on my premium yield.
(2)Margin of safety - (Premium + Dividends Rec'd) / Current Price. This is the downside protection that the shares would have to drop to counteract the premium you receive. I target a 4% margin of safety.
(3)Upside Profit - (Premium + Dividends + Strike Price - Current Price) / Current Price. This is the amount you would make if the option is exercised on the expiration date. I target at least a 6% total upside.

Here's the numbers for the HAL Call that I sold.
(1) 3.62%
(2) 4.65%
(3) 19.53%

If the option expires I will receive just the premium yield which works out to a 7.98% CAGR. The margin of safety for this trade I'm not too worried about because ideally the option won't be exercised and I can keep the shares to avoid the Disqualifying Disposition effect from the ESPP. The upside profit is great being another 19.53% higher than if I sold out now. Based on the purchase price of the shares my payout would be a 49.3% gain. I'm hoping for the option to just expire and feel that it very well could. The stock has to have a 15% move up from current prices to reach the strike price.

Wednesday, February 1, 2012

Income Update - January 2012

My expenses went back up from December thanks to lots of driving increasing my gas costs. Unfortunately my total expenses for January was pretty much on par with the average for last year. I’m hoping to get my expenses down further to create a larger buffer to be able to save. One good move in lowering my expenses was my total food budget. I decreased my total food expenses by almost 28%. I’m not really sure how that happened and know that it will bounce back up in February, but the goal is for it to not rebound much. My goal for this year is to reduce my food spending by a total of 15%. I brought in a total of $6,821.37 this month and was able to save or use as extra debt payment $5,082.27 or 74.51% of my income. It’s been a hard road to try and get my expenses down but anything worth doing isn’t easy.