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Posted by Martin September 12, 2014
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Mr. Market offers a good entry point into dividend stocks

Mr. Market offers a good entry point into dividend stocks

Today trading started promising in the morning, but afternoon turned sour. Once again we see panic and nervousness returning to the pit. Today, markets lost ground and sold off. Nothing dramatic yet, but we could see an easement.

What pushed stocks down? Among those companies which were dragging S&P 500 down were energy stocks (and as some media told us it was due to Russian sanctions) and surprisingly some dividend stocks were on the sale as well.

Not all dividend stocks were on sale today. If you however hold MLPs, and REITs you probably have noticed a sell off around or even exceeding 3% drop. Some stocks are even back to a point where it makes sense to watch them closely and potentially buy more shares.

Here are some of the stocks I believe are in a good level to consider buying:

Chevron (CVX)

An energy stock dragged down for several days was Chevron (CVX). It currently sits at its support level at $122 a share. It went down from its 5 year high at $135 at the end of July this year and sold off hard on heavy volume on Russian / Ukraine tension. We saw a little break throughout August and in September the selloff gained its strength. It is in its full swing and at the beginning of it trend wave.

(I believe the market moves in waves. Each wave has its own depth and length. CVX just started a new wave down and if you look at the chart below, it is already in a downtrend! What does it mean? It means that most likely the selloff will continue for some time.)

The CVX median number is $120 a share and I believe we will see the stock to get to that point. I believe it will be a perfect point to either buy new shares or add to existing position. The DCF (discount cash flow) calculated fair value is at $134.84 thus buying at $120 a share will provide enough margin of safety.

And just quick data I like to watch:

CVX pays $4.28 annual dividend
yield: 3.50%
Its projected 10YOC is 9.08%,
payout ratio 40%
5 yr average growth: 9.53%
paid dividend since: 1912
# of years of consecutive dividend increases: 19 years

 
Chevron
 

What others say about Chevron:
orporation: Is a Cash Flow Boom on the Way?
Chevron and ExxonMobil
Billionaire Ken Fisher’s Top Dividend Stocks
Chevron Corporation (CVX) Dividend Stock Analysis

 

 

PPL Corporation (PPL)

PPL is another energy stock (MLP) which is offering a good entry point. It’s not as good as Chevron, the stock would have to drop $30 a share (from today’s $32.64) to match Chevron’s path, but even at today’s level it is a fair entry point. As an energy stock the stock’s price action is the same as Chevron’s.

The first sell off started at the beginning of July this year and with a small break in August we saw a renewed sell off in September. Last two years PPL had declining revenues due to acquisitions, but it increased dividends this year in February so I believe, it still is a good buy if the stock goes lower to $30 a share. The calculated fair value is at $37 a share so there will be good margin of safety at this price.

If I was buying the stock, I would trace it down and I would use my contingency order strategy to buy the stock only at reversal. The stock is also starting a new down wave in the middle of a sell off, so I am expecting further price decline.

PPL pays $1.49 annual dividend
yield: 4.50%
Its projected 10YOC is 5.43%,
payout ratio 113% (note, this is MLP, the ratio will be at or higher than 100%)
5 yr average growth: 1.63%
paid dividend since: 1946
# of years of consecutive dividend increases: 14 years

 
PPL
 

What others say about PPL:
9 High-Yielding Utilities With A Growing Dividends
Top-Yielding Dividend Stocks to Combat Low Interest Rates
Compilation of all Dividend Stocks Per Sector for 2014
4 High-yield, Safety Stocks for Retirees
What Should PPL Corp. Shareholders Do With A 65% Stake In Talen Energy?

 

 

Realty Income (O)

Realty Income (O) a monthly dividend company which pays dividends every month and tend to increase it every quarter increased dividends yesterday by 0.13%. It is nothing much, but I like monthly dividends which can be reinvested.

Today the stock was under fire. The reason for REITs being under sell off today was most likely renewed fears that FED would increase interest rates sooner than what the investors anticipated.

As some on the market consider this the end of the world, it offers a great opportunity to buy more shares. The stock has been range bound in $40 – $45 since June 2013 with a few exceptions at the end of 2013 year when the stock fell below $40 and touched $38 a share.

Some people say the stock is still expensive and it will be expensive even at $40 a share, but I believe this stock will always be expensive. The reason is that this is a reliable company in the REIT industry which prides itself being a monthly dividend company for all seniors who rely on their regular monthly income. As our population is aging, more and more people will want to buy this stock which will be pushing its price higher although the valuation doesn’t justify it.

So you have two options – you can wait for the proper price, or you can take TA (technical analysis) help to find the best possible entry. If you have waited for the good price entry, you have been probably waiting for more than 5 years already and the price still didn’t get closer to you to entry. And most likely it will never get back down to you.

I believe that any price around $40 a share (+/- dollar) is a good entry. If get below $40 a share – even better, take it as a cherry on top of the cake.

Today the stock sold off by 3% and again, we are at the beginning of a down wave, so the selloff may continue next week. If I was buying today (or next week) I would use contingency order to track the stock on its way down and buy at reversal.

Calculating fair value is tricky for this stock. My own DCF calculation reveals a fair value to be at $11.95 a share, Morningstar estimates the value at $44 a share. You choose which one you want to use.

O pays $2.20 annual dividend
yield: 5.10%
Its projected 10YOC is 15.15%,
payout ratio 235% (note, this is a REIT, the ratio will be at or higher than 100%)
5 yr average growth: 5.33%
paid dividend since: 1994
# of years of consecutive dividend increases: 16 years

 
O
 

What others say about Realty Income:
Realty Income: This REIT Should Be Part Of Every Dividend Investor’s Portfolio
Realty Income Not Cheap, But Still Good
Realty Income Corp (O) Dividend Stock Analysis
Realty Income (O) Dividend Increase

 

 

American Capital Agency (AGNC)

AGNC is a company involved in mortgage back securities and unlike Realty Income, it is sensitive to interest rates. Generally investors do not understand the difference and when they assumed that FED may increase interest rates they start selling everything what has “realty” in its description. So although Realty Income is not exposed to interest rates, it still will be sold off.

AGNC is however exposed to interest rates, mainly to fast changes of the rates between long term and short term papers. AGNC makes money on a wide spread between those two. If the spread is open wide and changing slowly over time, AGNC can easily adjust its portfolio to those changes. Fast moves can however kill it.

We have seen this in the past when the stock crashed from 30+ levels to current 20-ish levels within two months.

Although we have heard talks about interest rates since July 2013 and AGNC is well aware of the future implications and adjusted its portfolio, investors yet continue panicking any time they hear about changes in the rates. Today’s slide in price is yet another example of ignorance. For educated dividend investors this slide is yet another great opportunity to buy more shares of one of the high quality mREIT stocks.

A high quality mREIT doesn’t mean safe however. If you plan on buying this stock, you will be rewarded with a nice dividend payout, but be aware that this stock is one of the riskier dividend stocks. I own shares of this stock, I have owned it for years and believe this stock will perform well. I was buying when the stock was selling at 30, 31 and even 33 a share and yet dividends and a few purchases at $20 a share lowered my cost basis down to 24 a share. My overall loss on capital is only -5%. When the stock recovers back to its 30s (and it is slowly rising) I will be positive, enjoying dividends on the road.

The company had to cut dividends several times. The last cut happened in December 2013. Since then the dividend rate holds and the company is poised for increasing it once again. Time will show.

If you are okay on adding a bit aggressive and risky stock to pepper up your portfolio, AGNC can be a good candidate.

AGNC pays $2.75 annual dividend
yield: 11.80%
Its projected 10YOC is 11.80%,
payout ratio 129% (note, this is a REIT, the ratio will be at or higher than 100%)
5 yr average growth: -6.88%
paid dividend since: 2008
# of years of consecutive dividend increases: 0 years

 
AGNC
 

What others say about AGNC:
American Capital Agency Corp – When The Dividend Yield is Bigger Than My Understanding of the Company
American Capital Agency: Let’s Face Facts
I Recently Increased My American Capital Position, Should It Be In Your Portfolio?

 

 

Prospect Capital Corporation (PSEC)

PSEC is a BDC (Business Development Company) which makes money investing into other businesses. This stock is considered by other investors as one of the best in this industry. It is not a true dividend growth company but it pays hefty dividend monthly. I use this stock as an income generating machine where the received dividends are used to buy other dividend growth stocks.

I do not expect any growth, but it paid its dividend consistently since 2004 and it even increased it for two consecutive years.

If played correctly you can make money and collect nice dividends. The stock has been range bound for years between $9.5 – $11.50 range. Whenever the stock approaches the lower level I usually add more shares to this stock. We have been there in June this year when the stock sold off, today we are slowly approaching to these levels once again. I consider everything around $10 a share (+/- 0.5 c) a good entry point.

My calculated fair value is at $15.93 a share, thus buying at the current levels can be a good opportunity.

PSEC pays $1.33 annual dividend
yield: 12.90%
Its projected 10YOC is 19.47%,
payout ratio 171% (note, this is a BDC, the ratio will be at or higher than 100%)
5 yr average growth: -3.43%
paid dividend since: 2004
# of years of consecutive dividend increases: 2 years

 
PSEC
 

What others say about PSEC:
Prospect Capital: Insiders Are Taking Advantage Of The Buying Opportunity In This 13% Yielder
This Is One Slick Dividend Stock
High Yield Dividend Stocks It’s Always a Good Pick When The Market is Bullish
Prospect Capital Corporation Redux
A Brief Primer on Business Development Companies (BDC) Part 1: What are BDCs and why should you invest in them?

 

 

Vanguard Natural Resources (VNR)

VNR is another MLP involved in oil and natural gas extraction. Although it is in Basic Materials sector, due to exposure oil and gas prices and recent Russia tension it is affected by sanctions and therefore the stock experienced the same sell off as energy stocks. It is yet another stock similar to PSEC above – my money making machine which helps me buying more quality stocks than VNR. It is not a true dividend growth stock though. It doesn’t increase dividends much. Dividend increases in the past are offset by dividend cuts. What to expect from this stock then? Nice dividend.

Once again, if played well you can make money and collect dividends. The median price for this stock is $28 a share. Today the stock fell to that level. Adding at the current price or waiting for $28 a share or bellow could be a good strategy to add this stock if you want a hefty dividend which can be reused for buying other high quality stocks. It depends on your strategy.

This stock is already at the end of a downward wave, so I do not expect this stock to continue falling further. It may continue sideway, maybe slightly drifting down or slightly drifting up.

VNR pays $2.52 annual dividend
yield: 8.70%
Its projected 10YOC is 8.70%,
payout ratio N/A
5 yr average growth: 4.77%
paid dividend since: 2008
# of years of consecutive dividend increases: 0 years

 
VNR
 

What others say about VNR:
Upstream E&P MLPs I’m buying
Vanguard Natural Resources: Is The Recent Weakness A Buying Opportunity?
9 Dividend Stocks Providing An Inflation Hedge With Increased Dividends
Vanguard Natural Resources Is On Track To Grow

 

 

Goldcorp Inc (GG)

Goldcorp is a mining company involved in precious metals, mainly gold. It moves in waves and it can be an interesting capital gain play stock with a decent dividend. It is not a true dividend growth stock, but it does well so far and can be a good addition to the dividend portfolio if you want exposure to mining companies. It experienced its up & downs on the way during the last 5 year history of this stock and thus you have to play it that way. To make money, you want to be buying at the bottom of those waves. Although I am not advocating bottom fishing here, when you look at the chart you could see nice waves with lows at $22 a share in December 2013, $24.50 a share in April 2014, $22.50 in June 2014 and today we are approaching to those levels once again.

The stock is in the middle of its downward wave, so I am expecting further decline. The best play to buy into this stock would be using the contingency order by tracking the stock on its way down and buy a reversal. If you enter in, you will be receiving a decent dividend while riding the new wave up to 30-ish levels. There you may sell or stay in (hold) and wait for the next down-wave to add more shares.

Morningstar estimates its fair value at $27 a share, so if they are right, you will have some margin of safety at these levels.

VNR pays $0.60 annual dividend
yield: 2.40%
Its projected 10YOC is 4.01%,
payout ratio 31%
5 yr average growth: 30.18%
paid dividend since: 2001
# of years of consecutive dividend increases: 4 years

 
GG
 

What others say about Goldcorp:
Goldcorp: This Gold Miner Hasn’t Run Out Of Steam Yet
Profit from Global Growth with the Natural Resources Sector
Best Dividend Paying Stocks – Recap January 2014
Investments That Pay Monthly Dividends

 

 

These were a few stocks from MLP, REIT, and BDC industries which were recently beaten down and which caught my attention as good candidates to enter a new position or add more shares. Except Chevron & Goldcorp I own them all in my portfolios (either TD or ROTH) and next week I may take advantage of this decline to add either of them to my portfolio. I am not decided yet which one would be the best stock to add, if opening a new position in Chevron or Goldcorp or just add more shares to the existing companies. I will make my decision on Monday next week.

What about you? Are you planning on taking advantage of the decline in these stocks?

 
 




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Posted by Martin July 12, 2014
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Why I trade options and even learn futures?

Why I trade options and even learn futures?

I got this idea to write about my reasons for trading options when reviewing monthly results of other investors, such as Dividend Hut, Dividend Mantra, Roadmap2retire, and many others.

I regularly review my peer’s investing progress as that motivates me for further strive reaching my goal. Humans are competitive creatures, so seeing other investors really pushes me forward. Their success kicks me forward.

I saw many investors starting their investing journey (like Captain Dividend) about a year ago, receiving just a few bucks in dividends and today their accounts outgrew mine in terms of received dividends.

So, why I started trading options instead of continued competing with my peers? (Take my words of “competing” in as good manner as possible as there is no animosity in it. I take it in a motivational way.)

Make moneyMany of the investors I mentioned are a lot younger than me and they can afford a slower pace of building their wealth-well. Time is on their side. On the other hand I started late and my accounts are relatively small. Probably at the same or similar level as those of my peers, but I lack the time on my side.

Another reason for looking for alternatives was my family. We have older kids requiring a lot of cash to support them at school, daily activities, after-school activities, sports event, then mortgage (and we live in a very expensive area, so our small condo cost us as a mansion elsewhere in the US), and other bills prevent us from saving 30, 40 or even more percent of our income. How I envy Jason from Dividend Mantra that he realized his dreams and goals early so he could adopt his 50% salary saving goal.

When you start your saving goal early and set the rules early, it is easy, or easier to have them adopted and create your life around it.

When you do it the other way, create your life first and then want to adopt some “drastic” saving rules, it is very difficult and some life events even prevent you from doing it at all.

Stock marketBecause I am a competitive, ambitious person, I wasn’t satisfied with a slow building process dividend investing requires. Above mentioned reasons basically prevented me from saving large amounts of money to my accounts. In many occasions I could only save $50 or $100 a month, not more. With that money I would be saving $100,000 account for 83 years (of course, I excluded compounding and capital appreciation).

When you are approaching your 50s, it is not acceptable way for building my money machine.

My competitiveness and ambitions were the engine of me learning other strategies besides dividend growth one. But don’t take me wrong. I am still a great fan of dividend investing, just read further, why I am trading options and even learning futures.

As I said, building a dividend growth portfolio which would provide you with ever lasting income no matter what you do (and income for your children, and their children, and their heirs all the way down the road of your family history) is a very slow process. If you want to succeed, you need to start as early as possible and let your greatest friend – time – work for you.

If you do not have that time, you need to find other ways to boost your portfolio. But having other ways of boosting your portfolio doesn’t mean gambling your retirement money! Not at all! Stay away from any gambling whatsoever!

You may have heard from advisers and other investment gurus, that options are dangerous and that you should stay away from it. I say, it is not true. Options are not dangerous any more than investing into stocks themselves.
Options
Yes, options are actually safer and provide you with great protection when investing into stocks. So where is the risk in options? It is in investor’s ignorance.

If an investor has no or little knowledge of how to trade options and doesn’t understand the risk and how to mitigate it, then options are a great danger to his money and his account. I experienced this on my own. But I learned my lesson already (or at least I hope I did).

So why I trade options?

As I mentioned above, it is a lack of time on my side. I needed a boost to my portfolio. I needed a boost to my money I can invest in dividend stocks. When contributing only $50 or $100 a month it wasn’t enough to build an account fast, so I needed a strategy which could bring in more cash which I could add to those contributions of mine to buy more dividend growth stocks.

Options perfectly fit into that desire. And they even outperformed my expectations. In average, I receive $150 monthly in dividends and on top of that I receive $800 monthly from options premiums. Now, my money to invest every month grew to circa $1000 a month. And mostly, I use other people’s money to build my account.

But I do not use that money immediately as I make them. That wouldn’t be wise. That would be that exact case of trading options with a huge risk. You cannot trade options with little cash. You need to stay small and trade only a portion of your cash and use the rest as reserves, security, or protection. If the trade goes against you, you must have enough cash for repairs of such trade. If you overextend your account, then you expose it to a great risk.

For that reason I use the cash I make from options for further trading and I made myself a rule, that at the end of the year I stop my options trading (either fully or partially), close as many trades as possible, count the profits or losses and if profits, take a percentage of those profits and buy dividend stocks.

For the current year I will take 10% of my profits and use it to buy dividend stocks. Next year, the percentage will be larger, maybe 20%. I do not have it decided yet. Then I use the rest reinvesting in options for the rest of the next year to double my account again, make more money and at the end of the year buy new dividend stocks. Rinse and repeat!

If I will be as successful in options trading as in the last three years, I will be able to stop contributing to my account completely, use my salary to enjoy it with my family, and still grow my account.

My dream of creating an ever lasting, ever growing and sustainable income will be fulfilled.

But do I want to stop here?

No! Not a chance! I mentioned above that I am a competitive and ambitious person. I want to learn more and I want more. While still trading options and investing in dividend growth stocks, I started learning other strategies – futures.

Futures up to skyI read that futures are even better than stocks or options. They can make you even more money even faster than options!

I do not know for sure. I have never traded them and now I do some reading on basics of futures trading. I will also trade them in my paper money account to see the mechanics of futures, how they work, how my indicators will respond to futures, what risks I will be facing, how to mitigate the risk, and how to make money in futures. If the futures make me even more money faster, I will be happy and my dream will come true.

And I will post about it. Life is about everlasting learning. I just put a challenge in front of me. Let’s see how it will work out.

I would like to encourage you – learn as much as you can about investing in stocks, trading options and maybe more (like futures). Even if you decide to stay away from them, learn it. Use paper money, fake account, to train and practice. You will see how easy it will be and maybe adopt that strategy in your account. And if you have a question about options or dividend stocks, you can always shoot me an email or post the question here on this blog.

Have a successful trading and investing next week!
 
 




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Posted by Martin July 01, 2014
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New Trade – SELL DEC14 PUTS on TEVA

New Trade - SELL DEC14 PUTS on TEVA

Teva Pharmaceutical Industries Limited (TEVA) recently offers interesting premiums and 60% chance that it will expire OTM. The trade setup is positive too. I decided to take this trade and sell one December contract to collect nice premium.

I would love to trade shorter time frame, but with a small account as mine I need to take longer terms to collect higher premiums and use options time ladder to spread my options trades among more months.

Also there is a good chance that the option becomes worthless earlier than in December.

Trade Detail

STO 1 TEVA DEC14 50 PUT @ $2.39

 

Max Profit $239 When selling puts, the hope is that they will expire worthless, so the max profit is equal to your execution price. Max profit occurs if TEVA is above 50 on expiration day, which is December 19 for this option.
Max Loss $4750 In theory, TEVA could keep going down all the way to zero, and since you are giving someone else the right to sell it at 50, your max loss is very high. However, remember that this trade has a time limit on it. On expiration day, December 19 for this option, if TEVA is below 50 you will either need to buy back (cover), roll the put, or you will be assigned -100 shares of TEVA as a long position, with an entry of 50.

 
 

 
 

At this point this will be a waiting game. Waiting for expiration, or action in case rolling of the put will be needed.

In case you are not familiar how rolling the put option works, here is a quick explanation. Rolling the put basically means that if the underlying stock (TEVA) price falls below strike price of the option (50) then at expiration day or earlier you want to buy this contract back and sell a new contract with lower strike (45 for example) and longer expiration time (January 2015, for example). When rolling a put, you want to sell a new contract so that you again receive a credit. If it is not possible, you may want to sell two or more contracts to offset the buyback of the original contract.

Have agreat day and happy trading and investing!
 




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Posted by Martin April 01, 2014
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March 2014 review


Up LadderMarkets regained the upward trend momentum as it confirmed its trend continuation last Friday. What does that mean? It is simple, the trend will continue and it will make sense to be buying any dips should they occur.

In this post I would like to review my view of the market in the past and my April 2014 outlook, but most importantly to review the results of my investing and trading.

In the previous post from February I revised my goals and the way I invest my money. I still will focus on dividend investing, but not in all of my accounts as I did before. I am shaping my strategy and tweaking it to make me comfortable and satisfy my way of investing.

I still use dividend growth strategy as my main strategy in my ROTH IRA account and Motif Investing account. In my TD account, however, I shifted my focus on options trading as a main strategy and dividend investing as a supportive strategy. That means, that I will invest a percentage of proceeds from options trading into dividend stocks and use the rest reinvesting into options contracts. Read my revised strategy in my previous post
“February 2014 progress, goal changes, and TD portfolio vs. S&P500“.

March 2014 market review

If you take a look at the latest market chart (SPY below) you will see a nice consolidation. What is it I see in the chart? I look at a few indicators:
 

  • Bollinger Bands
  • 10 day MA vs. 20 day MA
  • Chaikin Money Flow

 

Let’s start with the Bollinger Bands. This indicator will not tell you, which direction the market will go, but it will tell you what momentum the market is experiencing. The bands work like a rubber band. They contract and expand. Look at the chart. When you see them contracted, you may expect a dramatic move and a strong expansion of the bands. It will not tell you which direction the trend will go. It will just tell you that it will happen sooner or later.

When I see 10 day MA crossing above (or below) 20 day MA, then it is a moment when the trend reversal or breakthrough is going to occur. But, in order to avoid a false signal, the 20 day MA must be also trending up (for upward trend, or down for downward trend). If you check the chart below, you will see, that 20 day MA trend was moving up when it was crossed by 10 day MA.

Chaikin Money Flow indicates money flow into or from the stock. Although the flow is still negative, you can see a reversal in it as well. We may expect more money flowing into market which would support the trend.

SPY

Janet Yellen backing off

As many were expecting, myself included, FED’s (empty) chair (woman) is already backing off from her boasted proclamations about the stimulus and she announced that the interest rates will stay low longer than she originally claimed. To me, this is a confirmation of what Peter Schiff was saying all the long, that Yellen has no clue of what is happening and that she is just a Bernanke 2.0. She has no exit strategy, just pretends.

So, the new “trend” in FED’s policy boosted stocks more up and it looks like we have a clear path for new highs.

Earnings expectation

I do not have much to say about this item. All I could find is that Alcoa (AA), which is always the first to start reporting was recently also breaking thru upwards in expectation of great earnings season. It will be fun to see if it comes true. Alcoa has been downgraded many times last year by analysts, so if it beats their expectation this time, we may expect that this would boost the entire market.

April 2014 outlook

Historically April is considered as a good month for markets. Out of 19 years, Dow was up for 15 years. My indicators I watch are turning positive, so, I expect April to be a good month and our accounts should collect more gains. During last month I was increasing my cash reserves up to 30% (although not all in all of my accounts as this was a lot slower process this time than I expected). In some of my accounts I increased my cash reserves to 20%, but for April 2014 I will slightly use them down to 10 – 15% only as I do not see a need to keep reserves higher.

Remember that besides dividend growth investing I also actively trade naked options. In order to be able to manage the risk, I like to keep cash reserves which would allow me to roll contracts up and down as needed to avoid assignment.

March 2014 results

Although March 2014 was choppy and fear index I like to watch dropped down to 34 points I made money.

I had nice dividend and options premium income during this past month. Here are some numbers (TD account only):

 

January 2014 premiums: $156.10 (1.55%)
February 2014 premiums: $139.26 (1.38%)
March 2014 premiums: $746.62 (7.41%)
   
January 2014 dividends: $25.87 (0.26%)
February 2014 dividends: $167.02 (1.66%)
March 2014 dividends: $68.77 (0.68%)
   
Total 2014 income: $1,303.64 (12.94%)
2014 unrealized premiums: $926.00 (9.19%)
   
Account balance: $12,418.73 (23.30%)

As you can see from the table above March 2014 was a great month to me. What about you? How was your March 2014 and the entire year so far? Post a link to your website or write down your results to encourage other investors!

Have a great April in the markets!
 
 




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Posted by Martin March 03, 2014
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February 2014 progress, goal changes, and TD portfolio vs S&P500


Up LadderHello fellow investors. Recently I was working hard on my strategy, goals, and reviews. Why? Because I want to show the picture of my investments so all readers can see how well or poor I am in investing, trading and financial independence building effort.

Not everybody who you ask about their investment will tell you the whole truth. It is not comfortable for people to admit losses, so many will tell you just the bright side of their endeavor. I want to be open and show the entire reality. Although showing losses is not a pleasure rather than showing gains, I want to be open with all my investments.

Why? Recently I had two people who asked me if I could manage their portfolios. At first I wasn’t decided whether it is a good thing to do. It is a great responsibility and you risk turning your friends into enemies.

Well, lately, I decided to try with a friend of mine, who is a realty broker and I started managing his account a month ago. I have another person who might be interested in my help, but he is not decided yet.

Before I started, I opened a paper trading account to trade paper money first, so both my friends could see what to expect. The great thing trading the paper money was that I realized what a great potential I had in trading options. After two months of trading I already collected a little less than 20,000 dollars in premiums and realized 5% of returns. The current account value is $107,946.02, which is 7% in two months.

At first I had a few question about such high profits. When I told them that I am actually expecting almost 60% return this year (if nothing changes dramatically), both friends were quite skeptical and refused to believe me.

So I did a little research. I wanted to know how other options traders do; and confirm whether it is possible or it is an illusion which will potentially fail.

I know a few traders, so, let me list their profits:

Teddi Knight, a famous Canadian trader, who has a very nice blog about her trades. On her blog, in the section “Portfolios” you can find the following results:

2014 – 6.6% (and counting)
2013 – 58.8%
2012 – 41.7%
2011 – 26.8%
2010 – 29.86%
2009 – 113.53%

From the numbers above I don’t think I am that off the reality with my profits.

If you learn and know how to trade options, you can reach 40%, 50% or even 60% gains in your account. People are scared of such profits as they have bad experience with high returns investments. To them, these profits are too good to be true.

This experience was my eye opener and I realized that I should probably focus more on option trading as my source of income. Since I have a family, mortgage, debt, and many other obligations. I cannot contribute as much as some of my fellow bloggers such as Dividend Mantra, whose goal is to contribute 50% of his income.

But I can trade to get that income! I just was able to find out myself.

Goal adjustment

That brings me to my goal adjustment. Basically I am cancelling all my goals for 2014 except the debt reduction goal. My new goal and procedures will be as follows:

 

  1. Reduce my debt by 50% (as I said, I still will go for this goal).
  2. Save $160 monthly to TD Ameritrade account
  3. Trade options only – put selling – to generate income in TD account. Have all trades closed by the end of December
  4. Take 10% from the options net profit (if larger than $100) and invest it into a dividend paying stock (if equal or larger than $1000), if lesser, buy a commission free ETF as long as $1000 is saved. Then sell the ETF and buy a dividend stock.
  5. Withdraw 10% from the options net profit (if larger than $100) and contribute it to ROTH IRA
  6. Withdraw 10% from the options net profit (if larger than $100) and reward myself for a great trading. Go for vacation with my family.
  7. Withdraw 30% from the options net profit as a tax reserve (deposit temporarily in a savings account. Return back what is left after paying taxes.
  8. Reinvest the rest.

 

The overall goal would be to aggressively maximize gains so the income can start substituting some of my current expenses, savings to ROTH, and debt reduction payments. It will take time to build a large enough portfolio but I am very confident that I can do it.

My account progress

That brings me to reporting my progress. Currently I have majority of my cash in dividend growth stocks and very little in options. I want to reverse it and use options as a source of income which will be deposited into dividend paying stocks (one day, I won’t be able to actively trade, and dividends will become a main source of income).

January 2014 premiums: $156.10 (1.55%)
February 2014 premiums: $139.26 (1.38%)
January 2014 dividends: $25.87 (0.26%)
February 2014 dividends: $167.02 (1.66%)
Total 2014 income: $488.25 (4.85%)
2014 unrealized premiums: $1,437.00 (14.27%)
Account balance: $11,758.70 (16.74%)

You can check my dividend and option calendar to see when the next paydays will be. I am hoping as more and more money will be available in my account for trading, I will be able to generate more income.

If you want to follow my options trades, you can do so following me on My Trade, where all my trades are posted in real time.

My TD account vs. S&P 500

Recently I worked on benchmarking my results. I can proudly present my TD account tracked against S&P 500. The chart below shows my portfolio adjusted for contributions (contributions excluded) vs. the index. Last year, my goal was to recover my account from reckless trading I did in previous years. This chart proves, that I was successful and now I am beating the index.

I wish you good luck in upcoming months and hopefully your investments are performing well and per you plans.
 




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Posted by Martin February 20, 2014
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Options expiration tomorrow is a payday

Options expiration tomorrow is a payday

Although you receive your premium right at the moment when you sell your put option, you can actually claim that money at expiration of that contract. You have the cash, but it is blocked by the current market value of that contract. That’s why you want your option contract expire as quickly as possible. When the option starts losing value as it is getting close to expiration, it is the moment when you start seeing your money to materialize in your account.

Since I have a small account, I have to trade long term option contracts in order to make it worth it. I wish I could sell a front month and get the money every month, but I do not have enough cash for maintenance for multiple contracts.

If I want to sell a front month option against AT&T (T) for example, then by opening only one contract I can collect circa 30 cents and I will need circa $900 cash (or margin BP) for maintenance to cover this trade.

 
(MORE: Dividend Income Update – January 2014 – Dividend Mantra)
 

And that wouldn’t make sense collecting only 30 dollars (0.30 x 100), since commissions would eat up your gains. To avoid this you would have to open multiple contracts, for example ten of them.

With ten contracts I would collect $300 in premiums (0.30 x 10 x 100), but I would need $9000 for maintenance. And that’s what I currently do not have.

The only way to go around this with a small account is to sell a long term contract. If I sell 5 or 6 months contract in lieu of the front month, I have a chance, that I still can collect $300 in premiums and need only $900 for maintenance.

 
(MORE: January options expiration, naked puts in SLW, POT, RIG, CLF, LINE, GLW & more – Simply Puts)
 

But then I have to wait 5 – 6 months to claim the money to be finally mine.

To go around this obstacle I created my option time ladder. It is a strategy similar to a CD ladder when you sell options contracts so you have expiration literally every month. Yes, you will wait the first period for 5 – 6 months, but after that, you will have expirations every month. So, just keep it rolling the same way as in CD ladder.

And that’s what’s happening to me tomorrow. Not only it is my pay day as I will be able to claim my premiums as definitely mine, but it is also my first expiration in a ladder.

My ladder is not yet completed, but is set well to start my money rolling.

 
(MORE: Covered Calls and Cash Secured Puts – Covered Calls and Cash Secured Puts)
 

I will have two contracts expiring tomorrow:

Demand media (DMD) total gain from this trade: $41.21
Ferrellgas Partners LP (FGP) total gain from this contract: $101.21
February TOTAL: $142.42 (after commissions)

Not bad, considering that I collected $208.45 in dividends this month. With dividends and options, my total income for February is $350.87 and I am satisfied with this result.

That doesn’t mean I do not want to strive for more of course.

Once the option contracts expire tomorrow, I will be opening new contracts in the next empty months, see the print of my calendar as of today:

Calendar

As you can see, my next empty months are June, July, and August. Those are the months I will try to fill and collect as much in premiums as possible.
You can see my real time calendar in the calendar page.

How was your February financially?

 




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Posted by Martin December 30, 2013
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My goals for 2014


Planning goalsThe year 2013 is over. It has been a wonderful year. It passed very quickly and now we have time to reconcile our goals and set new ones.

My last year was a struggle fighting my debt. I could see how much money I was wasting on debt payments and interest. Many times I saw a great opportunity in the market, a great stock on sale, or an option contract offering a juicy premium which I had to let go because of the debt.

My eyes were weeping seeing all those opportunities go. Therefore my primary focus in 2014 will be on eliminating the debt.

This is a quick write down of my goals for 2014:
 

  1. Reduce my debt by 50%
  2. Make $5,000 in options trading
  3. Max. out ROTH IRA account
  4. Reach $300 monthly dividends income in combined accounts (in TD and ROTH IRA accounts).

Reduce debt by 50%

Last year, I was able to reduce my debt by 24%. It was a good achievement, but I know I could do more. For 2014, I will reduce the debt by another 50% from the current level. It is a huge task as it translates into paying down around 11,000 dollars next year. But such an achievement will save me circa $1,500 in annual interest. Definitely worth the money and work. Once I pay this off my family and I can take a decent vacation the following year. And I can increase my savings rate, which it currently is around 22%.

Make $5,000 in options trading

Last year, I made $2,400 selling puts and covered calls against stocks I like to own or I already own. My profit reached 44%. In 2014 I will increase this level and double my gains. I will build an option ladder which means that I will have at least one option contract expiring every month and I will roll them from month to month.

As I’ll have more cash available on hand while paying off the debt, I should be able to invest more into a put selling strategy. I should be able to sell puts against more expensive stocks, collect more expensive premiums, and be protected from volatility as more expensive stocks tend to be more stable.

Also the option ladder will help me buying longer term options (LEAPS) and collect more money in premiums. You can watch my Calendar how I will be progressing in this ladder building effort.

Max. out ROTH IRA account

Achieving this goal will be available only if I take into account my future bonus and tax refund if any. I know I can easily save $3,600 during the new year, so the rest of the savings must come from the refund and bonus. Since these are variables I can’t predict, I will be OK with only 3,600 dollars savings should this help achieving my debt reduction goal.

Reach $300 monthly dividend income in combined accounts

I believe that I should be able to reach this goal in my ROTH IRA account rather than in the TD account as due to my debt reduction and maxing my ROTH account goals I will be contributing to my TD account less as I did in the past if at all. So this achievement will come from the ROTH more likely. I also will be investing in stocks paying larger dividends such as MLP’s or REIT’s. REIT’s are currently under investors’ attack (negative) due to interest rates mess and in my opinion they are providing an excellent entry opportunity for long term investors.

Yet another opportunity can be seen in utilities as they are out of favor too. But that may not last long,so if you have spare cash, check them out.

The reason for allocating more money to higher yield in lieu of higher growth is that I believe this can help me to generate more cash now which I can then invest into stocks with higher growth. Of course I will strive to find stocks with balanced yield and growth, but these first two or three years of my accumulation phase I will prefer yield over the growth. Later I switch the gear and start accumulating more cash (reinvesting high dividends) to more growth oriented stocks. I plan to start investing in such stocks in 2016 and give them 10 or 15 years to grow. Some stocks can easily triple, quadruple or five fold their yield over such period of time.

Conclusion

The above described goals are quite brave and they will require a lot of financial discipline. But I believe these goals are meaningful and achievable. If reached they will get our family closer to financial freedom and possibly to retirement.

With reducing my debt as planned I can get more cash for investing and increasing income from those investments. Then I can stop worrying where can I get more cash for investing. I will be able to generate more cash.

Learning and successfully practicing put selling strategy and covered calls can help me to generate more cash with less initial cash commitment than with the stocks only and reach retirement early with smaller account.

What about your goals for 2014? What is the biggest achievement you want to reach next year?
 




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Posted by Martin November 20, 2013
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Trade adjustment – Demand Media (DMD) – covered call


The last Friday my covered call against Demand Media (DMD) expired worthless. That left me with an uncovered stock.

I reviewed the stock and the entire trade and decided to exit the trade via a covered call trade. Selling covered calls against this stock is almost impossible due to a significant price drop of the stock.

My original stock purchase price was $9.50 a share and it was offset by a covered call buy-write trade. My final cost was $8.90 a share (without commissions).

 
(MORE: Options Expiration – November 2013)
 

Unfortunately the stock dropped to $5.24 a share (as of today). I haven’t responded to this drop properly and I ended up with $366 loss.

Thanks to selling more calls and puts against this stock I was able to offset this loss by 50%.

With this trade I plan to be assigned and sell the stock at $5 a share. I would be selling with a loss, but lesser than if I held a single stock only.

Here are the numbers in a nut shell:


-950.00 stock purchase in December 2012
+ 60.00 sold covered call in December 2012
– 5.00 covered call buy back in January 2013
+ 45.00 sold covered call in January 2013
+120.00 sold covered call in May 2013
+ 50.00 sold put in October 2013
+ 95.00 sold covered call in November 2013
————————————————
=585.00 cost basis

My current cost basis for the stock is $5.85 a share. If I get assigned I will sell the stock for $5.00 a share and my loss will be $85 total. Better than $366, right?

 
(MORE: Covered Call Trading Plan)
 

Not every trade will end up as a winning trade, but the goal would be to offset losses as much as possible. The battle for this trade is not over yet as the latest option contracts will expire next year and during that period of time many things may happen.

Here is the trade I took today:

11/20/2013 09:34:11 Sold 1 DMD May 17 2014 5.0 Call @ 0.95

This trade is planned not to expire but be called. That means I will be forced selling the stock.
 




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Posted by Martin November 18, 2013
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How to buy stocks cheap in today’s expensive market

How to buy stocks cheap in today's expensive market

If you are a dividend growth investor investing into dividend growth stocks, you may have noticed that the market is somewhat overpriced. You can read on many blogs complaints from dividend investors that it is very difficult to find fairly valued or undervalued stocks today.

I agree, that some stocks of my interest are expensive today. My favorite stock JNJ is way above the price I would be willing to pay to add more shares to my portfolio.

 
(MORE: Johnson and Johnson: Let it Dip to a 3% Yield)
 

As income seeking investors are fleeing from bonds and moving their capital into dividend stocks they will be driving the market and dividend stocks higher.

As you know, this trend will have a very negative effect to a metric every dividend investor is looking for – yield.

As the price is marching upwards, the yield goes the right opposite.

And therefore my favorite stock JNJ’s yield is now at 2.8%. In the past, it was around 3.5%. My threshold for committing cash in any dividend paying stock is 3.0%. As long as any dividend stock pays 3% or more in dividends I invest. JNJ is below my threshold.

 
(MORE: Getting Started With Dividend Growth Investing)
 

Money counting

Another metric dividend investors usually look at is P/E. Investors should evaluate P/E from many perspectives – historical, competitors, industry, etc. Typically when you ask any dividend growth investor they will tell you that they would invest in companies which trade at 20 or lower P/E.
My favorite JNJ trades at 21.03 P/E. Again above the threshold.

But I like this company and want to be adding more shares!

What shall I do?

You have basically the following options:

  1. Ignore it and invest regular amount of cash every month and reinvest all dividends using DRIP. In thin periods you will be buying cheaper and this will average the price and P/E down and yield potentially up.
  2. Wait when the stock falls or correct to more reasonable level or its earnings increase, and dividend will be raised up enough to yield 3% or more again.
  3. Or apply strategies which will artificially lower your purchase price.

 
(MORE: $10,000 Worth of Dividends (so far))
 

I like the third option – apply strategies which will allow you buying expensive stocks cheap.

Put selling strategy

Yes, I am talking about basic option strategy – put selling. Selling puts can provide you with two benefits:

  1. Provide income
  2. Lower your cost basis

A great trader Teddy Knight from Fullyinformed.com once wrote on her blog why she likes put selling and what strategy you should use. It is a very simple and powerful cash generating strategy:

  1. Sell puts against a stock you want to own as long as you receive enough cash to buy the stock
  2. Buy the stock using collected premiums (or get assigned)
  3. Once you buy 100 shares of your favorite stock, start selling covered calls as long as you get assigned (sell the stock).
  4. Rinse and repeat

I like the first part of the cycle. Sell puts as long as you collect enough cash to buy the stock. You buy the stock using other people’s money.

 
(MORE: The Most Undervalued Dividend Stock in the Market)
 

That’s why I use options trading in my taxable portfolio (and I am planning on start using this strategy on my ROTH too). Not only I get income, but I can lower the cost basis of my stock and improve all metrics of that stock. I will be buying a lot cheaper than the current market price. I get a solid discount.

Buying dividend growth stocks cheaper

For example Safeway stock I wrote about in my previous post. I like the stock and I want to buy it. But let’s take a look at its metrics:


Current price – $33.04 a share
Current P/E – 18.28
Current yield – 2.30%

(Of course there are other metrics I usually look at, but I will list only these three for the sake of this article).

When I first added SWY in my watch list the above metrics looked like the following:


Price back then – $23.00 a share
P/E back then – 12.57
Yield back then – 3.47%

As you can see, at the beginning of the year, SWY was an attractive dividend stock, paying nice dividend, increasing dividends for 7 years with a payout ratio in its 40s and almost 20% growth rate.

 
(MORE: 5 Great Dividend Paying Stocks With Double-Digit Short-Term Dividend Growth)
 

Today, the stock doesn’t meet my criteria to invest in it. But by using options strategy I still can buy this stock cheaper. I started selling puts against SWY at the beginning of this year and here are the premiums I already collected:


+2.20 sold put in March 2013
+0.35 sold put in September 2013
+0.40 sold put in October 2013
+1.80 sold put in November 2013
——————————-
=4.75 total premiums received

This means that if I decide to buy this stock now or get assigned to this stock early or later, my purchase stock will be $28.29 a share. The metrics I look for will change as follows (being all other metrics the same):


Adjusted price – $28.29 a share
Adjusted P/E – 15.46
Adjusted yield – 2.83% (so I need to continue selling more puts)

 
(MORE: Should We Expect a Crisis After Bernanke Leaves the Fed?)
 

Don’t be afraid selling puts against the stock you want to own. There are only two possible outcomes which can happen to you – the option expires worthless or you will have to buy the stock at strike price minus received premium.

Both outcomes are good for you. This trade will always be a win-win trade.




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Posted by Martin October 29, 2013
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New Trade – Taser Int. (TASR) put selling for income

New Trade - Taser Int. (TASR) put selling for income

I opened a new trade against TASR last week on October 24th. The main reason was that:

  1. I like the stock and their product.
  2. I am OK to own the stock.
  3. I believe it has a good growth potential
  4. I want to generate income before I buy it.

TASR manufactures tasers, you know those fake pistols called in an ornamental language an electronic control device used by police and military enforcement mainly in areas where people believe guns kill people. Not humans, guns do.

So as the society will get weaker and sissier TASR will profit from it unless they screw up.

10/24/2013 12:33:14 Sold 1 TASR Mar 22 2014 15.0 Put @ 2

I sold this option contract before I decided to try creating my option ladder, so this trade didn’t follow that effort yet. But that doesn’t bother me that much.

What are two possible outcomes of this trade?

  1. The stock will trade above $15 a share at expiration on March 22, 2014 and the put expires worthless. I will keep my premium and will decide whether to repeat the trade or not.
  2. The stock will trade below $15 a share at expiration. I can decide to either roll the option to a lower strike and longer expiration or let the stock be assigned to me (I will buy 100 shares of TASR at $15 a share, but I still keep my $2 premium).

Happy Trading!

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