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Selling covered calls for income for beginners

by Yoda September 27, 2020

Curious about selling covered calls for income ? Not sure what are options, what is a call and where to get started? In this article we will discuss what are options contract, what is a covered call and how to sell covered calls for income. We will also look at risks associated with such a strategy.

What are Options?

An option is a contract between 2 parties. There are 2 types of options contract:

Call Options

Buyer of an option gets the right (not obligation) to buy the stock at a particular price (strike price) by a date(expiry date). On opposite side of the trade, seller of call option has an obligation to sell the stock at strike price by that date.

Let’s say stock XYZ is trading at 50$. Now, call buyer might expect the stock to go to 55$. But, he doesn’t want to pay 100*50(5000$) to own stock and wait to get to 55$. So, they will look for a call option on the stock. Let’s say its for 52 strike price for .50 a contract (each contract is 100 shares), 1 month expiry into future. So, they will end up paying about 100*.50 = 50$ for the option on stock XYZ. Option buyer was able to buy the right to buy these 100 shares of XYZ for 50$ in commission/premium. Commission goes to the seller of the option. 2 things can happen till expiry:

If at any time until expiry, price of XYZ reaches 52$ (strike price), buyer will be thinking his bet is turning true. When it reaches 52.50 (his commission plus strike price) then any price above it is pure profit on the stock. So, buyer can exercise their right to buy XYZ from seller at 52*100= 5200. Sell it all to book their profit. In such situations, contract is In The Money (ITM).
Price stays below 52$. In such cases, buyer still has the right to buy the sellers stock for 52*100=5200$. But, if they can get it for 51.99*100 = 5199, why would they exercise their call option? Thus, the contract option expires worthless and is Out of The Money (OTM).

selling covered calls for income diagram

Put Options

Gives the buyer of the option contract right (but not obligation) to “sell” a stock at a specified price(strike price) within a fixed period of time(expiry date). On the other side of this trade, the put seller takes on the obligation to buy that stock at the strike price. The put seller also gets some commission to take on the obligation for the put option. I won’t go into more details with an example since we only need to learn about call options for covered call.

What is a Covered Call?

Covered call is just a simple call option in which the seller already owns the underlying stock. As the call option seller has the obligation to sell the stock, the seller has two options: either sell the call option first and think about buying the stock later when the buyer of the call exercises their right to buy the stock at strike price(naked call). Or else, they can first buy or have an existing position of a stock and then sell the call option based on that. In this case, they already have covered the part of them being able to sell the stock at strike price if the buyer exercises their right.

Advantages of Covered Calls

Income! You get to keep the premium/commission from each covered call you sell. It also helps you reduce your cost basis. You can sell them every month or 45 days to boost your annual returns.
Exiting a stock position. Lets say, you have 100 shares of stock ABC and its currently trading at 39. You want to exit out at 41.50. You can look for a call around that strike price. This way, you make some commission by selling the call plus also get exactly 41.50*100 $ for your stock. Obviously for this to happen your stock needs to go at that price and call exercised. If that doesn’t happen you can always sell another call and collect the commissions waiting for it to reach that strike price.

Disadvantages of Covered Calls

You cap your profit potential. Speaking of the previous example, if the stock goes to 45 by expiry, you still get 41.50 for your stock and the call buyer will probably buy your stocks and make profit on the difference.
During the period between your selling of covered call and its expiry, you cannot trade away the underlying stock. Since the call buyer has the right to those stocks, they can buy it form you anytime before expiry.
You might end up selling a stock you are long on.

Selling Covered Calls for Income

Now let me walk you through the process of selling covered calls for income on an existing stock position via Schwab.

Make sure you can trade options on your broker’s platform. Different brokers have different ways to approve you. Schwab’s application can be found here. Each broker has levels of access that comes with options. First level is enough at most brokers for selling covered calls for income. Here is an explainer on Schwab’s levels. Depending on your broker, it will take 1-3 business days for them to approve you for selling covered calls for income.
Next, search for the stock for which you are selling covered calls for income. Make sure you have at least 100 shares of that stock within one account. You should also come out positive on your cost basis if your stock gets sold at strike price. We do not want to end up making a loss on overall cost basis. For me, this stock was Kontoor Brands (KTB), find it and hit trade: Depending on if you are enabled for options trading, you will see options under strategy. We want to choose Call here under strategy. So we are saying I want to trade (buy or sell) a call option.
Next, we need to figure out what expiry date options do we want to sell covered calls for. For this we need to look at the options chain for this stock. Most brokers will provide you the chain right there when making the trade. Click the link icon and then go to options chain:This is from a very recent screenshot, so numbers might not be accurate. Stock price was around 23$ at this time. What you see on left of the strike column are details for selling covered calls.
Bid is maximum price any call buyer is willing to pay at that time. Ask is the minimum price a call seller will accept at that time. Volume is the number of options contracts bought or sold any day. OI (open interest) refers to number of open contracts.
Eventually, I was able to find a 30$ strike price call contract with expiry date of 16th October 2020. As you can see below, the bid was about .15 cents and ask was about .45 cents per contract. So I entered a limit price order of about .25 cents for 1 contract. What this means is, if someone enters a contract to buy a call for KTB stock for .25 cents or higher with expiry of 16th October, my contract will get sold. The buyer will then have right to buy my 100 shares of KTB at pre-agreed strike price of 30$ anytime by 16th October. For that right, I get .25*100 = 25 $ commission. This part of selling covered calls for income matters to us, the call sellers.
The action will always be sell to open. It means you are selling a call to open a contract position for the underlying stock.Once, you place the order and it gets filled, then you will see the commission in your account immediately. The contract gets assigned against your existing 100 shares. That’s it!

Learn to sell covered calls to make some extra income on the side on your existing stock positions. Click to Share

Risks when selling covered calls for income

Most of us dividend investors are long on our stocks. Main aim is to hold stocks, get dividends and let compounding do its magic. Selling covered calls for income makes you technically short on the stock. You are hoping for your stock to stay down in price so it doesn’t get called and you get the dividend on the side.
You are literally betting here. Betting on where the price of the stock will be by expiry date. As we all know this can go either way. So, be ready to part with your stock position if your stock reaches the strike price.
Be aware of dividends and earnings dates. Sometimes, if a stock is paying dividends and the current stock price plus dividends will allow the buyer of your call to make even a few cents (even if the current stock price is lower than strike price). Buyer might call your stock and sell those shares. Similarly, earnings announcement leads to some volatility for most stocks. So, its possible your stock crosses the strike price and gets called by the buyer and you loose those shares and some potential extra profit.
Figuring out what stocks to use for selling covered calls for income and at what price and expiry date requires research in itself. You need to make sure the options for a stock have enough volume, open interest and you make a good commission when selling covered call for it. Usually, options near expiry date and with higher difference in current price and strike price will give very less commissions. So, you need to maintain a balance between commission and strike price and expiry dates. Otherwise, you may end up with a call options trade that doesn’t get filled. This is beyond the scope of this post, but you can check more about it here.

Conclusion

My strategy for all stocks I own is to be long on them. However, selling a covered call allows me to make some extra income. Although, I could be selling my shares at strike price. I could be generating tax events. I could potentially end up selling my stocks at less than cost basis generating loss. So, my plan is to sell covered calls for income at very high strike price. Its possible that I will get very less commissions because strike price is high, but I am interested in making sure my stock doesn’t get assigned/called away by call option buyer. I also want to make sure the strike price will always be greater than the cost basis of the stock. Plus, I want to do this in my IRA account to not create any taxable events. Let me know in comments about your thoughts on this.

Disclaimer: The above are just my opinions expressed in the article. I am not your fiduciary or an investment advisor. Do not consider this as investment advice to you. This article is just for informational and entertainment purposes. Options are a risky product so do your due diligence before buying or selling any options.

September 27, 2020 0 comments

Choosing an Online Broker for investing

by Yoda July 18, 2020

Are you ready to start investing? Choosing an online broker is a very important decision before investing. A lot of it depends on your investing style. Some people might be dividend investors, some growth/value investors, some just do index fund investing etc. Based on your requirements, you need to understand what all features various brokers offer and then go about choosing an online broker for yourself.

Factors to consider when choosing an online broker

1. Account Offerings

There are different types of investment accounts. Like retirement accounts (401K’s IRA’s), individual investment account, checking account etc. Not all brokers offer all types of accounts. There are certain types of investments you should buy inside specific tax-sheltered accounts to maximize tax free returns. Most retirement accounts also have limits on amounts you can contribute yearly. Depending on your requirements you might need all types of accounts or maybe just one. But usually for a sound retirement strategy people have both retirement and individual investing accounts.

2. Account features

Not every broker offers all type of features. Ability to reinvest dividends(DRIP) is very useful to keep your investing on auto pilot. Automated Customer Account Transfer(ACATS), helps in transfer of securities from one broker to another. Some brokers do not have the ability to transfer in. This could be much needed if another broker of yours decides to shut down abruptly. You might need ACATS-in ability in your second broker to move stocks. Real time quotes, analysis/research on stocks, ability to place different kind of orders like limit, stop etc. and schedule execution are all also very important features. Ease of moving money from and into accounts. Is the broker fast enough to move money? Since many times you will only get a buying opportunity for a day or two and you need the money then to buy stocks.

3. Fees

This includes fee to buy or sell an individual stock. Any fees to start the brokerage account? Annual fee on the account? (this should not even exist). Any minimum balance requirements to maintain? Some brokers have different fees to buy individual stocks and different fee for ETF’s/index funds etc. So, make sure when you make your decision you do know about the fee charges. Also, a reminder free is not always the best route to go. You might be compromising on some other features in exchange of no commissions. More on this later.

4. User Interface

This includes the website UI as well as a mobile application UI. Ability to look at charts, create watch lists, create stock screens is important. Availability of educational resources which you can read through in your time. Security settings and brokers emphasis on keeping data safe. Ease of access to historic records/statements for tax purposes, to calculate or look at how you are performing is helpful to track your progress over time.

5. Research Reports

Many online brokers offer free access to research reports from popular analysts. It allows you to view their detailed commentary on a stock you are researching. Their star ratings, information on moats, historical data, ratios etc. This information can definitely help you in your research before buying a stock. So do make sure this is also a factor when you are choosing an online broker.

Based on above factors, best online brokers are:

1. Schwab

Key highlights:

Now commission FREE (0$ to buy/sell stocks and ETF’s) starting 7th October 2019
$0 – $76 for index & mutual funds only to buy, no fee to sell (this only applies to non-Schwab funds, which makes sense since they want to encourage you to buy more of Schwab owned funds).
For non-Schwab ETF’s fees may be $0-$20 depending on the ETF, but the most popular ones you want to buy are free!
Schwab ETF’s & index funds both cost 0$ to buy or sell.
$0 annual fee on most individual accounts, $0 – 1000$ minimum balance, check more here. I would suggest the standard Schwab one account for individual account and their standard IRA accounts which come with 0$ minimums.
Free access to research reports from Morningstar, CFRA, Credit Suisse, Argus & Reuters.
Their checking account ATM card doesn’t charge you any fee to use at ATM’s around the world!

This brokerage has been around since 1975. Their customer service is top notch. Not only can you ask questions about your account, you can even get advisors to talk to, ask about transferring your brokerage from other places etc. They are helpful on every doubt you have. Their chat support is phenomenal. I haven’t had to call in at all even once! Other features I mentioned above are also offered by Schwab. Before 1975, trading fees were fixed regardless of the size of your trade. The government abolished this practice in May 1975. Schwab was the pioneer to introduce discounted trades at that time. The company has a history of making decisions and introducing changes in favor of the individual investor. Schwab was one of the best online brokers in 1990’s and continues to be today. Currently they also have a 100$ sign up bonus to sign up for new account. Also a fair warning, Schwab usually does a hard credit pull if you open an account with them for first time ever(without any prior relationship / account). But I think it’s totally worth it.

Good For:

People who want a person on other end to ask any questions. Really good customer service.
Those who want to do DRIP investing. Set your dividends to DRIP and forget about them.
People who like to buy index funds, as Schwab has cheap expense ratio index funds.
The checking account comes with a debit card that doesn’t have any fees when used abroad anywhere!
People who like to visit a physical branch once every while. Schwab has a big network of physical locations where you can walk in and chat with advisors, make deposits have some snacks, all on the house.

Shortfalls:

Although Schwab provides ACH in and out functionality and a checking account, it holds deposits into any account for 2-4 business days. This kind of holds your funds for some time if you want to move it to another account within Schwab or outside.
It is still a for profit publicly traded company that has other ways to make money irrespective of fee-free trades it provides.

2. Vanguard

Key Highlights:

$0-$25 to buy or sell stocks/etf’s depending on account size (Not free yet).
$0 to buy or sell Vanguard ETF’s and mutual funds plus some third party etf’s.
Some Vanguard mutual funds have 1-3K USD minimum requirements to start buying.
Incentive aligned with average investor. Not a for profit company.
Free analyst reports from Argus and Market Grader.

Before Oct 2019, I used to have Robinhood as my second choice broker. Mostly because of their fee free stock trades. I used to recommend them over other big brokers for most beginners in investing. However starting 2019 October, most big & best online brokers decided to offer fee free trades. So Robinhood is now out of the picture. In comes Vanguard. This company has also been around since 1975. I mentioned above in shortfalls of Schwab that they are still a for profit, public company and need to generate profits. Vanguard is a company that is held by investors who invest in Vanguard funds. So there is no incentive to generate any profits. You can read more about their structure here. J L Collins also wrote a very nice article on why he trusts Vanguard with his money. Vanguard’s ownership structure allows it to operate at cost and charge minimum expense ratios to make sure it covers expenses. This is what separates Vanguard from rest and makes them one of the best online brokers.

Good For:

People who want to invest in index and mutual funds only. Vanguard’s funds are the most famous and have some of the least expense ratios.
Vanguard is a big proponent of long term investing in index funds. So their platform is really focused on dissuading people from trading in individual stocks. Their fee structure, research, basic guides are all focused on long term investing. In my opinion this is a big positive for us everyday retail investors.

Shortfalls:

Not the best online broker if you buy individual stocks.
Their mobile app/web application is very basic. No frills, no big features. Good to check balances and place a trade. That’s about it. Don’t expect Vanguard to provide latest features you see elsewhere in other broker mobile apps.

How to go about choosing an online broker to start investing and our suggestions! Click to Share

Pitfalls about commission free trading

With most of the best online brokers offering commission free trading, there are things to be aware of. Commission free model encourages trading. It removes a psychological block in your mind and encourages you to be more open to sell/buy stocks based on daily stock prices. A lot of my friends who started with Robinhood app, buy and sell daily because they feel there are no problems since the fee is 0$. They are inadvertently day trading/short term trading. Selling as soon as it goes up a bit. Selling even if it goes into huge loses etc. Not realizing the enormous tax liabilities, they create in process. This is just a warning, you can obviously invest any which way you want. All I am saying is you need to have an approach and be disciplined when investing.

Another problem for brokers is they still need to make money. They are not in charity business after all. Most brokers like Schwab, Fidelity etc. already have banking divisions. They make money using the interest rate spreads on the cash in your trading account. You get very low interest on the cash you save with them for investing. They lend it to people at higher rate, pocketing the difference. Vanguard is a rare anomaly here as it moves all of the cash in your trading account to a money market fund that gives you market interest rate while it waits to be invested. Brokers also have an incentive to make money on spread between bid and ask prices for any order you place. When you place an order they might direct your order flow to high speed frequency traders and get some commission from them. This might result in you not getting the best price for your order. These might not be a huge concern if you do not trade often and invest for long term. Just be aware that brokers still have to make money and they are probably making you pay one way or another.

In Conclusion

Apart from these 2 picks, there are a few others who always feature in most lists of best online brokers I found during my research. However, I haven’t used them so I cannot write helpful descriptions on them. If you would like you can also look to Fidelity (for best retirement planning/investing) TD Ameritrade (for good data and options platform). Another pro-tip is a lot of big brokers allow for fee free ACATS-IN transfer of securities (they will even reimburse fees charged by your existing broker to ACATS-in to their service). Some also give you a fixed number or duration during which you can trade for commission free. They might even give you bonus money to move your account. You can always ask check with your broker if they offer any commission free trades if your account balance is above certain limits.

At the end of the day, choosing an online broker comes to your requirements, investment style & philosophy etc. If you like the customer service and more options available to you, go with either Schwab/Vanguard. Schwab has more features and research if you would like to venture into individual stock investing. Vanguard is the best solution to keep everything on auto pilot and investing in index funds without applying much brains. You can even have both accounts. No harm in that. I do! My aim was to just elucidate some factors on which you can base your decisions.

July 18, 2020 0 comments

Dividend Investing

Quarterly Dividend Update: Q2 2020

by Yoda July 5, 2020

Dividend Investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics and dividend safety. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. In contrast with Q1, Q2 2020 has been great for investors. From the bottom in March, the indexes almost rebounded back to their pre-Covid levels. I cannot and won’t even try to figure out what happens next. All I am planning to do is to keep buying stocks and ETF’s. Here is my Q2 2020 quarterly dividend update:

Total: $727 for Q2 2020 (up 40% from Q2 2019 & up 2% from Q1 2020 )

Here is a graphical view of the same data:

Check out my and download/make your own dividend tracking sheet here and create awesome graphs as above for free.

My Buys in Q2 2020

So, the volatile market has offered some great opportunities! Frankly speaking I was not a 100% prepared to think about what to buy. I definitely had some stocks in my watch list, but I had not looked at them in a long time. Plus I got busy with a lot of work and so did not get much time to research any new stocks. So, at first I decided to add to my existing open positions which I thought were at attractive valuation. I also added a new stock to my portfolio.

Added to position in A.O. Smith (AOS) in 30’s and low 40’s. They have had issues with revenue drop off in China since 2019. However, I like the safety of their dividend and their expansion in India. Eventually, they should get back to growth in revenues.
Added to my Cisco Systems Inc. (CSCO) position. You can read more about my complete research on Cisco Systems here.
I added to my position in Kontoor Brands (KTB). This is one of few stocks that is still around its March lows. They ended up having to cut their dividend. Because of this a lot of dividend based funds had to force sell this stock putting pressure on their stock price. This is still a long term hold for me. Full research here.
Started a position in Monmouth Real Estate Corp. (MNR). This is a REIT that is focused on industrial properties. They only have investment grade clients like FDX, AMZN, KO, HD, RTX etc. They even collected 98-99% rent during the last 3 months. Bought some at starting yields of 6.9 % and then added a bit more during the quarter.
I also added to my position in Starbucks (SBUX) in my Roth after selling some of my position form a taxable account.
Added to my position in Wells Fargo (WFC) in 20 & 30’s.
I used to have a small position outside my 401K in VTI before the crisis. However, last 3 months saw stocks go down so fast and come back up very fast. Working a full time job and researching what individual stocks to buy was looking difficult. I was just not finding enough time. So, I added to my existing positions which I had looked at before and opened new positions in MNR and HON only. But, throughout the crisis, I added big to my VTI position. No need to think/research much before adding to it. I am planning to continue adding to it every month. Since it will become a big part in my portfolio with all the buys, I also plan to add it to my statistics for every quarter.

I am projecting an increase to 2900$ in forward annual dividends as compared to 2103$ I made in 2019!

My Sells in Q2 2020

I sold my Starbucks SBUX position in taxable account and bought it in my Roth.
Sold my small CSCO position in taxable account and bought some in my Roth.
I had a small position in Trow Price (TROW). I decided to sell that from my taxable account and will focus more on my Blackrock Inc. (BLK) position.

I did have Kontoor Brands (KTB) and Disney(DIS) cut dividends in Q2 2020 to preserve cash. Both business were challenged by the virus and seems like a relevant action to take. I decided to not cut them in my portfolio as I still think they will bounce back from this over the long term.

Thoughts about Q3 2020

Upcoming quarter will have Q2 earnings from most companies in my portfolio. We will get to know more impact of the virus on companies. In the last week, we have had a steep rise in cases in many US states. Some states have hit a pause on reopening and some brought few restrictions back. It will be interesting to see if states want to close economies again or just carry on and not go back to the lock down people experienced in last 3 months. I know one thing for sure: I will keep buying stocks and ETF’s during this quarter.

Check out my complete dividend portfolio here.

Click this link for my 2019 Annual dividend income update.

Dividends stocks do come with some risk, but with precautions you can avoid the risky one’s and choose the best dividend paying/growing stocks for your portfolio. I prepared a guide where I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. Also find out how to get free access to Morningstar, Value Line, workaround paywall behind popular news sites like Seeking Alpha etc. Consider signing up for free instant access to the pdf version of the insights into dividend investing.

July 5, 2020 0 comments

Dividend Investing

Quarterly Dividend Update: Q1 2020

by Yoda March 31, 2020

Dividend Investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics and dividend safety. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. To say Q1 2020 has been volatile is an understatement. Coronavirus has practically brought the world economy to a grinding halt. My heart goes out to all victims of this tragedy and urge every one to practice social distancing. While it has caused a lot of destruction, it also brought down valuations of well managed dividend paying companies to attractive levels. Here is my Q1 2020 quarterly dividend update:

Total: $706.16 for Q1 2020 (up 70% from Q1 2019 & up 20% from Q4 2019 )

Here is a graphical view of the same data:

Check out my and download/make your own dividend tracking sheet here and create awesome graphs as above for free.

My Buys in Q1 2020

Added to my position in Abbvie Inc. (ABBV) in 70’s and then again in 60’s. I like their ability to generate cash flows. Allergan acquisition will go through later this year which will add to their earnings and also help them insulate with the upcoming patent expiration for Humira.
Added to position in A.O. Smith (AOS) in 30’s and low 40’s. They have had issues with revenue drop off in China since 2019. However, I like the safety of their dividend and their expansion in India. Eventually, they should get back to growth in revenues.
Added to my Cisco Systems Inc. (CSCO) position. You can read more about my complete research on Cisco Systems here.
I also added to my position in Disney (DIS). They will definitely have an impact from the shutdown. However, I believe in the long term, Disney will manage to bounce back.
I added to my position in Kontoor Brands (KTB). Full research here.
Bought more Pfizer Inc. (PFE) stock. Upcoming spin off should help them focus more on growth and dividend should also be raised faster with growth.
I also added to my position in Starbucks (SBUX). Crisis will impact revenues for Q1 2020 and Q2 for sure. But, they have been growing their dividend at a very fast rate and should bounce back. They even have a better shot at grabbing market share from local coffee shops around the world, since they will be able to bounce back much faster.
I also bought more Wells Fargo (WFC) in 30’s & 40’s. Asset cap should get removed some time this year and new CEO should help clean the image of the bank and move past their crisis.
REIT’s got hammered during this crisis. This gave me an opportunity to grab Realty Income (O) and Store Capital (STOR) at really cheap prices.
The new stock I added to was Honeywell International (HON). I like their dividend safety & diversity in revenues. They have their hands in aerospace, healthcare, construction technologies, energy etc. A bigger article on this coming up soon.
For full disclosure, I also bought some VTI. It was at 3% yield which might go down a bit in Q2. However I do not include this in any statistics shown in such updates.

I am projecting a increase to 2947$ in forward annual dividends as compared to 2103$ I made in 2019! I had not expected to be growing dividends so fast in 2020.

My Sells in Q1 2020

My big sell this quarter was General Mills (GIS). It was in my taxable account and I wanted to free up some cash to move to my Roth account and buy better dividend stocks in there.
Sold some of my position in National Instruments (NATI) from my taxable account. I just sell some of this position when it becomes too large, to reduce risk of too much of being in 1 stock.

Thoughts about Q2 2020

Upcoming quarter will be very interesting. Most companies will speak about impact of the crisis on their numbers. I am thinking about adding more to positions in PEP and HON for this quarter. Another REIT I am looking at is Monmouth Real Estate Corp. (MNR). Its a REIT that focuses on renting out big industrial properties to investment grade clients. Like, Amazon, Fedex, Coca Cola, IIPR etc. But I am yet to do research on it. I am also going to be looking at dividend cut announcements.So far, many companies have announced them and none of my companies that have cut or suspended their dividends. I am concerned about XOM and STOR, but I have confidence in them bouncing back in long term.

Check out my complete dividend portfolio here.

Click this link for my 2019 Annual dividend income update.

March 31, 2020 2 comments

Dividend Investing

Annual Dividend Income Update 2019

by Yoda January 26, 2020

Dividend investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics, dividend safety & future prospects. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. In Q4 of 2019 I was able to add to my CSCO & PFE positions. Here is my dividend income for all of 2019:

Total: $2103.36 in dividend income for 2019 (up 37% from 2018 )

Here is a graphical view of the same data:

Check out my and download/make your own dividend tracking sheet here and create awesome graphs as above for free.

Here is how much percentage of the dividend income is coming from each of the 26 stocks in my portfolio:

My Buys in Q4 2019

I added to my Cisco Systems (CSCO) position in Q4 2019 quarter. Cisco had fallen more than 20% from its highs. They reported a stellar fiscal year 2019. However, they gave weak guidance for fiscal 2020. They expected slowness due to trade war and Brexit uncertainty. CSCO seems pretty good by all dividend metrics. Great payout ratio and good cash position. Cisco is midst of transitioning from a purely hardware focused business to subscription recurring revenue business. They are getting into business of selling chips with Silicon One, getting into security and application analytics software. I like the direction and actions company is taking to future proof itself. Here is a detailed analysis on Cisco Systems and their dividend metrics.
I also doubled my position in Pfizer. Pfizer had announcements related to spin off plans this quarter. This has lead the stock to tumble to where I originally bought its stock. I think Pfizer would make sure that the spin off their expired patents drugs plus new Pfizer will give same in dividend income before spin off. However, I am yet to decide if I want to keep or sell the spin off after it goes through.

I would expect my Q1 2020 quarterly dividend income to go up with help of these buys .

My Sells in this quarter

None! I would like to see each quarter as this one in terms of selling.

Check out my complete dividend portfolio here.

This is how the market value is spread across various industries in my portfolio:

Performance for the year 2019

I was able to beat S&P 500 across my roth and traditional brokerage accounts. I did have 3 non dividend income paying stocks that also helped me to beat S&P in those accounts. My wife also started a roth account in 2019. We bought dividend income stocks in that too. Since we started it in middle of the year, I do not have concrete performance data on that. But I will track it in 2020.

Plans for 2020

Buy more dividend growth stocks in our roth accounts. Currently, I get 45% dividends from 3 stocks in my portfolio. I will try to increase my existing positions in some holdings. I am looking at $AOS and $WFC in the near term to add to.

January 26, 2020 2 comments

Dividend Investing

Cisco Systems : Analysis of CSCO dividend

by Yoda November 26, 2019

Cisco Systems Inc. (CSCO) is one of the largest networking hardware and software provider in the world. It also started giving out dividends in 2011. I wanted to analyze the safety of the CSCO dividend and look at its future prospects. We will do an overview of what Cisco Systems does and then look at its financials.

Overview of Cisco Systems Inc.

Cisco Systems Inc. (CSCO) is large cap American multinational company that focuses on building hardware/software related to computer networking, security, applications & collaboration in cloud and on-premise environments. Think of them as someone in business of building infrastructure to help world of internet function & grow. They mostly build these tools and services for enterprise customers. You might go and buy a Wi-Fi router or modem to allow you to tap into internet connection provided by your ISP. Most big business need to do this but, at a much larger scale. Most companies have their own data center. They usually setup their own private internet which employees work on. This needs to be done across multiple sites across multiple countries. They need to make sure connection is secure and only legitimate employees can connect. Employees use various devices. Companies need to make sure employees can connect using these devices from workplace or while travelling etc. The complexity involved with so many factors is huge. Cisco essentially provides their own proprietary hardware/software to help business manage their users, devices etc. connect to their own network and the global internet in a secure manner.

CSCO in Cloud Era

However, times are changing. Cloud is the new jargon. Nearly every big company on earth is looking at implementing or has implemented some or the other cloud-based applications/solutions. Most big cloud providers like Amazon, Google & Microsoft do not use Cisco switches or hardware in their data centers. They prefer to use white box(open source) cheaper alternatives to do networking. Companies today are preferring to outsource infrastructure/networking/storage related tasks to these cloud providers. This gives them even more money/effort to focus on their core competency. So, this can represent a challenge to Cisco for future growth.

Software Defined Networking (SDN)

What is making it possible for public cloud providers to use white box hardware instead of Cisco’s hardware? A new software based approach to manage networks. Traditionally the data plane (responsible for moving data across hardware) & control plane (responsible for controlling flow) used to reside within the hardware itself. Changes in config had to be done physically at the device and by a human. However SDN separates the logic from data flow. You can now make any changes using software. The actual hardware switch/router will act on them. So, this leads to easy reconfiguration of hardware using software. Now the hardware can be by any company and the software is what matters. This is a big shift in networking industry.

courtesy researchgate (click/hover to remove caption)

I work on the IT programming side for a big company. I can safely say that not all applications are going to be moving to cloud anytime soon. Hence, you have a situation where 15-20% of the applications are in a public cloud, some in private cloud and rest are still on their own on-premise data centers. Moreover, cloud applications are also distributed among various providers like AWS, Azure, Google etc. I can already see we work with AWS, Azure, Oracle cloud products on top of managing our own data center. We now have requirements to make sure one application residing in one cloud can communicate with some other application in our private data center or some other cloud. This type of setup is known as a multi-cloud environment.

An Exciting Opportunity

Imagine the amount of challenges this will have across multiple applications/platforms/users for networking and providing a seamless user experience. Cisco is already positioning itself as the leader in this multi-cloud space. They are now creating more software to manage networking and communications between multiple cloud environments. Here are some examples of their products:

Domain	Product	Competitor
Infrastructure-switches	Catalyst 9000 switches with Cisco DNA software	Arista Networks, Huawei, HP
Infrastructure-routing	SD-WAN with Cisco DNA	Juniper, Riverbed, Alcatel Lucent, Fortinet
Infrastructure-wireless	Catalyst and Meraki based wireless access points	HP, Ubiquiti, Extreme Networks
Application-collaboration	Webex, Cisco telepresence	Microsoft, Zoom, Slack
Application-analytics	AppDynamics	New Relic, Dynatrace
Security-endpoint	AMP, Any connect VPN, Umbrella	Fire Eye, Citrix, Zscaler, Fortinet
Security-cloud	Cloud email security, stealth watch cloud etc.	Palo Alto Networks, Fire Eye, Symantec

I am sure I have probably missed many other Cisco applications in the above table. But Cisco has some or the other cloud feature for each of the above apps/hardware.

They can either be found on app stores of biggest cloud providers or can be used as SaaS solution from Cisco themselves. Cisco is aggressively converting many of their hardware contracts by providing some cloud software to manage the underlying hardware. Again, this has been possible after moving logic and hardware into different layers in first diagram. Software to manage networking hardware and security is becoming more important. Then bundling this as subscription-based solution instead of customers buying the hardware & paying a one-time fee. Historically, Cisco has been a bit cyclical and there is some drop off revenues after every few years. But by moving into subscription style sales, they will address this in few years.

Cisco Systems seems to be on right path

Cisco provides application/hardware over most networking sub-categories. They do not have to be the best at everything or even one thing. Most of their products are in top 3-4 in every category. That is all they need. For any business looking for their networking needs for multi-cloud, Cisco can probably cater to everything. Provide support for everything under one roof. That is a big usp for most of their customers. Being in similar position at my job, I realize support is very important. If one company can provide me support for multiple solutions, I would like that instead of chasing customer support for 2-3 different vendors. Its not just me saying this, check out a post from reddit where multiple system and network admins talk how important support is in big companies:

Point is, it seems like Cisco is again trying to become one stop shop for everything you would need to manage multi-cloud environment at any enterprise. Cloud is immense opportunity to grow, has lots of challenges and Cisco Systems seems to be well equipped in all fronts.

A look at what cisco systems does and how it makes money Click to Share

Cisco Silicon One

On 12th Dec 2019, Cisco Systems announced it was getting into the business of selling chips. Historically, Cisco has been making and designing its own chips that go into its routers and switches. However, only way to get them was by using Cisco’s own hardware. As I mentioned above with increasing adoption of cloud, Cisco had not been able to sell its hardware to Google, Microsoft, Amazon or any big cloud provider. However, white box chips/hardware needs a lot of R&D and investment. Cisco Systems is now starting to sell these chips to any customer who wants them separately. They will do the R&D and make chips that will work in any white box router, switch or other networking hardware and design it to be more efficient. This move really helps them to start selling to these big cloud providers I mentioned above. Its a completely new business line for Cisco Systems and brings them in competition with Broadcom, Juniper which used to have their chips in this white box hardware so far.

Financials (Cisco Systems)

Here is a financial snapshot from Valueline with last 15 year results:

courtesy ValueLine (click/hover to remove caption)

Revenues

It is important to note that CSCO’s fiscal year lasts from Aug-July of every year. Keeping that in mind, in recently concluded Year 2019 in July, CSCO made about 51.9 billion in revenues. This was 5% growth as compared to fiscal 2018. Services grew by 2% and products revenue by about 6%.

If we look at revenues by different segments Cisco operates in:

Security is going to be massive in the multi-cloud world. So Cisco growing 16% in that and another 15% in cloud applications segment is great to see. Switching and Router products come under the infrastructure platforms which also grew by 7%. This segment is most challenged by SDN and good to see that Cisco grew revenues in this segment. I think this is where they are probably bundling some controller UI or software to manage routers and switches. So Cisco is already on the offensive to make sure they remain relevant in multi-cloud world.

However, in Q1 2020 ending in Oct 2019, CSCO only had a 1% increase in revenue and guided down to -4% revenues in Q2 2020. They attributed this to the weak macro environment. With Brexit and trade war between US and China still unresolved, its possible many of its customers are holding back on investing in networking equipment. Additionally, most telecoms are currently only using 4g equipment to demo 5g networks. So, less revenue on that side as well. Another reason might also be them converting one-time payments customers made, into deferred revenue subscription model. So, upfront revenue would be less as compared to previous years. But, it will be realized over the life of the contracts (multiple years).

Dividend Yield & Safety of CSCO Dividend

Dividend per share as of Nov 2019	$1.4
Price as of Nov 22 2019	$44.85
Dividend Yield as of Nov 22 2019	3.12%
EPS as of Jul 2019	$2.61
EPS Payout Ratio as of Jul 2019	.5363 or 53%
Cash flow per share as of Jul 2019	14.922/4.273 billions = 3.49
Cash flow Payout ratio as of Jul 2019	(1.4/3.49)=40.11%
9-year DGR	23.02%
5-year DGR	13.146%
Latest dividend increase in 2019	6.06%

Cisco Systems pays a 1.4$ dividend annually at 3.12% yield as of Nov 2019. Moreover, the payout ratio based on eps and free cash flow both seem relatively safe as compared to other tech companies. I think Cisco has some wiggle room during this period of transiting their business to cloud and subscription base. Looking at the latest dividend increase of 6% and the 9-year average of 23%, it looks like CSCO has tempered down their raises a bit. Although, I am still expecting mid to high single digit raises going forward. 3% starting yield with 6-9% yearly increases can still help return about 10% return on dividend income every year which is great!

Ability to Service Debt and continue paying dividend

Total Debt at end of fiscal 2019	$24666 million
Total shareholders equity at end of fiscal 2019	$33571 million
Debt/Equity	24666/33571 = .734 or 73%
Operating Income as of end of fiscal 2019	$14219 million
Annual Interest payments	$859 million
Interest Coverage ratio	14219/859=16.55

Cisco’s competitors have a lower d/e ratio. JNPR is at 40, ANET is at 3% & HPE is at 59%. Cisco is a highly acquisitive company. Here is a list of about 200+ acquisitions they have made since 1984. I think they’re just being very opportunistic in such a low interest rate environment. Making smart acquisitions and with a huge history, making those work. Having a interest coverage ratio of 16 means they have enough earnings to pay interests and service their debt. Cisco generates a lot of cash even after dividends and can pay debt down if it wanted to within 3 years. Thus, having debt/equity ratio a bit on the high side shouldn’t be much of a problem for a cash cow like Cisco Systems.

Trends

There is a very popular reversion to mean theory. It says that most stock metrics tend to hover around the mean of its lifetime average. So if the PE of a stock increases to very over-valued, over time it will fall back to its mean PE ratio. Hence, I also like to look at average PE ratio and dividend yield of stock I am looking to purchase as compared to its historical values. This plays a small part in my decision-making process. Cisco only started paying dividends 8 years back in 2011. Using Macrotrends, we can see the current yield of 3.12% is higher than the overall average yield of 2.67% over 9 years.

The fwd pe ratio as of Nov 2019 is 13.77. Average annual PE over last 11 years is about 13.37. Ignore the spike in 2018, its from tax reforms and them paying taxes to bring cash back into USA.

As you can see both pe ratio and dividend yield seem higher or close to the average in last 9-11 years.

Risks

Cloud

As mentioned earlier, Cisco faces threat to its core hardware business which made more than 50% of it revenue in 2019. With more enterprises looking to move applications to cloud to reduce operational costs, less Cisco hardware gets purchased. But with Cisco trying to move to more subscription based business and getting into chip selling business, I think they are moving in right direction. Move to cloud is definitely happening but it will take time and till then we will be in a multi cloud environment for which Cisco seems well prepared.

Trade War

Cisco’s sales in China fell a whopping 26% from the 2018. Just as US is trying to eliminate Huawei equipment from its upcoming 5G network, Chinese government is making sure it avoids equipment from US based vendors. Although Chinese sales only comprise of about 3% of overall revenues for Cisco. However this could be a long term trend. Secondly impact of tariffs on Chinese goods also increases price of Cisco hardware coming into the US. So at least a resolution in trade war could help Cisco on one of these issues.

In Conclusion

Cisco in its most recent fiscal Q1 2020 guided revenues to be down in its fiscal Q2 by about 3-5%. They attribute it to their slowdown of sales in China, general macroeconomic environment and less investment in buying products by cable & telecom companies. With 5g standards still being finalized, slowdown in cable and telecom industries can be explained. Trade war can explain slowdown in sales in China and rest of the world as many customers seem to be delaying investments in technology improvements. They want to wait and watch because of the uncertainties. Eventually, 5g will be here. Companies won’t be able to keep delaying investments in upgrading their networking and cloud infrastructures. ANET & JNPR have both given lower guidance between SEP-NOV 2019. So, it does look like this is a broad industry issue and not just CSCO doing something wrong. The macro economic weakness may go on for a few quarters. But, Cisco Systems CEO Robbins did mention they expect fiscal Q1 2021 to be better.

In the meanwhile, we get a cash cow paying 3+% safe yield and maybe even growing it mid-high single digits every year. This could be a good time to at least start a position for the long term in a tech stock that pays dividends. I am long CSCO.

Please check out my complete dividend portfolio and analysis of other dividend stocks.

I am by no means an expert on networking technology. So, I will also love to hear your opinion on the analysis in the comments below. Is Cisco Systems on the right path on the way to Cloud future?

References:

SDN Explaination

Cisco investor relations

Forbes article on CSCO

Disclaimer: The above are just my opinions expressed in the article. I am not your fiduciary or an investment advisor. Do not consider this as investment advice to you. This article is just for informational and entertainment purposes. Also please note that this article was published on Nov 26th. Many numbers would have changed when you are reading it.

November 26, 2019 3 comments

Dividend Investing

Quarterly Dividend Update: Q3 2019

by Yoda October 1, 2019

Dividend Investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics and dividend safety. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. This quarter I was able to double positions in 2-3 of my holdings. Here is my Q3 2019 quarterly dividend update and comparison with Q3 2018.

Total: $585.53 for Q3 2019 (up 44% from Q3 2018 & up 13% from Q2 2019 )

Here is a graphical view of the same data:

Check out my and download/make your own dividend tracking sheet here and create awesome graphs as above for free.

My Buys in Q3 2019

I received some shares of Kontoor Brands (KTB) from the spin off of VF Corp (VFC) last quarter. Shares of KTB went down significantly after starting trading. Most likely due to it being small-mid cap company post spin off. Many funds that held VFC probably were forced to sell KTB due to its market cap and fund rules. I thought of it as a good long term opportunity. They are in a very boring jeans segment in the market which has stable sales. Plus the 7+% yield was a bonus. I bought some more during Q3 2019. I did more analysis on it here.
Doubled my position in Wells Fargo (WFC) in Q3 2019. This quarter had lots of talk about rates heading either direction. Rates were even cut for the first time in last 10 years. And then cut again. This created a lot of volatility in bank stocks. I believe that the worst from their scandals is behind WFC now. The fed enforcing a limit to their balance sheet in the meanwhile has really helped them to focus more on good quality loans to generate income. Towards the end of the quarter WFC finally managed to assign a new CEO. New CEO probably has a lot of house cleaning to do, but I think this is definitely a step in positive direction.
I bought some more of Altria (MO) in Q3 2019. With all the negative news around vaping and ban on vape devices from various state and international governments, MO’s price has fallen down a lot. Although I think MO management has a lot of experience with moving through regulatory hurdles. I think MO still has a pretty good chance of working with the governments to re-introduce vape devices in a very regulated manner. WSJ had a couple of interesting articles where they mentioned how JUUL took off their flavored pods form retail stores and ever since then we have had this health crisis. It also talked about how JUUL is already in process of making applications for May 2020 with the FDA to get their devices approved for sale. The dividend in the meanwhile appears safe.
I also doubled my position in Pfizer. Pfizer had announcements related to spin off plans this quarter. This has lead the stock to tumble to where I originally bought its stock.

I would expect my Q4 2019 quarterly dividend update to reflect higher dividends with the help of these buys.

My Sells in Q3 2019

Sold some of my position in National Instruments(NATI) from my taxable account. I just sell some of this position when it becomes too large, to reduce risk of too much of being in 1 stock.

Check out my complete dividend portfolio here.

Click this link for my Q2 2019 dividend update.

October 1, 2019 0 comments

Dividend Investing

All about making a living off dividends

by Yoda July 12, 2019

Passive income has become a big topic now a days. As people become more busy and stressed, they are trying to search for alternate sources of income. Something they can earn passively. Making a living off dividends is one of the best ways to take part in investing and growing your wealth. Be warned this is not a get rich easy scheme.

Living off dividends passive income strategy requires you to put a lot of time and effort over a long term to be successful. I wanted to break down some myths about dividend investing with facts and explain how you can be successful in this strategy.

Let’s get started!

What is a Dividend?

When any public company makes a profit any year, it needs to decide what to do with its profit. This is usually called the question of capital allocation. A company can:

Invest back in its business in R&D, in operations to grow more and make more profit next year.
Invest in acquiring a new company and boost its return on invested capital.
Return capital to shareholders in form of buying back stocks thereby boosting EPS(Earnings Per Share) or by giving dividends.

A company need not only do 1 or 2 of the above-mentioned things. They can employ all 3 strategies every year. That third point above is where dividend investing comes into picture. Dividend is essentially your share of profit in a company in which you own stock. When you purchase a stock of a company you are part owner in that company. You have the right to vote for the board of directors in the company. By voting them in, you expect them to make sensible decisions on the above 3 criteria. So, the executives in the company every year/quarter announce if they will have a dividend or not. They announce the following dates too which are important to know when investing in such stocks:

Record Date	Date on which the broker will check to look who all own the stock that day to calculate how much dividend owner of stock on record will get.
Ex-Dividend Date	Once you buy a stock it takes couple of days for the transaction to settle and for you to be a shareholder in the company. So, this is the date before which you need to buy the stock in your brokerage, for you to show up as the owner of the said stock by record date. This is usually 1-3 days before record date.
Payment date	That’s the date on which you will get the payment of dividends in cash/stock in your account as per the company’s policy. Mostly its cash and you can re-invest it automatically or use it for buying other stocks.

Why Dividends?

Dividends are actual income (Passive Income)

No doubt capital gains via price appreciation of a stock are good. However, you need to sell the stock to realize the gain. With dividends you get a part in the profits of the company without selling the stock. You can choose to reinvest it again to get more dividends next year. Over long term, you will see your dividends compound and you would see yourself living off dividend income alone. Again mind you this can easily take from 10-25 years depending on how much you invest every year. Nothing in life is easy and dividend investing needs time and effort on your side, but its definitely possible. I know a few people already living off dividends in retirement.

Dividends force executives to be more sensible

Importance of this cannot be understated. Sometimes management makes foolish decisions to acquire companies out of their circle of competence. They spend a lot of money and years down the line, we don’t see any returns at all. A lot of such acquisitions must be written off in balance sheet in form of goodwill impairment. Having a dividend policy forces the management to make more sensible/disciplined decisions. This leads to better returns for you as an owner in the company.

Risk Management from volatility

Dividend stocks are a way to lower the risks arising from volatility in daily/monthly/yearly stock movements. Since the owners of dividend stocks get their dividends as income every year, they are more open to not selling the stock in tough times and giving the company a chance to tackle problems at hand. Many companies that have an established dividend policy also have a large base of owners who are looking for those dividends to come in like clock work and they are more forgiving of the performance of the overall appreciation of stock.

Dividends taxed favorably

Dividends are taxed favorably under the current tax scheme. You pay lesser taxes for qualified dividends as compared to your taxes on income.

Dividends Drive overall Stock returns too!

There is a lot of data and analysis done that proves companies that pay dividends outperform companies that don’t pay dividends over long periods of time. Look at this chart below for a comparison between the index of dividend stocks vs non div paying stocks (courtesy Hartford Funds):

As you can see in the last 4-5 decades dividend growth stocks have outperformed the whole market. Check out some articles from Hartford Funds and Raymond James which go on to give way more data on how over the long term, dividend stocks outperform non dividend paying stocks.

Dividend Yield Investing vs Dividend Growth Investing

Dividend yield is basically ratio of total dividends given out per year by the price of the stock. For e.g. if AT&T (T) pays out 2.00$ every year and its current price is 31.62$ then the yield is 6.32%. So, it might make sense to buy the stocks yielding the highest to get more income. However, do not go chasing the yield. Usually stocks with 10-20% dividends are highly risky and prone to getting dividends cut soon. Dividend Yield Investing (DYI) focuses on having more income from your stocks. Usually people who are close to retiring and have a more conservative approach prefer dividend yield investing. Usually if you look at high yield companies they do not increase the dividends by huge amount every year. In case of AT&T its usually 1-2% per year.

Total Return= Dividend starting Yield (6.32%) + increase of 2% in dividend payout every year + capital appreciation

Meaning you get 6.32% return every year using dividends alone. I haven’t even included any stock price appreciation yet in the above calculation. Neither did i include dividend raises, nor did you sell any stocks to get this money in your pocket. See the magic of dividends?

People who are younger and have much more time to compound money usually should do Dividend Growth Investing(DGI). This is where you forgo the initial high dividend yield in favor of higher dividend increases every year. E.g. Starbucks (SBUX) yield of about 2.79% at price of 51.62$ as of 15-JUL 2018. However, if you notice the annual rate of increase of dividend over the last 5 years, its almost 20-25% annually!

Total Return = Dividend starting Yield (2.16%) + 20% increase in dividends every year + capital appreciation

Just as Einstein mentioned, compounding is the 8^th wonder of world. Real magic happens if you re-invest these dividends to buy more of the same stocks. Since more stocks next year would result in even more dividends. This is where dividend growth investing also leaves dividend yield investing behind. If you continue to Dividend Re-Investment Program (DRIP) and reinvest dividends its easily possible you will have a much higher yield in 8-10 years for your DGI stock as compared to the DYI stock.

Let’s look at Starbucks and AT&T stocks as of 15^th Jul 2018:

You can see the starting and ending yield on cost in these 2 investments above. Over time a DGI stock usually performs and returns way more money. However, it obviously comes with its risk. At&T has many years of history in successfully paying dividends. Starbucks has only 5-6 years of history paying dividends. But there are many indicators and fundamentals to look for when choosing such stocks.

Case against Dividend Investing

Dividend payout = Lower share price

This is true, every time a distribution gets paid out the price of the stock goes down by equivalent value on the payout date. People argue what’s the point of getting dividends. However, that’s just being very short term in thinking. If you plan on holding such stocks forever and you should, how should a short-term blip on payout date matter at all? Over the long term, company grows and so does the stock price!

Dividend paying companies grow less

Another argument is only companies that have stopped growing or have no use of cash, pay out dividends. Such companies cannot efficiently allocate capital and so choose to give out dividends. So capital appreciation on the stock gets hit. You won’t be able to make much off of capital gains on stock. However as mentioned earlier, good dividend stocks bought at correct price have great potential to provide above average returns.

Preferential tax treatment for dividends can change

This is a minor threat. Currently you pay less taxes on dividends as compared to short term capital gains on stock sales. However, nobody knows the future, and this can change at any time. When that happens, its possible such stocks can fall out of favor.

Dividend stocks make you miss out on fast growing industries

Usually most dividend stocks belong to consumer cyclical, consumer staples industries. Companies that have very stable fixed stream of income. Some financial companies etc. Argument is that tech stocks which grow the fastest usually never pay dividends. So, if you do not buy such stocks you are missing out on the best growing stocks in the market. However, there are big tech companies like Microsoft, Apple, Intel, Cisco etc. that pay dividends and increase them at a fast rate. Secondly, I never said to not have any non-dividend paying stock in your portfolio. Ideally you should have a balanced portfolio of stocks, bonds, REIT’s as mentioned in my earlier article on portfolio building.

Dividends are not guaranteed

This is true. In the recent past companies like Kinder Morgan Inc (KMI) and General Electric (GE) have cut their dividends. They were considered dividend stalwarts but fell into a lot of trouble and had no choice but to cut dividends. However, for such companies there were always signs. Things like payout ratio which was increasing, financial health was deteriorating, too much debt, not being shareholder friendly etc. But most of these signs were identifiable.

How much do you need for living off dividends?

There is no fixed answer to this question. You know how much you spend annually and how much you would need. For e.g., lets say you need about 45K annually in your retirement around age 60. Assuming you go on to live for another 30 years, you need about 1.3 million dollars (30*45000). Another way to think in terms of dividends is you need about a million dollar portfolio of dividend stocks to generate about 50K$ every year at 5% dividend yield. You will only be living off the dividends. Principal can still keep on growing at a healthy rate.

Also realize that its possible you do not even have to actually save a million dollars. You can just keep on investing money over 15-20 years & re-invest dividends. Your portfolio will keep on growing during that time, eventually reaching a million dollars. At that point you can simply stop investing stop re-investing and live off of dividend income. Here is a calculator that shows how starting with 0$, investing 12000$ annually with a dividend yield of about 4% and below avg price appreciation of 5% you can get to 1.4 million dollars in 30 years.

The above are just some numbers I plugged in. You can even do this 12K investment in your Roth account and your taxes will be 0! Feel free to play around on the calculator with different numbers, but living off dividends is definitely possible.

Best free resources to get you started with dividend investing

Dividend Condition(DIVCON) free ratings

This is a free rating system developed by the firm Reality Shares. They rank dividend stocks from highest (5) to lowest (1) depending on their probability of increasing dividends in next 12 months. They look at cash flow, future earnings, buybacks, dividend trends, etc. to come up with this rating. Although not iron clad, but its a good thing to check up on when deciding to buy a dividend stock. We have heard the saying safest dividend is the one that has just been raised. This tool allows you to find out stocks that most likely will raise it! Its also a good idea to look at their quarterly list of worst ranked (1) stocks which hints at possible divided cuts. This could allow you to highlight a stock in your portfolio and go deeper into it. Check more about them here.

Invest alongside the Superinvestors!

Its always good to have some extra information while investing. Sites like Insider Monkey, Whale Wisdom & DATAROMA allow you to see what the most famous super investors like Buffett, Munger, Bill Ruane (Sequoia Fund) etc. bought in the most recent quarter. Most of these websites have free signups which give you the most data you would ever need! I am not saying to blindly buy what Superinvestors are buying. But its always good to get more information. Do your own research, look at fundamentals and make your own decision.

Dividends stocks do come with some risk but with right precautions you can avoid the risky one’s and choose the best dividend paying stocks for your portfolio. I created a free guide for you to get started on your journey to living off dividends. I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. It will show you how to get free access to Morningstar and Value Line reports and how to look at them from dividend point of view. I discuss how you can read most financial news articles from Seeking Alpha, WSJ, Barrons for free even if they are behind paywall! Consider signing up below and get the free pdf version of the insights into dividend investing research and how to keep your dividend income safe.

Check out my complete dividend portfolio of stocks.

Create your own dividend tracking google sheet with graphs and pie charts.

July 12, 2019 2 comments

Dividend Investing

Quarterly Dividend Update: Q2 2019

by Yoda June 30, 2019

Dividend Investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics and dividend safety. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. This quarter though, I decided to focus and keep/move more of my dividend stocks in my and my wife’s Roth accounts. So I did end up selling in small quantities wherever it made sense in my taxable accounts. Ideally I would like to buy and never sell. Here is my Q2 2019 quarterly dividend update and comparison with Q2 2018.

Total: $516.76 for Q2 2019

Here is a graphical view of the same data:

My Buys in Q2 2019

Bought about double my existing position in A.O. Smith(AOS) when 2 firms released short articles and the stock price went down to low 40’s. My original position was in my taxable account. This year I am focused on moving a lot of my taxable dividend positions to Roth accounts. This seemed like a good opportunity to do it.
Doubled my position in AbbVie Inc. (ABBV ) after they announced they are buying Allergen Plc (AGN) and it fell by 16%. Dividend is still pretty safe. They even announced plan to further focus on dividends. New company will have 18-19 billion in cash flows which is probably the main reason for the deal(diversification of revenue of course). Huge debt now becomes a concern now. I am planning to watch this like a hawk. Need to see debt go down next year as they mentioned in their presentation.

I would expect my Q3 quarterly dividend update to reflect higher dividends with the help of these buys.

My Sells in Q2 2019

Sold my small position in Coca-Cola Company(KO) at gain from my taxable account, purely to move proceeds to Roth. I might start building a position back in KO but not at these prices.
Sold my small position in Vodafone Plc(VOD) at loss from my taxable account, again moving proceeds to Roth. Plus this was leading to some dividend being withheld and not being able to re-invest dividends owing to foreign entity in my broker’s account.
Sold my 1 stock position in Apple Inc.(AAPL) at gain from my taxable account again to move money to Roth. I would like to start a position again in this maybe if it gets back to Dec-Jan 145$ prices.
Sold some of my position in National Instruments(NATI) from my taxable account. I just sell some of this position when it becomes too large, to reduce risk of too much of 1 stock.

Check out my complete dividend portfolio here.

Click this link for my Q1 2019 dividend update.

Check out my and download/make your own dividend tracking sheet here.

Dividends stocks do come with some risk, but with precautions you can avoid the risky one’s and choose the best dividend paying stocks for your portfolio. I prepared a guide where I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. Also find out how to get free access to Morningstar, Value Line, workaround paywall behind popular news sites like Seeking Alpha etc. Consider signing up for free instant access to the pdf version of the insights into dividend investing.

June 30, 2019 0 comments

Dividend Investing

Quarterly Dividend Update: Q1 2019

by Yoda April 22, 2019

Dividend Investing for me is a long-term strategy. I like to buy great companies when they are out of favor. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. I have been investing in dividend stocks for the last 3-5 years, but only started recording my dividend income since 2018. I decided to share my dividend investing journey on a quarterly basis from Q1 2019 on wards.

Here are the results from Q1 2019 and comparison with Q1 2018:

Total: $412.37 for Q1 2019

Here is a graphical view of the same data:

My Buys in Q1 2019

Bought about 33% more position in DIS (Walt Disney Company) a few weeks before the Disney+ streaming announcement.
Bought some more of T (AT&T) purely for income.
Increased 50% more position in MO (Altria) in February.
A starter position in XOM (Exxon Mobil Corporation) and ABBV (AbbVie Inc.) in February.

Most of these buys in Q1 2019 did not contribute to any dividend income in Q1. But I would expect my Q2 income to grow much faster with the busy buying quarter I had in Q1.

My Sells in Q1 2019

None!

Check out my complete dividend portfolio here.

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April 22, 2019 0 comments