WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
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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.




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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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Posted by Martin February 28, 2020
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What is the secret of stock trading to make money all the time?


You need to distinguish between “stock trading” and “stock investing”.

Stock investing is easy and you can make a lot of money over time. People tend to over estimate their ability to make money in the stock market in short time (everyone thinks they can get rich quick) but under estimate their ability to get rich in the long run.

So the secret is to set a plan of what you will be buying and why. What do you want your investments to do for you. Do you want growth? Or income? What is your time horizon? And how much money can you invest?

For example, I myself wanted stock to buy and hold them for a long run – 20, 30, or 40 years. And while sitting on them and waiting, I wanted to be paid all the time, 4 times a year. And which stocks will reward you with quarterly paycheck while you hold them? Dividend growth stocks.

Buy and hold strategy works 100% of the time if you hold the stocks 100% of the time. Let me repeat it – if you hold them 100% of the time! People lose money because they are a buy and hold investors only until the next correction. Then they panic and sell. And usually, they sell at the low. Then they are afraid to buy back in because “what if the stock goes lower” fear. And when they are finally convinced that this correction was finally over, they buy back in – and usually at the high.

So the secret is, buy and hold. Never sell. Consider your stocks to be your rental property. You do not buy and sell your house whenever the price goes up or down, do you? So, do the same with your stocks. And if you buy high quality dividend stocks, which grow the dividend every year you will be rewarded while waiting. For example, Johnson & Johnson (JNJ) paid dividends for last 100 years and increased dividends every year for the last 50 consecutive years. They even increased the dividend in 2008 when everyone was predicting the end of the world. What are the odds that this company suddenly stops paying or reduce the dividend? Well, there is a chance, but so slim that we can call it “impossible”. These are the types of companies you want in your portfolio.

Later on, you can start monetizing your “property” (stocks) by selling options around them (like renting your house). You can sell cash secured puts to buy stocks, and covered calls to sell the stocks – and generate additional income. An excellent book on this strategy is “Generate Thousands in Cash on your Stocks Before Buying or Selling Them by Samir Elias. I practice this strategy myself and it is very rewarding. You may expect 30% – 45% annual return on your portfolio.

And trading stocks? Well, that is a different topic and in my opinion you would have to be a prodigy or a miracle child to succeed. 95% of all stock traders fail in 6 months. I admit, I tried myself and failed. I tried three times, and three times I wiped out my portfolio. I made money – tons of them, but I also lost them all. And I do not have the secret formula to tell you how to trade stocks and be rich quickly (and if I had one, I would use it myself and wouldn’t share it).




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Posted by Martin February 26, 2020
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When the market goes up, everybody complains. When it falls, everybody complains.


So, I was wrong. Yesterday, I posted my expectation of a measured move. And it failed. Twice the futures tried to set up a pullback, twice that attempt failed and markets finished red. After exceptional, and never seen before, 3% drop in a row, a 1% selloff now seems like a lukewarm tea for babies. Almost nothing to talk about. Just a few days ago, 1% drop would spark heated debates on social media about crashing markets. Today, nobody cares.

And the markets are setting for another exceptional rare behavior. We had the market falling for five consecutive days. And today’s overnight futures are already down by 1.4%. So, if cash market (SPX) stays down tomorrow, we will have a 6th consecutive down day with no bounce.

The market have seen five consecutive declines without a bounce only twice in its history – in December 2014 and January 2019.

However, the absolute record was 10 consecutive down days which occurred in February 1966. If tomorrow stays red, we will break the 5 day record heading towards 10 days rank.

However, we have approached a 200 day MA and if we stay red tomorrow, we may actually touch it on daily time frame. We may go a bit below it. But, it will be crucial moment. Will the buyers step in and start buying? And if so, will it be a sustainable buying or just a dead cat bounce? We will have to wait and see. So far, in the recent past (at least 2 past years) corrections were always supported by 200 day MA and markets recovered. Let’s see, if this will be the case these days or not.

There are two observations I noticed and find actually funny, if you think about it.

First, the coronavirus issue. Everybody talks about it. Everybody project worse case scenarios, deaths, gloom and doom, cases here and there. But, it seems to me, the coronavirus is not that of an issue (and I do not want to downplay its impact on people). It seems, it is the media, and so called experts on TV shows painting the apocalyptic after-virus world with few human survivals, what makes the matter worse, that it actually is.

At least, we have the memes to laugh at. For example, Trump and Pence going to address the coronavirus and coordinate its handling. Now, we are in big trouble.

The second observation I find funny, is in the same psychological category as the one above. When the markets are running up, everybody is freaking out about it, selling their positions, screaming about high valuation, predicting the end of the world, rigged markets, FED pumping the stocks, fake economy, and who knows what else.

And the markets start finally falling and correcting, these same people are freaking out about it, selling their positions, screaming about crash of the markets (8.3% pullback is not a crash), predicting the end of the world, rigged markets, FED screwing up the markets, fake economy, and who knows what else.

I find it truly funny. All people who claim that they are long time buy and hold investors are buy and hold until the next pullback.

Stay safe out there, save cash for more buying. When this rout ends, it will be a great opportunity to be buying at a huge discount.
 

S&P 500 correction

 




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Posted by Martin February 25, 2020
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What’s next in the stock market after this big rout?


The selloff we just experienced exceeded all my expectations. I do not remember when I saw the market drop more than 3% in two consecutive days. It was amazing! Well, of course, if you forget, that it was your money on the table in this rout. It is also a never seen move action when the market saw two consecutive days losing over 3%. Never ever in history, this ever happened. What a move!

At the end of the day, the correction settled at 8.1% and VIX as max 29.7 level:

 
S&P corrections
 

This also makes it the shortest correction deeper than 6% in terms of the losses. If we stop here and start recovering, it would really be the shortest one. If we keep falling, we may see more days of selling.

What can we expect from here?

I expected a bounce from yesterday’s 3.45% selloff. The market bounced up for about 1% (futures) but at the cash open, it lost the steam quickly and sold off. The selling speed gained steam soon and before we knew it the market was down over 3% again. It went as low as 3.4% again and bounced of the lows to finish 3.05% down. Unimaginable!

Will the bounce happen then and where is the bottom of this first wave of selling?

For that, we may use a measured move practice again.

To find a potential bottom where we may expect the market to bounce, we take the market peak and measure the distance to 50 day MA. On the chart (see below) we identified the peak to be 3388 (remember, this is not an exact science, so an approximate number works well too). The 50 day MA level was at 3260. If we subtract the numbers, we get 128 points distance.

Take that number and project it down from the 50 day moving average: 3260 – 128 = 3132. So we may expect the market to drop to approx. 3132 level and see a bounce. Today, the market finished at that exact level (plus / minus).

Thus, I expect a bounce from here, possibly back to 3240 level which was the previous correction low support and also a long term support line. Then we will probably see another wave of selling. I expect it to drop a bit further and touch 200 day MA which, hopefully, will end this correction. From there, we may see a long way to recovery.

Of course, I may be wrong and selling may continue tomorrow and for the rest of the week. If so, it however, will be extremely rare. But again, no matter what happens, this is a great opportunity to be buying great companies at a nice discount.

For my measured move speculation, see the chart below:

 
S&P corrections
 




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Posted by Martin February 25, 2020
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A needed correction on the way – don’t panic


Selling never feels good and people have hard time to handle it. It’s their money and they fear them getting lost. They start rushing to protect the value of their portfolio and start selling. Pouring oil into fire.

However, this is not the time for panic and time to start selling. If you knew this was coming, you should have sold three days ago. Today, it is probable too late to be selling. We may be already bottoming this small correction (as on now 6.4% decline). Sure, it may go lower in the next few days. We can correct additional 4%, or 14%. But do you know it? Do you know for sure? I don’t. And I do not ant to speculate. This correction may be in the range of the previous corrections, or it may exceed and go down 20%, or 30%. But given the US economy is relatively strong, a larger than 20% correction would not be justified. And even if it happened, it would be a GREAT opportunity.
 

S&P corrections
 

And recoveries or bounces can be as sharp and fast as the drops. You know that bear markets rallies can be as dangerous as the selling itself. Shorting now may catch you on the wrong side of the market.

And so, when everyone is panicking and selling due to some bogus reason, I decided to add to my portfolio. Lately, I started adding an index to my portfolio in addition to my dividend stocks.

So I added 1 SPY ETF. And if this market keeps sliding lower, I will be adding more shares. I will be adding individual stocks too and selling puts. But, I need to wait a bit for the dust to settle.

 

S&P corrections
 

Remember, this will pass too.

S&P corrections
 




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Posted by Martin February 21, 2020
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The stock market is now at all times highs. What are you buying? Are you worried about a recession?


I keep buying what I have been buying since 2006 and that is high quality dividend growth stocks. If you look at the chart from 1982 to 2000 (that is 18 years long bull market) the market was making new all time highs until 2000 for 18 years. 18 years of all time high market. And that is excluding the previous 10 years from 1972 – 1974 bear market when the market rallied from 1975 to 1982 recovering from the lows and then added additional 18 years of rally and some 900%+ gains.

So, if we look at the history and we see that the exact same pattern happened before (twice) what makes you think that this market cannot rally additional 18 years from the recent breakout in 2013?

See the chart:
 

All time highs
 

And here are the cycles I was referring to, indicating easy markets and difficult markets. We just broke out from a difficult market and we will see additional cycle of an easy market. It could be additional 18 years and additional 800%+ gains:

 
All time highs
 

Of course, the rally up was not a straight shot. there were corrections and secondary bear markets (drops by 5% to 20% at times), but overall, the markets went up.

So, knowing this, why would you be panicking about all time high when 90% or so the markets in fact spend time making all time highs?




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