New Stock in Dividend Growth Portfolio

Today my wife and I bought Raytheon (RTN), the defense contractor. It has international exposure, a low payout ratio, high dividend growth and is set to raise it's dividend next quarter.

I look at this investment as a buy and hold issue. It also diversifies our portfolio a bit and adds additional international exposure as well.

We will reinvest all dividends back into the company. Let the compounding begin!

BDC's, mREIT's and CEF's?

I've been doing a lot of reading lately about these type of investments. They offer very high yields. What attracts me to some is the monthly income stream. I am looking at PSEC and ARR right now. Also, DX a high quality mREIT, is a Dividend Challenger but since I've been watching it, it has gone up nearly 10%.

I've been looking at these because the market keeps grinding up and up thereby making it difficult to find undervalued entry points in dividend growth stocks. These are not the type of equities though that one can just buy and hold with minimum oversight.

I'm thinking of pulling the trigger on Raytheon (set to raise dividend soon, low payout ratio, high dividend growth rate) as a dividend growth addition to our portfolio but also have some other money to invest. I'm debating whether to wait for a drop and enter into a dividend growth stock position or to give one of these other issues like PSEC a whirl.

It's been a long time since fear has taken over the market and provided good buying opportunities. Should we be patient and wait or try out a high yield issue? Do you think Helicopter Ben's QE will continue to send the market higher? What do you all think?

My Dividend Growth Stock Portfolio

I love selling puts but my wife and I also have a portfolio of dividend growth stocks which we hope will provide the income we need for retirement without having to liquidate the principal. Our portfolio as of today contains the following stocks:

Johnson & Johnson
Intel
AT&T
Realty Income Corp
Phillip Morris
Exxon Mobil
Microsoft
Proctor & Gamble
Coca-Cola
McDonald's
Altria Group
Conono-Phillips
Phillips 66 (spun off from Conoco)
Wal-Mart
Kimberly Clark
Pepsico
Lowe's

For the purpose of diversification I will probably add a financial dividend growth stock like Aflac and a utility like Southern Company. Are you all aware of the the Dividend Champions, Challengers and Contenders list? Google it, it's awesome.

Buy the Rumor, Sell the News

Intel had been rising on rumors that it was going to have a better quarter than expected. Intel has beaten estimates much more than not. In addition, there was no warning to the downside. As such, the stock had surged in the last few days.

I'm getting a bit long in the tooth and for the first time I took advantage of the maxim "buy the rumor, sell the news." I did this in a contrarian manner by closing out two-thirds of my put selling positions in Intel at the top when the stock nearly hit 23.

Intel's quarterly report was a mixed bag at best. My only positions I have left are 5 February naked puts written at the 23 strike for which I've already collected over $500 in premium and some buy and hold shares in my wife's IRA where we reinvest the dividend.

Even with the drop in Intel today I expect I will be able to roll the Intel 23's and bring in more premium. Long term I expect Intel to be a fine performer. It's a heavyweight which is really attracting the dividend growth investor crowd.

New Dividend Growth Stock Additions/Update

I added Phillip Morris to my wife's IRA and Exxon-Mobil to my IRA. I have been selling puts on Intel, Southern Company, Pepsico, General Electric and Altria Group.

The market is way overbought so I am in no hurry to enter into any new long term investments or short term put selling trades.

Trade Continuation: Intel (INTC) Naked Puts

On October 10, 2012 I continued the following transaction:


08/24/12   STO 5 INTC Oct 20 2012 23 Puts @.35      161.20
10/10/12   BTC 5 INTC Oct 20 2012 23 Puts @1.22   -623.79
10/10/12   STO 5 INTC Nov 17 2012 23 Puts @1.53   761.14

This is how I played the Intel tank on these puts last month. On this trade I have now brought in $298.55 in option premium. If put to me my cost basis is down to $22.40. I anticipate rolling these puts out, rolling out and reducing a contract or rolling down and out. All this will occur prior to option expiration and will only be done for a net credit.

Even though INTC has tanked I am still bringing in regular income and reducing my cost basis in the stock. Unfortunately, my margin maintenance has increased substantially and of this writing it sits at $2800.

I very recently thought Intel had bottomed but now there are rumors that Apple wants to build their own processors and not use Intel anymore. Intel is a huge multinational with a rising dividend so I'm not too worried. I will keep on: rolling, rolling, rolling...

New Trade: Pepsico (PEP) Naked Puts

On October 22, 2012 I entered into the following transaction:

10/22/12   STO 2 PEP Dec 22 67.5 Puts @.8     $148.46

This is a 59 day trade that uses ~$2600 in margin maintenance. Pepsi had showed a bit of weakness after issuing it's quarterly report. If these puts expire worthless we will earn 5.71% in 59 days or 35.32% annual return on maintenance. If the shares our put to us our yield on cost will be 3.2%.

Trade Continuation: Intel (INTC) Naked Puts

On October 10th I rolled this Intel trade as follows:

08/22/12   STO 5 INTC Oct 20 2012 24 Puts @.37        $171.18
10/10/12   BTC 5 INTC Oct 20 2012 24 Puts @2.15     -1088.79
10/10/12   STO 5 INTC Nov 17 2012 24 Puts @2.40     1196.13



It's no secret that Intel tanked...and hard. When I entered into this trade Intel was at 25.70 and it tanked to the low 21's.

I rolled these puts out a month for a net credit of $107.34. I have now brought in $278.51 in option premium. This lowers my cost basis in INTC to $23.44. As of this writing that puts me down ~.96/share. Not bad for a complete tank job! Put selling is a very valuable trading tool.

Absent unforeseen circumstances, I will roll these puts again in a couple of weeks, dropping my cost basis once more. I can roll out at the same strike with 5 contracts, roll out at the same strike lowering to 4 contracts or roll out and down. I will only do so for a net credit.

Profitable Trade: Conoco Phillips (COP) Naked Puts

I know it's been awhile since I posted. I've been busy at work, play and with family. In any event I closed the following transaction for a profit:

09/05/12   STO 3 COP Oct 20 50 Puts @.38    $101.73
10/02/12   BTC 3 COP Oct 20 50 Puts @.04       -12.06

In this trade I made $89.67 in 26 days on ~$1500 in margin maintenance. This equates to a return on maintenance of 5.98% or 83.95% annual. I closed the trade for a profit without paying a commission.

I've got other trades to report and I'll try to post once a day for a while and get back in the swing of things.

Random Thoughts

1) I believe U.S. housing has bottomed. Inventory is down. Foreclosures are down. The number of failing banks is decreasing. Mortgage interest rates are still at record lows. The government is all in. Real estate is a hard asset unlike funny money paper currency. Builder stocks are up. Home improvement stocks are up. Financials have stabilized and are rising. Relevant stocks on my watchlist are Lowe's, Bank of America, Caterpillar and Freeport-McMoran Copper and Gold. Copper is used a lot in building.

2) There remains great out of the money put selling opportunities on Intel. At the 22 strike or below the price is buoyed by a 4% (and rising) dividend. Can sentiment get much lower?

3) After the Fed, the initial frenzy of precious metals buying has occurred. I will be looking to enter positions in GDX, FCX, GLD, SLV or GDXJ on the dips. Silver Wheaton (SLW) will probably be added to my watchlist as well. FCX makes it on two lists...

4) I really want to trade GE and Bank of America. I think both are on the rise. A couple of down market days and I'll probably pull the trigger. The start today looks to be in the red so I'll be keeping my eyes open.

5) I like Waste Management (WM). As municipalities overspend they are able to provide less resources. We aren't going to stop/slow down on our trash emission anytime soon. WM has a 4% dividend that is rising. I'm waiting for some weakness, preferably down to the 33 range before writing some out of the money puts.

6) Unrest in the Middle East brings war back into play. Beaten down defense stocks could be a good bet. I watch General Dynamics and Lockheed Martin. Lockheed pays a hefty dividend.

7) Fullyinformed.com is an amazing blog and an amazing resource. This woman really understands money and trading. She never ceases to impress me. She is a great teacher as well.

8) Have a great day. Laugh a lot and don't let the negative emotions of others diminish your joy!

New Trade: Southern Company (SO) Naked Puts

On Friday when SO dipped below 45 to ~44.70 I entered into the following transaction:

09/14/12    STO 3 SO Nov 17 43 2012 Puts @.5    137.69

With Bernanke's latest moves the "risk on" trades are in vogue. That provides weakness/opportunity in the "risk off" trades, i.e., utilities, telecom and healthcare. Southern Company is my favorite utility stock and it has a rising dividend. I have been patiently waiting for the stock to drop below 45 so I could write some out of the money puts.

SO currently has a yield of 4.35%. If put to us our yield on cost will be 4.61% with another dividend rise announcement expected in April 2013. I feel that the yield will buoy the price of the stock.

This is a 64 day trade with an initial maintenance requirement of $2218. If these puts expire worthless we will earn 6.2% return on maintenance or 35.36% annual. If the stock price drops I anticipate volatility will rise and we will be able to roll down and/or out for a net credit. As such, an exit strategy is in place.

This trade illustrates the remarkable returns that naked put selling can generate. I mean this is a utility stock for goodness sake :)

Profitable Trade: Caterpillar (CAT) Naked Puts

Today I closed the following transaction for a profit:

09/04/12   STO 2 CAT Sep22 2012 77.5 Puts @.57   102.46
09/14/12   BTC 2 CAT Sep 22 2012 77.5 Puts @.01    -2.04

I was able to close this trade for a penny and without commissions so I did. When I originally sold the puts CAT was down to $82.20. Ten days later it was over $93/share. Due to the steady rise in the stock, margin maintenance averaged down to ~$1700. As such, we earned $100.42 in 10 days on $1700 in margin maintenance. This equates to a 5.9% return on maintenance or 215% annual.

That's another thing I love about put selling. If the price of the stock skyrockets, you can close out your trade early. Each day the stock rises the amount of margin maintenance needed decreases thereby freeing capital for other trades. I remember when I exclusively traded covered calls that it would not be beneficial if the stock rose too much or too quickly. Buying back the calls when volatility was in an uptrend was not very profitable.

Random Thoughts

1) Helicopter Ben is fueling the risk on trade. Time to get out of bonds and into equities, especially hard assets like precious metals and oil stocks. I will be looking to sell out of the money puts on the dips. The only issue is: will there be dips as these dollar denominated commodities race higher.

2) The banks are safe with Ben at the helm. I wish I would have pulled the trigger on Bank of America a few days ago when it was below 8. It's probably still not too late to drink the punch.

3) For those of us who sell puts on weakness and fear this may be a challenging time. We'll need to balance patience and swinging at the fat pitch vs. standing at the station and missing the train. I'm glad I entered into my recent Caterpillar, Conoco Phillips, Phillip Morris and Intel trades so I've got some skin in the game.

4) Intel seems to have found support at 23. Writing puts at the 20, 21 and 22 strikes looks like a profitable set up to me.

5) Facebook seems to have found support at the 19/20 level. There are still some pretty nice put selling premiums to be had at the lower strikes. 

6) If you've got the capital, heavyweight AAPL has some nice premiums for out of the money put selling. The volume is so great that there are many option rolling opportunities should the trade go against you.

7) Perhaps weakness will be found in the risk off, high dividend securities, i.e., telecom, utilities and health care. Wherever it is we'll be watching :)

8) Have a great day and a great weekend!

New Trade: Phillip Morris (PM) Naked Puts

Today with Phillip Morris showing weakness and trading down below $87/share I entered into the following transaction:

09/12/12   STO 2 PM Dec 22 2012 80 Puts @1.23    234.50

I've wanted to trade PM for a while but never had the opportunity as it was in a constant incline while I like to sell puts on weakness. Phillip Morris is a blue chip company with a rising dividend. In fact it raised it's quarterly dividend today to .85/share which increases PM's yield to 3.9%. The stock has been rising but appears to have support above 80. If put to us our yield on cost will be 4.3%.

If the puts expire worthless we will earn $234.50 in 101 days on initial margin maintenance of $2100. This equates to an 11.16% return on maintenance or 40.33% annual. We have downside protection in the neighborhood of 10%. In the event the stock tanks we should be able to roll down and out for a net credit. As such, an exit strategy is in place.