The Money Tree

Safely Generating Income in Retirement

New Trade – Dominion Energy (D)

Posted by mounddweller on April 11, 2018

Fellow Investors,

I entered a new trade today; one that I hope will lead to a buy and addition to my long-term portfolio.  Specifically, I sold May $65 puts on Dominion Energy (D) for $1.65.  Before I tell you about my rationale and objectives for this trade please let me tell you a little bit about D.

Dominion Energy is a regulated utility holding company headquartered in Richmond, Virginia.  It engages in the provision of electricity and natural gas to homes, businesses, and wholesale customers. Its operations also include a regulated interstate natural gas transmission pipeline and underground storage system. It operates through following business segments: Power Delivery, Power Generation, and Gas Infrastructure. The Power Delivery segment regulates electric distribution and transmission. The Power Generation segment includes regulated electric fleet and merchant electric fleet. The Gas Infrastructure segment comprises gas transmission and storage, gas distribution and storage, liquefied natural gas import, and storage.

Dominion has a market capitalization of around $44 billion and generates about $12.5 billion per year in revenue.  It has about $37 billion in total debt.  It currently pays $3.34 per share annually in dividends.  Dividend growth has averaged 7.74% per year over the past 5 years.

Why am I interested in adding Dominion Energy to my long-term holdings?  First, and foremost it is a well run utility.  Second, I didn’t have any utility companies in my long-term holdings and felt that was a gap considering my overall objective of creating a steady, safe, yet growing source of dividend income.  Third, Dominion has strong growth prospects for the foreseeable future.  It has a stated goal of achieving 10% annual dividend growth through 2020 and then a minimum of 5% thereafter.

Why do I like Dominion at this time and price?  The simple answer is the current dividend yield.  At a $65 share price and $3.34 in annual dividends, D currently yields a substantial 5.14%.  This is the highest it has yielded since the great recession of 2008/09.  The current weakness in the stock price coupled with the company’s stated goal of 10% dividend growth through 2020 leads me to believe this is an excellent time to invest in Dominion.

So, why didn’t I just go long on Dominion stock rather than selling puts?  Two reasons. One, despite having support on the 3-year chart at $65, D could continue to fall in the short-term.  Thus, by selling puts, if assigned, I lower my cost basis down to $63.35.  Two, the ROIC on my cash secured puts was enticing.  $1.65 against a $65 strike price with a 38 day holding period gives me a cash on cash return of 2.54%. My annualized return is 24.4%.

Let’s look at the long-term potential for adding D to my portfolio.  As I previously mentioned, D intends to grow its dividend by at least 10% per year through 2020.  If they are successful in doing this the dividend in 2020 will be at least $4.04.  With a cost basis of $63.35 that would mean my yield on cost (YoC) in 2020 would be 6.4%.  Even better, it would continue to grow at around 5% per year thereafter.  That’s a darn good return for a stable, low risk investment.

If I don’t have D put to me at $65 at expiration, I will likely directly enter into a direct buy of the common stock, hopefully at a price less than $66.80, which equates to a 5% dividend yield.

Regards,

Troy

 

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