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Posts Tagged ‘TGT’

Building a “Dividend House”

Posted by mounddweller on February 26, 2018

Fellow Investors,

I am a frequent reader of articles on Seeking Alpha (www.seekingalpha.com).  There are several superb analysts who write regularly on the site.  There are also an innumerable number of hacks.  It doesn’t take long to tell which is which.  There are also many individuals, like myself, who just like doing their own analysis and publishing the results.  One such individual goes by the non de plume, “Dividend House.”

“Dividend House” is a person nearing retirement age who decided to take the bull by the horns, divest her and her husband’s portfolios of mutual funds and start investing in dividend growth stocks (DGI).  In order to make sense of her portfolio she devised a wonderful analogy of the stocks in her portfolio as being sections of a house, i.e. foundation, walls, roof, etc.  If you’re so inclined you can read about her Dividend House model here: https://seekingalpha.com/article/3791466-build-dividend-house-stocks-go.

Recently, Dividend House, posted another article discussing the possible need to replace one of the stocks in the foundation portion of her portfolio.  The stock she was considering replacing was Owens & Minor (OMI).  OMI is a healthcare company with an excellent record of growing dividends.  However, in recent years, the turmoil in the healthcare industry has wreaked havoc on its business model and forced it to adapt or die.  For this reason Dividend House was considering removing it as a foundational stock.

After reviewing Dividend House’s criteria for foundational stocks and the overall methodology for building her portfolio, I made the following observations:

  • With over 60 stocks, she had too many stocks in her portfolio, and
  • Stocks that form the foundation of a portfolio should very rarely need to be sold.

I told her if it were my dividend house I would simplify the criteria for foundational stocks to only include those which met the following:

  • Stock must be a Dividend King (50+ years of annual dividend increases)
  • Dividend growth must have exceeded and have a reasonable expectation for continuing to exceed the annual rate of inflation.

My rationale was simple as well. The overall goal of the portfolio is to provide a safe and growing stream of income in retirement. She also want to sleep well at night (SWAN). A dividend king stock has proven to be resilient in all kinds of markets and economic conditions. As long as you can reasonably expect its business model to continue to be successful and its growth to exceed the rate of inflation nothing else should really matter.

I would also have fewer stocks in my foundation. Foundational stocks should be big, ‘cornerstone’ size investments. I would have more, smaller positions in my wall stocks and even more and smaller positions in my roof stocks.

After writing these comments, I decided I would spend some time coming up with what I thought would be a good foundation for a DGI portfolio.  However, before doing that I had to come up with a methodology for how I would build my own dividend house.

First, the foundation.  I previously referenced my simple criteria for selecting foundational stocks.  I also decided that foundational stocks would constitute 50% of my total stock portfolio and that each position would be less than 5% of the total stock portfolio.  Thus, my foundation would consist of no more than 10 stocks.

Next, are the walls.  The criteria for wall stocks is similar to those of the foundation.  The only difference being that the stock must be a Dividend Aristocrat, having increased its dividend annually for at least 25 years.  The walls would constitute 25% of my overall portfolio.

The criteria for stocks in the roof of my dividend house would consist of equities that have raised their dividends annually for at least 10 years.  In aggregate, they would constitute no more than 15% of my DGI portfolio.

Finally, I would also have a garden section of my dividend house.  This would consist of ‘up and comers’ in the world of DGI stocks.  They might not have any record of annual dividend increases but have the potential for rapid revenue growth and eventually might become consistent dividend growers as well.  The garden would constitute no more than 10% of my total DGI portfolio.

After building this framework I then spent some time determining what stocks should be placed in the foundation of my dividend house.  Using David Fish’s latest DGI spreadsheet which you can find here: http://www.dripinvesting.org/tools/tools.asp, I found that there are currently 27 companies that qualify as Dividend Kings, i.e. having raised their dividend annually for 50+ years.

As you might expect many of the names in this list are well known large cap stocks.  However, I also found several smaller, lesser known stocks which have very enviable dividend growth records.  To determine which 10 of the 27 stocks would best fit in the foundation of a DGI portfolio I decided to use the following criteria:

  • 10-year annualized growth rate of dividends
  • 10-year yield on cost (YoC), assuming investor had purchased stock 10 years ago at the 52-wk low.
  • 5-year YoC, assuming investor had purchased stock 5 years ago at the 52-wk low.
  • Free cash flow (FCF) payout ratio using the most recently available data. In most cases this was the fiscal year 2017 data, but in some cases was the trailing 12 months, and in a couple of cases was the 2016 fiscal year data.

7 of the 10 stocks selected were in the top 10 of the 10-year average growth rate of the dividend,
8 of 10 were in the top 10 of the 10-year highest yield on cost, 7 of 10 stocks selected were in the top 10 of the 5-year highest yield on cost, 4 of 10 were in the top 10 of the FCF payout ratio, and 3 of 10 were in the top 10 of all four criteria.  The results of my analysis are contained in the below table.

The 10 stocks I selected for the foundation of my dividend house, listed in alphabetical order are as follows:

  • Minnesota, Mining & Manufacturing (MMM), now more commonly known as 3M, is a large cap conglomerate which has increased its dividend annually for 60 years. I selected MMM because of its enviable ability, despite its size, to grow its dividend at a double digit rate.  It also has a very high 10-year YoC.
  • Colgate Palmolive (CL) is a well-known manufacturer of personal care products. It too, is a large cap stock.  It has increased its dividend every year for the past 54 years.  I selected it because of its high single digit growth rate in dividends as well as its leading position in a recession resistant industry.  People are never going to stop buying shampoo and toothpaste.
  • Genuine Parts Co. (GPC) is a lesser known but well respected manufacturer and retailer of replacement auto parts. It has increased its dividend annually for 61 years.  GPC is one of those companies that you rarely see mentioned on CNBC or on the lips of your friends as a stock tip at a cocktail party.  I selected it because it too is in a recession resistant industry and despite not being in the top 10 of 10-year average dividend increases, its annual dividend increases have handily outpaced inflation.  It also was in the top 10 for both 10-year and 5-year high YoC.
  • Hormel Foods (HRL) is a well-known name in the food manufacturing industry. It has raised its dividend for 52 years.  I selected it for its recession resistant business model and the fact that it was in the top 10 of all four of my selection criteria.
  • Johnson & Johnson (JNJ) is one of the most well-known and respected companies on the planet. It is a large cap stock that is diversified across the healthcare and pharmaceutical industries.  It has raised its dividend annually for 55 years.  I selected it for its consistent growth.  In my opinion, no DGI portfolio would be complete without it.
  • Lancaster Colony (LANC) is an amazing hidden gem. Like HRL, it operates in the food manufacturing industry.  It has zero debt and has raised its dividend for 55 years.  I selected LANC for its conservative balance sheet and its focus on returning capital to its shareholders.  Not only does this company pay out a growing annual dividend, it also pays out a special dividend every few years.  The past couple of times the special dividend alone has equaled 5%!
  • Lowe’s (LOW) is the well-known home improvement retailer. This large cap stock has also increased its dividend for 55 years.  I selected it because it was one of only three stocks that were in the top 10 of all my criteria.
  • Nordson Corp. (NDSN) is another one of those hidden gems I found. Prior to doing this research I had never before heard of it.  It is a manufacturer of packaging machinery.  It has increased its dividend every year for 54 years.  Despite it having a very low initial yield, it has one of the highest 10-year YoC.
  • Target (TGT), like JNJ and LOW, is another one of those household name stocks. It operates as a big box retailer.  It has increased its dividend for 50 years.  I selected it because despite its well published hiccups of the past several years (data security and amazon competition) it has managed to continue to rapidly grow its dividend.  It was also one of the 3 stocks which were in the top 10 of all of my criteria.
  • Vectren (VVC) is a lesser known utility stock. It operates both regulated gas and electric utilities in the Midwest.  It has increased its dividend annually for an amazing 58 years.  I selected it as the one utility in my foundational portfolio and also because of its conservative, slow growth, operations.

Before wrapping up this post I want to briefly comment on two prominent Dividend Kings that are conspicuously missing from my pick of foundational stocks.  They are Coca Cola (KO) and Procter & Gamble (PG).  Both of these companies, while continuing their streak of annual dividend increases, 55 and 61 years respectively, have faltered in the past several years.  Neither company was in the top 10 of any of my selection criteria.  I own KO in my current portfolio and as a result of this analysis I am considering replacing it.

Best Regards,

Troy

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September 2014 Results

Posted by mounddweller on October 6, 2014

Fellow Traders,

There isn’t much to report for the month of September.  The level of activity at work has severely curtailed my trading.  This is both a good and a bad thing.  Good in that it has allowed me to miss several ‘opportunities’ which likely would have resulted in a bad trade and would have put me in a rescue mode.  Bad in that I did make a few snap decisions which I’m now regretting.  Let’s first look at the trades I closed in September.

I closed 3 trades in September.  They were in KMI, TGT, and TROW.  KMI is a stock in which I’m looking to build a long-term position.  I have been trading naked puts in KMI since February.  The range of puts I have sold has been $32.50 – $37.50.  In September I had 2 SEP $37.50 puts expire OTM.  This trade netted me $118.05 with a ROIC of 1.57%.  I kept the trade very small because I felt KMI might fall further and I wanted to be able to roll out and down while increasing the number of contacts as necessary.  That didn’t happen so I’m happy with a small profit.

Next up is TGT.  My TGT trade started back in early August as a buy/write in order to capture the dividend.  I bought the stock at $58.06 and sold the AUG $58 calls.  The calls were exercised and I had the stock called away from me at expiration and after the ex-date.  The dividend landed in my account on September 10.  This trade was also small, only a couple hundred shares.  I netted $195.10 and my ROIC was 1.68%.

My last closed trade was in TROW.  TROW is another stock in which I’d like to build a long-term position.  Back in July I began this effort by selling the AUG $80 put.  TROW fell significantly in AUG and rather than accept assignment I decided to roll the AUG puts out into SEP.  TROW subsequently recovered and the SEP $80 puts expired OTM.  This trade netted me $216.60 and my ROIC was 2.71%.  I am now waiting to reenter the trade with NOV expirations being the target.

Now let’s take a look at the new trades I opened in September.  Actually one, VALE is a trade I opened in late August.  You’ll recall I sold the SEP $12.50 puts for $0.15 and said I’d let the stock be put to me if they expired ITM.  The purpose of doing so was to be long the shares and in a position to capture the substantial $0.40 semi-annual dividend whose ex-date is October 17.  The trade started out as planned but has fallen much further than I anticipated.  I am now sitting on a substantial unrealized loss as I bought the stock at $12.50 and it closed today at $11.31.  This, however, is an improvement over its low last week of $10.61.  My plan remains to sell $12.50 calls after it recovers and I’ve earned the dividend.  Now it just looks like it’ll take a bit longer than I originally anticipated.

My new open trade is in ADI.  Specifically, I sold the OCT $49 puts at $0.75.  This is one of those cases where I took my eye off the ball and let the trade run away from me.  My original intent was to sell the puts as the result of the stock hitting and bouncing off the lower Bollinger Band.  The trade was to end when the rebound petered out and I had captured a large portion of the initial premium.  Unfortunately as I mentioned at the beginning of the post I’ve been very busy at work and I missed the turn in the stock.  ADI got as high $50.64 after bouncing off the lower Bollinger Band at around $48.72.  Today, ADI closed at $47.15.  Unless we have a big bounce in ADI before expiration, I’ll need to roll this position out and down.  I’ll likely increase the number of puts in the trade and roll down to the $48 strike.

So there you have it.  That’s the extent of my trading during September.  Best of luck to everyone as we head into the historically volatile month of October.

Regards,

Troy

 

 

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August 2014 Results

Posted by mounddweller on August 29, 2014

Fellow Traders,

Well another month has passed us by.  This one seemed to pass by very quickly.  Let’s see how I did.

I closed 5 positions this month, 4 were winners and one was a loser.  Let’s put the bad news behind us and talk about the loser first.  Back in April of this year I bought JUL $VIX puts.  My rationale was that the VIX was very low and that we’d have a pullback at some point before July expiration after all the big shots on Wall Street headed for the Hamptons in late May.  Alas, the substantial pullback I felt was a certainty never transpired.  Instead the averages just kept plowing on to new highs and the $VIX got even lower.

In early JUL as expiration drew ominously closer I decided to roll my puts out by selling the JUL puts and buying AUG puts.  The total amount of capital I had in the trade at this point was $1,578.  Thankfully for me we finally got a small, quick pullback in early AUG which allowed me to exit the position with a loss of just $530.  Am I happy about the loss, definitely not!  However, it is a much better result than losing the entire $1,578.  I could have rolled out again and tried to wait out being able to exit at a profit but given the market’s trend to the upside I decided to just cut my losses and move on.

This was the 3rd time I’ve tried to trade the $VIX.  I’ve lost money 2 of the 3 times.  I doubt I’ll try this trade again anytime soon.  OK, enough said about the lone loser.  Let’s now look at my winners.

My four winning trades were in INTC, MAT, QCOM, and TGT.

Last month I told you about being called out of my long-term position in INTC with deep ITM covered calls at $27.  The other part of that original trade included more covered calls at the AUG $26 strike.  I got called away at $26 and ended up making 9.88% on the trade.  I still have some INTC left in my account that I hadn’t sold covered calls against.  I will look to add to that position in the coming months once INTC falls back into my buy range which is just under $30.

Now, let’s look at MAT.  You’ll recall I originally sold the AUG $35 puts at $0.35 and my plan was to take assignment if they closed ITM and then turn around and sell SEP covered calls and try to collect the $0.38 dividend, the ex-date of which was 8/25.  Well, at AUG expiration MAT closed at $35.08, thus my AUG puts expired worthless.  On the following Monday with the dividend ex-date only one week away I took another look at my options.  As it turned out premiums were far better for the SEP puts than they were for the calls even after accounting for the $0.38 dividend.  Thus, I decided to sell the SEP $35 puts for $0.70.  After going ex-dividend on 8/25 MAT fell through support at $35 and got to as low as $34.46 on 8/26.  On 8/27 it bounced so I decided to buy back the SEP $35 puts at $0.55.  Doing so got me out of the trade with a profit of 1.24% in 41 days.  I’m now looking for a good time to re-enter the position as I feel MAT is a true bargain at these levels.  I’m currently tracking the SEP and OCT $34 puts.  MAT closed today at $34.46.

Next up is QCOM.  Last month I mentioned that QCOM was taking me for a wild ride.  Thankfully the ride, while exciting, ended profitably.  I entered this position back on July 24th by selling the AUG $74.50 puts.  A week later I had to role these down to the AUG29 $74 puts.  Then just one day later I had to roll down yet again, this time to the SEP $72.50 puts.  I also had to increase the number of contracts to keep the trade in a net credit status.  It bottomed at $72.49 on August 7th and has been rising nicely ever since.  On 8/26 I bought back my SEP $72.50 puts at $0.13.  I ended up closing the trade with a net gain of 0.79% (about $180).

My last ‘closed’ trade is in TGT.  I have closed in quotation marks it isn’t officially closed yet.  I’m actually waiting on the dividend I captured to hit my account on 9/10.  On 8/15 I bought TGT at $58.06 and sold the AUG22 $58 calls for $0.61.  I had the stock called away from me on 8/22.  However, I still earned the $0.52 dividend.  My net gain on the trade will be 1.68% with a 26 day holding period.

That’s it for my closed positions.  However, I also opened some new positions this month as well.  I currently have open positions in KMI, MCD, TROW, and VALE.  All but VALE are on my long-term hold list.  With KMI I already have a small position that I’m hoping to expand by having sold the SEP $37.50 puts at $0.63.  I initiated a small position in MCD by just buying the stock outright.  I couldn’t find a decent covered call trade I liked to try to capture the dividend so I just bought it straight out.  With TROW I’ve been selling the $80 puts for a couple months now.  It goes ex-dividend on 9/10 so I’ll need to make a decision on it in the next week or so.  Last up is my brand new trade that I just entered today in VALE.  On the Yahoo message board I frequent they’ve been talking about VALE for quite some time.  It’s not on my list of tracking stocks but after hearing about all of the successful trades everyone was making in it I decided to give it a try.  Today I sold 10 VALE SEP $12.50 puts at $0.15.  We’ll see how everything turns out in about 3 weeks.  My plan is if assigned at $12.50 is to sell covered calls and try to capture the large, semi-annual dividend of $0.4075 dividend in October.  If the puts stay OTM I may go ahead and do a separate buy/write trade later in the month to try to capture the dividend.

Well that’s it for another month.  Happy trading.

 

Best Regards,

Troy

 

 

 

 

 

 

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March 2014 Results

Posted by mounddweller on April 3, 2014

Fellow Traders,

Better late than never I always say.  Other responsibilities have kept me from compiling and communicating the results of my trading during the month of March.

In March I closed out 6 trades with a net profit of $1,084.20.  The 6 trades required $72,835 in capital which means my ROIC was 1.488%.  The average holding period was 42 days.

I closed out NP trades in 5 stocks and 1 CC.  The NPs were:

(1) BEN MAR $50 puts expired OTM,

(2) KO MAR $37 puts expired OTM,

(3) WMT MAR $7.50 puts expired OTM,

(4) FDO MAR $60 puts expired OTM, and

(5) PG MAR $75 puts expired OTM.

My CC trade was in AT&T (T).  Back in January I had purchased 500 shares at $34.97 and sold CCs to capture the dividend.  The calls expired OTM and I received the dividend.  I then sold another round of calls and also sold puts at $33 and $32.  I closed the position last week after both my puts and calls expired OTM by selling my stock at $34.86.  All in all, it turned out to be a good trade.

I also have a few trades that rolled over into April.  I rolled my KMI $32.50 puts out from MAR into APR.  I also have pen NP trades in CSCO and TGT.  I am short the APR $21 and $57.50 puts respectively.

My only new trades in MAR that remain open are FDO APR $57.50 puts and my most recent trade which occurred back on 3/27 where I STO NKE APR $72.50 puts at $0.75.

With just over two weeks left before APR expiration I am keeping an eye on a couple possible trades:

(1) STO ABT APR $37 puts at $0.30 or better, and

(2) STO KO APR $37 puts.

 

Well, that’s it for the month of March.  Unless something big happens in the next couple of weeks it looks like I’m not going to have much to write about in April.

Best of luck to all my trading friends.

Regards,

Troy

 

 

 

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