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Posted by Martin April 16, 2020
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Dividend aristocrat Helmerich & Payne (NYSE: HP) cuts dividend. What to do?


In these hard days of covid mess it is difficult to be a true dividend growth investor. Even high quality companies like Helmerich and Payne (HP) which was increasing their dividend for 47 consecutive years decided to cut the dividend.

As a dividend investor I was relying on the dividend aristocrat list and always defended the idea that if a company increases dividends for 50 years or more then it is very unlikely that it would cut the dividend. Although, I admitted that it can happen, I actually didn’t believe it much. Now, that it happened, the question is what to do next?

I was building my position in HP lately adding shares to reach 100 shares in this stock. The dividend was nice and all numbers looked OK to me. I am not an overly expert in evaluating dividend stocks, so I may have missed some warnings but I still felt confident that this stock would be safe.

Then the Covid crash came and the stock plummeted. Then the oil crisis added on top of it and the stock plummeted even more. It went from $45 a share to $12 a share at some point.

 
H&P
 

And, on top of all that the company announced the dividend cut. The dividend growth investor is supposed to liquidate such position and move to a different, better company. At least, that is the theory. But if I liquidate at today’s price, I would be realizing huge loss. And I am not willing to do that.

One reason is that the metrics of the company are still good and the dividend cut is not a result of reckless leadership but to preserve cash in the difficult times like today. It can actually be perceived as a good approach from the board.

This had me to reevaluate my dividend investing strategy and line it up with my recent approach to treat my stock holdings as true asset, like a rental property I decided to buy, hold forever, and monetize it.

And that is the response to the question “what to do?”

I will keep the stocks and keep accumulating my positions despite the dividend cut, and deploy options to generate cash in lieu of the dividends. It is basically an approach described by Samir Elias in his book “Generate Thousands in Cash on your Stocks Before Buying or Selling Them” where you keep selling puts until you buy 100 shares of a stock and once you buy 100 shares you keep selling covered calls until you sell the stock. Then repeat the process.

So, instead of selling a stock, I will keep it. I will keep accumulating until I reach 100 shares and then start selling covered calls. I will also track my cost basis and may reevaluate my holdings once the cost basis drops below the current stock price. Then I may decide to liquidate the position and move elsewhere or keep it. Time will show.




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Posted by Martin April 15, 2020
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Recovery, retracement, crash, or what?


Some time ago, I posted my crystal ball vision about the market creating a pennant, or flag, and that most likely it will go higher.

See my predictions here:
https://tinyurl.com/ybeduenk

Then, I had to find enough evidence out there to confirm my bias and assure myself that everything I saw in my crystal ball is the future to come:

https://tinyurl.com/yc7efeuy
https://tinyurl.com/ydhh7vfp

And today, my predictions of the guru came all true. The market broke up its relationship with bears and up from the pennant and rallied up to the expected target, defined by expected move, and that defined by the pole of the pennant. That target was in the vicinity of 2750 – 2800… but if you look at my picture it was at 2935, but that is a detail which doesn’t fit the narrative so I am ignoring it.

Well, long story short (not really), the market stalled at 50 day MA and now what?

My first gut feeling (the reason why there is no toilet paper in the stores) is that we are going to go through a pullback as of now. Or it can be just a consolidation. We can go sideways, we can do down, or we can continue up. You pick, let me know, and I will win.

People are expecting another crash as this rally was just a bear rally. We recovered about 50% of the previous crash! A perfect Fibonacci retracement. There is no other way but down. Right? Or? What if not? Volume is mediocre, compared to previous days and earnings reports are showing disappointment. All as expected. And that’s the issue I have. It is all expected. This market was crashing all month long on the expectations of bad earnings, so this is all baked in already. Or should be. Apple (AAPL) was warning of bad earnings since day one of this coronavirus mess, who would be surprised if what they said was actually true?

Even bearish, now bullish Goldman Sachs agrees with me on this that the bottom is in (https://tinyurl.com/y8re293u). This actually now sparked a lot of controversy among other gurus like me (mainly those who are seers and revelators) arguing that when GS is bearish, you should be bullish and when GS is bullish you should be bearish. And since GS turned bullish you should go bearish. Ignore, that with this narrative it is like 2+2 = fish, because we do not know what time frame, outlook, and metrics GS used for their prediction and we then apply it to confirm or disprove our narrative (that is happening all the time out there). I too argued till death with a person about the market while I was looking at daily chart and the other guy, a day trader, was looking at 4 hr chart. But that didn’t prevent us from killing each other over an argument where the market would go next.

We have to wait for the next move in the market. I have no clue and my crystal ball doesn’t say anything. My market diarrhea gut prediction says we we see a pullback to 2620 level (some very old support from 2018 or 2019 days of glory). That would create a new higher low and moon will be the target again. Or we can really re-test the lows as happened in 1987, 2000, or 2008 (I hope 1987 it is, because that was just 9% loss, while 2000 and 2008 years saw another almost 40% loss). Given my guts, all super bad news about the economy were already expected, people and revelators were all talking about it or weeks, if not months, companies were warning about their earnings miss one after another – sell the rumor, and now we may see the market actually shrugging it all off and going higher – buy the news. And of course, if… and let me stress the IF here… (I forgot the point while stressing the IF).

Another IF: if the bad earnings news will not be as bad as everybody was panicking about during the March rout, the market may in fact go higher from here. So, stay safe, trade so you preserve cash (I buy equities and trade little to do so), and let’s wait what happens next.
 

S&P 500 prediction




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Posted by Martin April 10, 2020
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What do you think of trading weekly stock options?


There is nothing wrong with weeklys. Of course, it all depends how you trade them. Before, when weeklys were new, there was a problem with liquidity. Not anymore. Then, if you trade weeklys as monthlys, meaning you pick a weekly option but still with 30 or more days to expiration. For example, you pick BA February 28, 2020 280 put option, which is still a weekly options but with 37 days to expiration then there is nothing wrong doing it. You will just have more options to pick strikes and expiration dates than just monthlys.

If you, however, want to trade them a truly weeklys meaning you want to pick them to have 7 days to expiration then there is also nothing wrong with it but be prepared for potential limitations (I wouldn’t call it risks because I deem options less risky than stocks) such as short term to expiration will limit your ability to adjust the position should it go against you, you would have to be too close to the market to collect a decent premium so you run a risk of ending in the money – which is OK when trading equities rather than SPX, for example, and there may be a limit that if you want to roll from one weekly to another, or to monthly or quarterly option, the strikes you want to roll in may not exist and you would have to roll to different strikes which may change the entire trade characteristic and risk profile (for example adding more risk to the trade). Other than that, there is no problem at all.

My view on options, mainly my claim that options are less risky than stocks, sparked controversy among less informed:

This guy “deems options less risky than stocks”.

I would advise you against taking him seriously. ~ Jacob Nikolau

 
If you think that I am wrong, as the guy suggested, then review the following situation:
 

A trader A buys 100 shares of a stock at $30 a share.

A trader B sells a cash covered put with 26 strike price.

The stock ends at $20 a share at expiration.

Trader A sees $1,000 loss.

Trader B sees $600 loss.

Who holds a riskier asset?
 

Trader A holds 100 shares of a stock ABC at $30 a share and does nothing.

Trader B holds 100 shares of a stock ABC at $30 a share and sells 20 strike call options (ITM option) and receives 12.55 premium.

The stock drops to 22 a share. Who is better off? Trader A or trader B?

 
Where is the risk? On the stocks or the options?




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Posted by Martin April 03, 2020
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Should I invest in CDs or annuities?


No, unless you want to waste money.

In CDs the interest won’t even beat inflation and your principal will never grow (unlike stocks where you get dividends and growth, with CDs you get poor interest and no growth).

Annuities look good on a surface but they in fact deprive you of off the stock market growth. What annuities do, is that they tell you that you will get a guaranteed 10% annual return and 0% loss (they guarantee you no loss). But if you look how markets work, you find out annuities are a rip off. The markets usually grow 29% or 30% a year. And time to time they have a severe 20% to 50% bear market (that’s why over time, if you average it, the average annual growth will be 12% only). But this doesn’t take into account time. It only accounts for the percentages. If you see how long the market goes up 20% – 30% per year and how long they go down 20% to 50% per year, you will see that the market can go up 30% for 10 consecutive years while down 50% for 2 consecutive years. And here is the rip off. The annuity company will tell you that for those two years you will not get those losses. But for the next 10 years, you will only get 10% upside while the annuity will reap the remaining 20% .
 

Let’s look at example:
 

Let’s say, you bought an annuity in 2005. Here is what you would get:
 

Dec 31, 2019 – 29.44% – you get 10% – annuity gets 19.44%
Dec 31, 2018 – 20.49% – you get 10% – annuity gets 10.49%
Dec 31, 2017 – 16.21% – you get 10% – annuity gets 6.21%
Dec 31, 2016 – 9.27% – you get 9.27% – annuity gets (0.73%)
Dec 31, 2015 – (15.42%) – you get 0% – annuity gets (15.42%)
Dec 31, 2014 – 2.11% – you get 2.11% – annuity gets (7.89%)
Dec 31, 2013 – 15.82% – you get 10% – annuity gets 5.82%
Dec 31, 2012 – (0.51%) – you get 0% – annuity gets (0.51%)
Dec 31, 2011 – 12.41% – you get 10% – annuity gets 2.41%
Dec 31, 2010 – 51.76% – you get 10% – annuity gets 41.76%
Dec 31, 2009 – 242.54% – you get 10% – annuity gets 232.54%
Dec 31, 2008 – (77.52%) – you get 0% – annuity gets (77.52%)
Dec 31, 2007 – (18.81%) – you get 0% – annuity gets (18.81%)
Dec 31, 2006 – 16.73% – you get 10% – annuity gets 6.73%
Dec 31, 2005 – 19.27% – you get 10% – annuity gets 9.27%

Out of these years, there were only 4 occurrences where annuity would grow at zero growth rate, 9 occurrences where the market grew more than 10% and 2 where it was a bit less that 10%. Just look at December 2009. The market went up 242.54% but your annuity would pay you only 10%. The remaining 232.54% would be a nice gain tot he annuity company using YOUR money. And this is just a 15 years long example. Imagine you would do this for 30 years. Add fees to it and it will not be you who would be rich…




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Posted by Martin March 30, 2020
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History repeats itself


I can see it all again and it is amazing and satisfying at the same time. Although, I should feel sorry or sympathy but I do not. Call me cynical or rude, but I actually feel satisfaction.

What am I talking about?

All the fools who last few weeks were boasting about their great success buying put against this market.

For a few years, people were predicting crash. It finally arrived. They started celebrating and posting on Facebook all over the place how right they were. They started buying puts, telling everyone with different opinion what idiots we were not buying puts that making thousands of percent of gains was easy and how come you are losing money, you must be a special kind of idiot then.

And now, we see the market bounce. The same people who were boasting their gains are now losing money. They are denying the market is in bottom, they keep predicting more selling because of the Coronavirus, because of debt, because of economy, because of FED, because of Tuesday…

And they still keep losing money. And they keep buying puts because this bounce must end obviously. They do not question that it may not end. What if this market keeps bouncing around? What if we lose 5% this week and gain 5% next week, or day, or a few days? All their long long puts will lose money.

What is interesting is how backwards their thinking is. Being bearish after 35% market drop is simply wrong. If you are bearish, you have it all backwards. When I told these people that they are on the wrong side of the river, they came up with bazillion of reasons why I am wrong. Bias. They trade their reasons and expectations, not reality. But ask yourself, what risk reward do you have on bearish side and on the bullish side? Is being long better to being short? Or vice-versa? The market dropped 35% with VIX peaked at 85 and now waning away from those highs. Can we go lower from here? Of course we can. And I believe, we may even re-test the previous lows or go below. But we may not. We may just chop around.

Being bearish after 35% drop is wrong in my opinion. The time of the market free fall is over. The Coronavirus panic is also fading away, central banks are now competing with each other who will bring a better stimulus plan to the table, and economy will get hit hard in the upcoming quarter or two. EVERYBODY knows this. The market knows this too and it is all priced in. An example? Look at the job numbers. People were telling all over the Facebook how the markets would tank hard once the bad data come out. The market rallied. Not on data, that was priced in, but on the stimulus. What makes you sure that the market will tank once the quarter earnings come out? If it is all priced in and earnings come out thew market may in fact rally. Not because the data are bad, but not as bad as everyone expected and market was pricing in. I have seen it in the past too. People predicting bad earnings, loading puts, “because it was a sure thing” and then they lost. The earnings was bad, but not as bad.

A time of a free fall when it was easy to load up puts every day and make “millions” is over. Expect a great choppiness now. Expect the market bouncing around. We are now rallying, tomorrow it can all turn around and we may be dropping just to rally again next week. Can you predict with accuracy when this turns around? If so, re-position your trades accordingly, if you cannot predict, it is better to stay out as this unpredictable choppiness will wipe out your account with directional trades. I got tired with all the choppiness.

I got hurt in 2018 Trump’s trade war and I didn’t want to get hurt again this time, so I decided to stay out and did not trade this slump. But once we are this low, I will slowly start adding new trades and trade my way up. Even if it is a choppy up (or some down) as I do not expect daily moves to be more than 5% or 10% as we saw a few weeks ago. I was out and waiting for this craziness to end. Other were trading it by buying puts and considering themselves geniuses. The problem is, it is hard to spot the time when that particular strategy is going to end and it is time to shift the strategy. In euphoria, many keep piling puts because this market (SPX) will go to 1700… or I have even seen a prediction to 700. And spotting reversals is darn hard. So people will keep piling puts until they lose all their accounts which will happen long before they admit that the market bias has changed.

And I start seeing this on Facebook again. These geniuses are now asking questions what to do with their puts now. How to salvage their positions. I have seen one asking if selling a call against his long put would help him. A clear ignorance.

I decided to stay out of the market as far as options go. I traded a few butterflies here and there, made money, but overall, I closed some of the position when the market started tanking (yes I took a loss) and I plan to re-open those positions as soon as this market calms down, but I was not sitting completely aside. I was buying stocks on sale. Thanks to zero commissions trading I could be adding few shares here and there of companies I liked. I was adding SPY, MSFT, CVX, CLX, GAIN, PPL, BIF, JNJ, KBE, DIS, O, XLU, XLY,and BAC. When I see the market stop moving 2% to 5% a day, I will start adding naked puts and covered calls.




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Posted by Martin March 27, 2020
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In what type of market environment should you be buying dividend stocks?


This depends on your plan and goal. If you plan on building a portfolio over long haul which will one day generate nice income you can use to pay your bills and live off of your investments, then you should invest in any and all market environments. Ignore all noise, rumors, and fears of others telling you that the market is overvalued, at all time high, the longest bull market ever, prone to an imminent crash, etc. There is a very high chance, that those people saying this have no idea what they are talking about.

To illustrate my point, if you are going to invest for the next 20 years, here is a chart of my stock, 20 year chart. It is a high quality dividend growth stock, paying dividends for the last 100 years and increasing them for the last 57 consecutive years. If you invested in that stock 20 years ago, your dividend yield on that original investment would be 12.83% today and you would make 700% gain on the stock itself.

I removed the name of the stock and hid the X,Y axis. Can you identify the 2008 recession on that chart?
 

20 year chart
 

If you held through those blips called recession and hardly identifiable in the long run, reinvested the dividends you would be able to live comfortably from your dividends. If you listened to rumors and got scared anytime a market dips or panic, you would blow up your account.

People over estimate their abilities short term but grossly under estimate their ability to invest long term. There will be dips, panics, corrections, and recessions, but if you look at history of the markets, bulls can last 20 years, while bears only about 2 to 3 years. Yes, bears can be severe, but they are short. You will also have periods of difficult markets. Some people will rush to tell you that if you invested in 1932 or in 2000 the market got nowhere for 20 years. Well, yes, overall market was stagnant, but even if you look at the chart, it was not a single drop which took 20 years. It was a drop, which took 3 years, then several years of recovery, then another 3 years drop, and several years recovery, and eventually a breakout from this pattern. If you kept reinvesting the dividends and buying more shares during these panics, you would be buying cheaper and cheaper and every time, during the recoveries, you would be ahead the market. For example, I was purchasing JNJ stock during 2008 recession. My average cost basis is $44 a share today and the stock trades at $150. Even if the market crashes today and loses 70% of its value, this stock would go down to $45 a share (70% loss). I will still be above my cost basis with no loss at all. And on top of that, I still will be getting my nice fat 12% yield dividend.

And that is the beauty of dividend investing. With dividends you do not care what your stocks are doing, whether there is an end of the world out there or a bright sunshine. As long as your stock keeps paying you nice dividend and increases that dividend every year, you do not need to worry about the current price of the stock itself (unlike the growth investors who need to sell a portion of their holdings to generate cash).

If you want to speculate with dividend stock, then you need to identify the market environment correctly and be buying in bullish market and selling short in bearish market. But you would have to be really good at it otherwise say goodbye to your account…




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Posted by Martin March 20, 2020
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Why are so many people saying to putting money into an emergency fund and 6 months of expenses in savings when I could put that money in a taxable investment account and let it grow and use a credit card or HELOC for any emergencies?


There is nothing wrong with that as long as:

you have access to a credit card which you can use to pay all your living expenses for a prolonged time without a need to pay it back every month (for example, if you lose a job or have an accident and can’t have a job and have no income until you find a new job, which in recessions can take 6 or more months) so you will have no income but you still have to pay monthly bills and credit card (or HELOC credit line).
You credit card or HELOC interest rate is smaller than what you can make with your investments. If for example, your credit card is 16% annual interest but your investments make only 6% then it w ill be a bad idea to use a CC. On the other hand, if your HELOC rate is only a 3% but investments bring in 6% than it is fine to use HELOC rather than touch your investments.

Note, that the “6 months of expenses” funds advisers are talking about is for your loss of income and not small emergencies like when your car breaks and you need 400 bucks to repair it. The emergency fund is meant for your job loss or job transition (for example, you want to start your own business, but you cannot do it while full employed, so you need to save your monthly income, then quit your day job, and while building up your own business you will use your emergency fund to pay your bills. Once your business is up and running and generating income, you stop using your savings, rebuild your emergency fund, and your business pays your bills now.

If however you have a passive income for which you do not have to work, then you do not need an emergency fund as you have a stream of income. In that case, it is OK to use credit cards or HELOC for your sudden emergency expenses (as long as you still have means to pay it back in the grace period before interest and penalties kick in).

If your investments bring that passive income without a need to actually liquidate your investments (for example dividends) then it also makes sense. If however you have to sell your stocks (or any other type of investment) in order to generate income to pay your HELOC or CC off, you may end up selling during panic or recession and in fact lose money.




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Posted by Martin March 18, 2020
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Brutal wipe out with bright outlook?


This was hard few weeks on Wall Street with markets flushing out a lot of value over a flue. And yes, I mean it. This is just another version of a flue we know about. Scientists were able to identify the virus genome 10 days after outbreak and worked on a vaccine and solution. All the deaths so far were people of older age and/or those with health problems, pneumonia and compromised immune system. No healthy person died of Coronavirus. One sign can be children. Usually elderly and children are the most risky categories, yet Coronavirus has no impact on children. Only elderly and sick. Yes, you may call me cynical, rude, or any other names you want, but I stand behind this and behind my next claim, that this hysteria and panic is a pure idiocy and self-inflicted pain. Let’s call this market sell off A Great Toilet Paper Shortage!

 
Recession
 

And so, while we see people going on panic shopping, buying out all the toilet paper, meat, eggs, milk, and other food supplies:

 
Empty Store Bananas

Empty store icecream

This is an ice cream freezer… half empty. Who the heck is hoarding ice cream?
 

The markets lost over 32% and VIX spiked to 85.5 level. A level not seen even during 2008 crisis. And this is all insane. And this is all a self inflicted pain, self inflicted recession (if we fall into it). Yes, I am not downplaying the virus. I am downplaying the hysteria around it. Every year, just in the US alone, more than 30,000 people die of influenza. Who cares about these people? Who is closing stores, sports events movie theaters, sending employees home over influenza; every year? No one. NO FUCKING ONE!

 
Recession
 

However, days like those we are currently experiencing are a great opportunity to invest and make nice profits once the markets rebound. And they will rebound.

But, it is also time to protect your capital. That is why we suspended all trading and in fact closed some of our positions.

Although we took a loss on those closed positions and we are sitting on paper losses on our long term open stock position, we look at all this positively. We closed all naked puts for a loss (our trade journal here on FB page hasn’t been updated yet) and took a loss. The reason was to preserve capital and avoid margin calls as these were the positions hurting us the most.

However, when all this mess and panic ends, we may re-enter those positions and re-establish the trades and manage. We will also start new trades.

We keep sitting on our stock positions and in fact keep adding shares as the market keeps falling. We feel that this is a great opportunity. But we also see that the market hasn’t bottomed yet, so we are not buying too much yet. Only a few shares here and there.

Over the course of the few weeks we bought a few shares of SPY, CLX, BIF, XLU, and we plan on adding BA, BAC, PPL, JNJ, and other shares from our watch list. When the panic selling ends, we will also start selling naked puts. What do we mean by “when the panic selling ends”? Once the market stops having these 10% wild swings to both directions then we start selling puts. We are OK with the market still falling or better say drifting to the downside and selling puts, but we do not want to sell puts and see the stock plummeting 10% or 20% in the next two days. We want fairly stable market no matter what direction. And we are getting there.

You may ask why we are not taking advantage of this volatile market and actively trade puts or calls and take advantage of these swings and make tons of money? Look at others in other Facebook groups posting their trading results making thousands of per cents in profits! Well, we no longer trade that way. We may be trading and take trades such as butterflies, or Condors here and there, but we are primarily investors and buy for long time to build a portfolio which will be delivering income long term. And I bet, those people who are boasting great profits today, will stay silent about their losses tomorrow.

And today, we had another beautiful day at Wall Street… We dropped 9% intraday at some point.

But, there was one difference from other days which may turn positive for the markets. We now have a long shadow candle. That means, buyers were stepping in (although it seems on a very low volume, (but since volume on SPX is derived from futures trading, it still may not be the final volume).

 
Recession
 

This could be positive for the markets.

Or it can turn out to be a set up for a bear rally to some of the previous levels (I would expect 2750-ish) and then resume of a selloff.

Well, we need to wait to see.




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Posted by Martin March 13, 2020
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Are dividend shares a good way to protect yourself in a recession? If not, why not?


Yes and no. Dividends themselves will not protect your principal investment. If there is a recession or a panic selling, your stocks will lose value. There is no protection except going 100% cash. But that is tricky because no one will ever know when the recession started until we are in one deep to our eyeballs. And going full cash at that moment is usually too late already. So the best way is to stay invested during recessions and if possible keep buying more shares.

What the dividends can however do for you (unlike the growth stocks) is to guarantee your income. So there is a difference between buying growth stocks and dividend stocks and that difference is the reason why I use dividend stocks over growth stocks.

And the difference is that even during recessions, your dividend stock will keep paying you your dividends. And if you build a portfolio over time made of dividend stocks paying you enough every year so you will never have to sell a single share of your stocks, then you do not have to worry about the value of your stocks. If you never have to sell, who cares if your portfolio loses 50% or even 70% of your value?

There are two strategies how people can save for retirement – a 4% rule (peddled by current financial advisers) and a sole dividend income.
The 4% rule means, that every year you sell 4% of your portfolio and use the cash for your daily expenses. So if you have a portfolio of, let’s say $1 million you will be selling $40,000 annually for your retirement (and if you need more than that, let’s say $60,000 every year, you need to save more) and hope that during the next year your stocks grow more and make up for your next year withdrawal (because after your first year withdrawal, you will only have $960,000 in your account).
But let’s say the very second year a recession hits the market and your portfolio drops 60%. Now your $960,000 portfolio is worth only $384,000. And since recessions and bear markets usually last 1.5 to 2 years (sometimes a bit longer) at the end of the second year you will be taking $40,000 out of your $384,000 leaving you with $344,000 to start a year three. Ouch. That is pretty much an end of the game and a sure ticket to go back to work.

On the other hand a dividend growth stocks can provide you a protection of your income; not your portfolio, but your income.

If you start building up your portfolio when you are 20 years old and save $1,000,000 then your YOC (yield on cost) on your stocks will be around 15% to 20% (depending on the stock selection and dividend growth). But let’s stay conservative and say that your YOC will be only 6%. And 6% annually from your $1 million stock holdings will be $60,000. Yes you will receive $60,000 every year no matter what is happening. If a recession hits and your portfolio shrinks down to $384,000 you still will receive your $60,000 annually and you do not have to sell a single share. And 6% is a very achievable rate. As I mentioned above, over 25 or 30 years, your actual yield will be a lot higher due to the dividend growth as every company increases the dividend every year. For example, Johnson & Johnson (JNJ) paid dividend for the last 100 years and increased the dividend for the last 50 consecutive years, Coca Cola (KO) increased dividends for the last 57 consecutive years, McDonalds for 44 consecutive years, etc. There is currently 138 high quality dividend growth stocks (aristocrats) which were paying dividends for more than 50 years and increased them every year for more than 50 years. Even during 2008 recession these companies increased their dividends.

And these are the stocks you want in your portfolio because they will protect your income. They will not protect your portfolio value (to some extend) but with these stock, you can let your portfolio drop by 50% or even 70% and you wouldn’t have to move a finger and you would be comfortable waiting the storm out and in two to three years your portfolio recovers.

There is another aspect to the dividend stocks. They tend to grow at the same rate as their dividend. So if a company increases the dividend 3% every year, you may expect the stock price to increase by 3% that year too. For example, I was buying JNJ stock when everyone was selling it during the panic. My average cost basis is $48 a share. Today, the stock is trading at $147 a share. Even if it loses 70% of its value during the next recession, it will be trading at $44 a share. I will be pretty much break even on the value of my holding but on top of that, I will still keep receiving my nice fat dividend (currently my YOC is 20%). And guess what I will be doing if this stock loses 70% of its value? You guess it, I will be buying like crazy!

And that is the big difference between growth stocks and dividend stocks and how dividend stocks can protect you and help you to weather out recessions.
Of course, there is another important aspect to dividend investing – you must pick high quality dividend growth stocks. On my blog, I have a list of the dividend aristocrats (champions) updated every month (note: the list was originally created by David Fish and now when he passed away the list is maintained by one of his followers Justin Law). Here is a link: Dividend Growth Stocks CCC list.

If you keep buying shares from that list (and sell when they are removed from the list) your portfolio will be well invested and your income well protected.




TastyWorks

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Posted by Martin March 06, 2020
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What are the investment strategies you are having?


Strategy: I decided to invest into high quality dividend growth stocks.
 

Reason: To get paid regularly regardless of what the stock market is doing and regardless of what the stock price is. If you buy a growth stock and plan selling a portion of it to generate income and the stock drops, you will be selling at a loss or not able to sell. If a high quality dividend growth stock price drops, it doesn’t matter to me, because every three months I receive my dividend which is same every three months no matter what the stock price is and on top of that, every year, the company increases the dividend, so my dividend income growths annually.
 

Strategy: I created a watch list of 60 optionable high quality dividend growth stocks.
 

Reason: First, I go to a David Fish CCC high quality dividend growth list, pick 60 dividend champions, challengers, and contenders. Study these stocks to learn as much about the companies as possible. I also pick stocks which trade options (they are optionable).
 

Strategy: I then trade a strategy, some call a “Wheel”. The strategy consists of :
 

  1. Selling cash secured puts against those stocks, collect premiums, and do is as long as I get assigned to the stock and buy 100 shares of underlying at the strike price. For example, I like a stock ABC currently trading at $30 a share. I sell 26 strike put and collect 0.36 premium (or $36 dollars). If the stock stays above strike price, the put option expires worthless and I keep the premium. If the stock drops to or below strike price, let’s say to $24 a share, the option will be executed, I will be forced to buy 100 shares of ABC at $26 a share, and still keep the premium collected.
  2. When I buy 100 shares, I hold the stock and collect dividends.
  3. While holding the stock I start also selling covered calls. I keep selling covered calls and collect premiums as long as I get assigned and forced to sell the stock. For example, I was forced to buy 100 shares of ABC stock at $26 a share. It currently trades at $24 a share. I sell a call with strike price at 27 a share and collect 0.24 (or $24) premium. If the stock stays below 27 strike, the call expires worthless (and I can sell a new one in the next cycle) and keep the premium. Let’s say the stock moves higher to 26 a share, so I sell a new call (or roll the old one) to 28 strike and collect another premium. Once the stock moves above the 28 strike, the call will be executed and I will be forced to sell 100 shares of the stock at the strike price (in this example for 28 a share).
  4. Once the stock is gone, I go back to step one, completing the “Wheel” strategy.

 

Reason: My ultimate goal was to create a strategy which would generate income no matter what the market does. If you buy a growth stock which doesn’t pay a dividend you are at mercy of the stock market. The stock may go up over time (and it will) but you lock your money into a stock for a long time while waiting for the price appreciation and I didn’t like it. I wanted to be paid while waiting for the price appreciation. On top of it, I wanted to monetize my stock holdings. Like having a rental property renting it to tenants, I wanted to use options to “rent” my stocks and collect rent (premium) to boost my immediate income. I can then take that income and either re-invest it to buy more shares, or pay the bills, or spend it in any other way without a need of selling my “rental property” to generate cash. You won’t achieve this with growth stocks. In order to generate cash, you have to either sell a portion of your holdings (which has tax implication) or go to work elsewhere to get more money to invest (yes you still can trade options, but you will miss the third source of income – dividends).




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