February 2017 dividend income

We are once again at the end of the month. I still feel like the month just started and it is time to report our achievements in dividend investing (and options trading which I will publish in my next post).

This month, we received $87.79 dollars in dividends. I am happy about it for two reasons:

1) It was more dividends than what we received last month!

2) I checked my last year February dividend income, and February is typically my weak month! Last February, I made $57.42 in dividends, this month it was $87.79 dollars!

Definitely, this month was a success!

Another very positive aspect of our dividend portfolio is the dividend growth. Our annual dividend income increased to $1,062.66. This is a great increase compared to $883.48 annual dividend income from 2016.

· ROTH IRA investing/trading strategy

Here is my investing & trading strategy I use in my IRA account. If you want to read about this strategy

click here.

In our ROTH IRA account we primarily invest into high quality dividend growth stocks. However, we allow exceptions and invest to higher risk, non-growth dividend stocks.

We reinvest all dividends using DRIP program. We will be using DRIP as long as dividend income will be below $1,000 per months or dividend period.

Once our dividend income reaches the limit of $1,000 dollars per the period (quarter, dividend payout, etc.) we will cancel the DRIP program and start re-investing the dividends selectively into either new stock holding, or existing stocks.

In our ROTH IRA account we also use options trading strategy called “triple play”.

We sell cash secured puts as long as we are assigned and buy the stock. With this strategy, we do not roll the puts unless there is a great opportunity to do so or the stock dropped in price significantly.

Once we buy shares, we keep them, collect dividends, and start selling covered calls.

We sell covered calls at the money, slightly in the money, or above the money. We do this as long as we sell the stock.

During this cycle, our DRIP program ensures that we reinvest the dividends.

For example, we sell puts against stock XYZ, we get assigned and buy 100 shares of the stock. Later, we receive the dividend, which is automatically reinvested. We buy fractional shares of the stock, for example 2.468 shares. Now we own 102.468 shares of the stock. While we are selling covered calls, when we get assigned the calls, we sell 100 shares of the stock. At the end of the cycle, we are left with 2.468 shares which continue bearing new dividends. These dividends are then reinvested back into the same stock, so our position is slowly growing.

Now, you may ask, what if you buy a stock and it drops significantly down, so selling covered calls down low may result in selling the stock at a loss and what would we do in this situation?

This is a valid question and no stock, even dividend growth stocks are not protected against a violent price drop. It may happen. In this case, we may temporarily stop selling covered calls and simply wait, or we may be selling covered call down low, but we will strive avoiding assignment and rolling those calls higher as long as we get above our stock purchase price where we can let the calls assign.

Once we sell shares via covered calls, we start selling puts again.

This options strategy is slightly different than the one we use in our trading account.

You may ask why doing this and not just keeping the stock to avoid losing capital gains?

Many times, the options income from puts and covered calls is a lot larger than the dividend itself. Also bringing income from options every week or two weeks will exceed any capital gains of the stock.

And we want options income too. We want to capture dividends and we want income from options. Most of the stocks are quarterly dividend paying stocks. That means, if we keep the stock and we will not be selling options, money invested in the stock will be dead money. There may be a small capital gain, but overall, it will be dead money.

· ROTH IRA dividend income

As I mentioned above my dividend income was better than last year. I made $87.13 in dividends and all dividends were reinvested back to the companies which generated them.

Here are some numbers:

Dividend Income = $87.79 (account value = $22,205.80 +3.39%)
The account is up 6.88% for the year.

Monthly dividend Income:

This month, we purchased 100 shares of Energy Transfer Equity, L.P. (ETE) using triple play strategy. We sold cash secured puts and got assigned to the stock.

Now we are selling covered calls.

My dividend holdings:

(Click to enlarge)

· ROTH IRA options income

As I mentioned above we trade options in our ROTH IRA account to generate income which could be re-invested into dividend growth stocks.

We are in an “accumulation phase” when we deposit our sparse contributions of $50.00 dollars monthly and keep that cash in the account to trade cash secured options with it. This way we generate income from the options.

As of today, we only have approx. $2,843.90 dollars in ROTH IRA available for options trading. The goal in 2017 is to reach $6,000 available dollars for options trading.

With that money available for trading, in January 2017, we generated $35.00 dollars income from options 1.23% return on invested capital.

This month, we traded options using stocks Ensco plc (ESV) and Energy Transfer Equity, L.P. (ETE).

For ETE stock we used a triple play – dividend capture strategy we described in this post. Currently, we purchased the stock to capture the dividend. The dividend ex-day will be in February 3. As soon as we purchased the stock via cash secured puts, we sold a new covered call. If the stock stays below our covered call strike ($19.00) then we should capture the dividend (if the stock stays above the strike we may get an early assignment, although I do not expect it since we trade long term contracts).

With all collected premiums our cost basis is $17.47 per share. We got assigned at $19.00 a share, expecting 0.28 a share dividend and hopefully sell the stock at $19.00 a share. This would leave us with a nice $153 cash or 9.53% profit or 83.98% annualized return.

The play is still under progress so I will be able to report it next month.

· Our dividend investing outlook

The stock market rallied even more since January. The more the market rallies the more investors become nervous and predicting stock market crash. More and more I see people talking about the market to be too expensive.

But are the stocks really expensive? And even if so, how much can you be sure that the stocks cannot be even more expensive?

Many investors who are afraid about the market today however forget underlying fundamentals. Is the growth justified?

In my opinion it is justified. The US economy is growing at aggregate EPS growth rate of +4.90% rate. The last earnings season showed that all sectors except energy grew:

Consumer Discretionary +6.29%
Financials +5.85%
Health Care +7.95%
Technology +8.58%
Consumer Staples +6.54%
Industrials +5.45%
Materials +5.27%
Energy -4.86%
Utilities +4.63%
S&P 500 +5.58%

Can this expensive market be more expensive?

Yes, it still can be more expensive. On the way up, we will of course see many consolidations and pullbacks. But as of now, and the growing US economy, a large crisis and sell off is unlikely.

Here is another view at the market.

Let’s take a look at today’s S&P 500 TTM P/E the current multiple is at approx. 22 PE. According the the chart below, the stock market reached a lot higher levels in the past such as 30 PE multiple in 1999 – 2001 or 28 multiple PE in 2009 -2010.

Source: Bloomberg

The bottom line is that EPS growth data point to higher market growth. The US economy is also growing and that may be the catalyst for further growth of the market. There fore the already “expensive” market may become much more expensive!

Let me know what you think!

Dividends 4 Future says:

March 5, 2017 at 6:20 pm

Things are progressing nicely. Are you picking up stocks to setup a consistent flow of dividends, my payments are all out of wack, usually the heavy hitters come in on the 3rd month of each quarter.

I think the market still has some firepower left, I think we will get to 22,000 in the DOW before maybe a slight correction might come in, I’m still a buyer and will continue to be a buyer in solid companies that pay dividends regularly.

Martin says:

March 8, 2017 at 10:51 am

Hi, I am sort of doing it. Most of the time I was just buying stocks and held them but lately I am focusing on picking up stocks, selling puts against them to get assigned (buy the stock) and then selling calls to sell the stock. Doing it with ETE as of now. The goal will be to have no stock holdings and buy them only before the dividends and sell them after using options so i should have a constant stream of income (dividends and options) with no or little stock holdings.