Wednesday, July 13, 2016

Closing Four More Positions

The markets are climbing higher and higher...

Today, the Dow surged to a new record high, closing at 18,347.67 – about 35 points above the previous record set on 19 May 2015. The S&P 500 built upon its record close yesterday, pushing the record high up another 15 points to 2,152.14. The Nasdaq is now in positive territory for 2016, but still 3.6% under its record close.

Amid these record-setting movements, I've been closing some of my DivGro positions. Last week I closed five positions and reduced one, reported here and here. Today I'm reporting on four more sells.

Certainly, selling when the markets are making record highs is not a bad thing, but in my case it is more opportune than planned.

The main reason I'm selling stocks is that I'm looking to boost dividend income through options. To do so, I need to own at least 100 shares per candidate stock, because each option controls 100 shares. Most of my DivGro positions involve fewer than 100 shares, so I'm closing some positions in order to increase others.

Covered call writing is a safe way to earn extra income on stocks you own. You can sell a call option for every 100 shares you own and collect the option premium in return.

My first covered call involved selling 6 call options on the 600 shares of Ford Motor Company (F) I own. By agreeing to sell these shares for $13 before or on 19 August 2016, I earned about $315 of option income. The annualized yield for this trade is at least 21%, which compares very favorably to F's current dividend yield of about 4.5%.

So far, my strategy has been to sell stocks that trade well above fair value or have weaker fundamentals, comparatively speaking. I'm convinced that selling these stocks and investing the capital in the remaining stocks will strengthen my portfolio (despite owning fewer stocks). Most of the stocks I'm retaining are safer and fundamentally stronger stocks.

In the summaries below, I'm listing some of the reasons I sold these particular stocks.

Recent Sell: Phillip Morris International Inc (PM)

I bought share of PM in two lots, once in August 2014 (green circle) and again in September 2015 (blue circle). In the past 9 months, PM's share price has climbed nicely, allowing me to exit this position with a nice gain.
Trading Summary

2014-08-05
 Bought 31 shares of PM at $81.29 per share:
 $
2,519.99
2014-10-10
 Cash dividend on 31 shares:
$
31.00
2015-01-09
 Cash dividend on 31 shares:
 $
31.00
2015-04-10
 Cash dividend on 31 shares:
$
31.00
2015-07-10
 Cash dividend on 31 shares:
 $
31.00
2015-09-25
Bought 34 shares of PM at $81.27 per share:
$
2,763.18
2015-10-14
 Cash dividend on 65 shares:
 $
65.00
2016-01-08
 Cash dividend on 65 shares:
$
65.00
2016-04-11
 Cash dividend on 65 shares:
$
65.00
2016-07-11
 Cash dividend on 65 shares:
$
65.00
2016-07-08
  Sold 65  shares of  PM at $103.68 per share:
$
6,739.34
Capital gain:
$
1,456.17

Dividends received:
$
389.20

Commissions/fees/taxes:
$
0.00

Net gain:
$
1,845.37

The net gain is 34.9% on the original amount invested, or 26.1% annualized.

My fair value estimate for PM is $98.20, so the stock is trading about 5% above fair value. There are some concerns about PM's changing risk profile after the company lost a law suit filed against Uruguay seeking compensation for economic damages caused by the government's anti-smoking regulations. Also, the sustainability of PM's dividend is being questioned. The company's payout is consuming most of its earnings and debt continues to grow. The payout ratio is at 95%.

I own two other tobacco companies, Altria Group, Inc (MO) and Reynolds American, Inc (RAI), both home run stocks for DivGro. Both have significantly outperformed PM over my holding period:
Source: Google Finance

Recent Sell: Chevron Corporation (CVX)

CVX is the first stock I bought for DivGro, so it is with a little nostalgia that I'm parting ways. The stock performed quite well for me, until the energy crisis of 2015 caused the share price to tank!

I bought CVX in two equal lots, first in January 2013 (green circle) and then in December 2014 (blue circle). Today, the stock price rose above my cost basis, so I eked out a small capital gain!

Trading Summary

2013-01-08
 Bought 25 shares of CVX at $109.56 per share:
 $
2,739.00
2013-03-11
 Cash dividend on 25 shares:
$
22.50
2013-06-10
  Cash dividend on 25 shares:
 $
25.00
2013-09-10
 Cash dividend on 25 shares:
$
25.00
2013-12-10
 Cash dividend on 25 shares:
 $
25.00
2014-03-10
  Cash dividend on 25 shares:
 $
25.00
2014-06-10
 Cash dividend on 25 shares:
$
26.75
2014-09-10
 Cash dividend on 25 shares:
 $
26.75
2014-12-10
 Cash dividend on 25 shares:
 $
26.75
2014-12-16
 Bought 25 shares of CVX at $102.97 per share:
 $
2,574.26
2015-03-10
 Cash dividend on 50 shares:
$
53.50
2015-06-10
  Cash dividend on 50 shares:
 $
53.50
2015-09-10
 Cash dividend on 50 shares:
$
53.50
2015-12-10
 Cash dividend on 50 shares:
$
53.50
2016-03-10
 Cash dividend on 50 shares:
$
53.50
2016-06-10
 Cash dividend on 50 shares:
$
53.50
2016-07-12  Sold 50 shares of CVX at $106.46 per share: $5,323.14
   Capital gain: $9.88
   Dividends received: $523.75
   Commissions/fees: $3.00
   Net gain: $530.63

With dividends included, the net gain is 10.0% on the original amount invested, or 3.9% annualized.

My fair value estimate for CVX is $103.04, so the stock is trading at a slight premium of about 4%.

While CVX may be continue its recent upward trend, I notice that the company has paid the same dividend for 9 consecutive quarters. While it doesn't constitute a dividend freeze yet, I don't want to wait to see what happens. I suspect the company would want to retain its Dividend Champion status, but the next dividend increase may be just a token increase.

Recent Sell: Starwood Property Trust, Inc (STWD)

I also decided to close my position in STWD, the largest commercial mortgage real estate investment trust in the United States. I first bought shares in January 2015 (green circle), then witnessed the share price trend down and plummet to $17 before recovering somewhat. Adding shares in March (blue circle) allowed me to reduce my cost basis significantly.
Trading Summary

2015-01-16
 Bought 110 shares of STWD at $23.61 per share:
 $
2,597.06
2015-04-15
 Cash dividend on 110 shares:
$
52.80
2015-07-15
 Cash dividend on 110 shares:
 $
52.80
2015-10-15
Cash dividend on 110 shares:
$
52.80
2016-01-15
Cash dividend on 110 shares:
 $
52.80
2016-03-17
 Bought 140 shares of STWD at $18.73 per share:
 $
2,622.19
2016-04-15
 Cash dividend on 250 shares:
$
120.00
2016-07-12
  Sold 250 shares of  STWD at $21.02 per share:
$
5,254.91
2016-07-15
Cash dividend on 250 shares:
 $
120.00
Capital gain:
$
35.66

Dividends received:
$
451.20

Commissions/fees:
$
0.00

Net gain:
$
486.86

The net gain is 9.3% on the original amount invested, or 10.4% annualized.

My fair value estimate for STWD is $24.04, so the REIT is trading at a discount to fair value of about 13%. So, why sell STWD with some upside still present?

STWD is not covered by Morningstar or Value Line, but the stock's S&P Credit Rating is BB. Several Seeking Alpha contributors like STWD, though, despite the BB credit rating. Brad Thomas reiterated a BUY recommendation, while Achilles Research thinks the stock is not expensive yet despite the strong rebound since February.

My decision to sell STWD was not easy, especially giving up the 9%+ dividend yield. However, I'm really motivated to prepare DivGro for options trades, so I'm sacrificing STWD here for larger gains down the road...

Recent Sell: Meredith Corporation (MDP)

The final sell I'm reporting on is MDP, which I bought in March 2014 (green circle). The share price jumped to $57 about a year after I bought my shares, but then crashed down to about $36.50 before recovering to my sell price of $55.28.
Trading Summary

2014-03-14
 Bought 55 shares of MDP at $45.13 per share:
 $
2,482.15
2014-06-13
 Cash dividend on 55 shares:
$
23.79
2014-09-15
 Cash dividend on 55 shares:
 $
23.79
2014-12-15
 Cash dividend on 55 shares:
$
23.79
2015-03-13
 Cash dividend on 55 shares:
 $
25.16
2015-06-15
 Cash dividend on 55 shares:
 $
25.16
2015-09-15
 Cash dividend on 55 shares:
$
25.16
2015-12-15
 Cash dividend on 55 shares:
$
25.16
2016-03-15
 Cash dividend on 55 shares:
$
27.22
2016-06-15
 Cash dividend on 55 shares:
$
27.22
2016-07-12
  Sold 55  shares of  MDP at $55.28 per share:
$
3,040.13
Capital gain:
$
557.98

Dividends received:
$
226.45

Commissions/fees/taxes:
$
3.00

Net gain:
$
781.43

The net gain is 31.4% on the original amount invested, or 13.5% annualized.

My fair value estimate for MDP is $52.82, so the stock is trading about 4% above fair value.

Morningstar does not cover MDP, but Value Line does – it has a Safety Rating of 3 and Financial Strength Rating of B++. I prefer holding stocks with a 1 or 2 safety rating and a financial strength rating of B++ or better.

I'm satisfied with MDP's performance while I owned the shares. However, I don't consider MDP a core holding, so it has to make way to allow me to increase my core holdings.

Selling PM, CVX, STWD, and MDP reduces DivGro's projected annual dividend income by $1,068.10 to $9,962.18.

DivGro now contains 57 holdings, 54 stocks and 3 closed-end funds.
 
Thanks for reading! 

17 comments :

  1. Ciao DG,
    Extremely interesting strategy, I have recently started with naked puts and some covered calls, but I am more on the put side of things. How many holdings are you targeting to have? Why not buying the core portfolio stocks with covered puts to have a lower price entry point?

    Ciao ciao

    Stal

    ReplyDelete
    Replies
    1. Hi Stal -- thanks for visiting and commenting. I'll definitely consider using cash-secured puts to get lower entry points, especially for those core holdings that have decent options trading volume. In some cases, though, I need to add fewer than 100 shares to get to the next 100 multiples, so I'll just buy those at the market.

      Ciao!
      Ferdi

      Delete
  2. Kudos for going against the grain and selling some of the winners in your portfolio, FerdiS. Those are decent returns and you have booked some profits by taking money off the table.

    Best wishes
    R2R

    ReplyDelete
    Replies
    1. I probably wouldn't have sold if it had not been for wanting to prepare for options trading. But I'm happily doing so -- I really believe the portfolio will be stronger and safer when all is said and done.

      I have some losers (BBL, GPS, and PNNT) that I want to get rid of but have so far resisted selling. I'm hoping for better exit points. I feel the portfolio would be even stronger without those stocks, but taking those losses now would be hard.

      All the best to you, too!

      Delete
  3. Great moves booking some profits! It's never popular to sell, but you're doing so at a time when the markets are at an all time high. I think it's safe to say we are far closer to any top than bottom at this time.

    No one ever went broke booking profits.

    Al the best!

    ReplyDelete
    Replies
    1. HI FI Fighter! Good to hear from you again!

      The markets are climbing the proverbial wall of worry now. At some point the holdouts are going to jump in when they realize they're losing out. Then we'll see a big drop...

      The fact that I'm selling now is motivated mostly by my desire to prepare for options trading. That the markets are trading at an all time high, is a welcome benefit!

      I've been scolded a little for selling... but that's OK. I like being challenged to defend my actions. That's what interacting with readers are all about!

      Delete
  4. Great jobs crystallizing gains. That's one of my favorite times of investing. With the proceeds, we can look for another good quality undervalued stocks!

    ReplyDelete
    Replies
    1. I like your term "crystallizing gains"! Yes, lots of cash on hand and a challenging task to find great, undervalued stocks in this market environment!

      It'll be fun!

      Delete
  5. I thought all of these sells were simply because of where the market is and selling to preserve gains. A step which I can hardly criticize, and have given thoughts to myself honestly. I wish I had a good understanding of options, currently I won't touch them since I don't. Best of luck and keep us posted.

    ReplyDelete
    Replies
    1. The market has played along nicely to line up with my desire to prepare for options trading. Really lucky there! At the same time, though, I worked hard to figure out which stocks I wanted to keep and which I wanted to sell. That wasn't trivial. Overall though, I'm satisfied with where things stand.

      Options take a bit to get used to. Its best to learn first before dipping your toes into the tank, so to speak. The biggest difference between trading options and stocks is the time factor. That adds some complexity, but also opportunity!

      Take care and I'll keep you posted!

      Delete
  6. I like the strategy Ferdi. I did something similar last year. I sold a few holdings and used that money along with new money to acquire more than 100 shares of many stocks in my portfolio. The only advice I'll give, is be sure the stocks your accumulating have options value. Not all stocks offer value in options.

    Lately, I've been thinking of selling some of my larger positions that have gained a lot, PM for example, then using the funds to sell puts on the same stocks at lower prices. I figure what comes up will go down at some point. I'll be sacrificing dividends but offsetting them with premiums. The best part is, I'll be able to get the same stocks back at a lower cost basis. That's the theory anyway ;-)

    ReplyDelete
  7. Well done. Love to see options being used wisely and for income!

    ReplyDelete
    Replies
    1. Thanks Velociraptor -- I'm still a learner but an eager one, so hopefully the wisdom will come with experience!

      Cheers!

      Delete
  8. All good. As I have noticed the last few weeks, more and more DGI bloggers are selling to lock in gains. Them most selling I have seen since I started following these blogs about three years ago.

    ReplyDelete
    Replies
    1. You're right! Lots of sells lately to lock in gains. I'm not convinced we're at the top yet, though. I think we have some ways to go yet, perhaps even into next year. We shall see!

      Take care and thanks for visiting!

      Delete
  9. I follow and agree with your logic on which stocks you've elected to cull from the herd.

    Now I'm looking forward to reading about which positions you concentrate in to implement the call option strategy. The bargains are few and far between these days...

    ReplyDelete
    Replies
    1. Thanks, catfishwizard -- I'm happy with the cuts, with the possible exclusion of STWD. I'll miss that huge dividend!

      Adding to some of my core holdings, by necessity, will be at elevated prices. I'll choose as carefully as possible which positions to build up first. For some I might sell puts to attempt to get at lower prices.

      Cheers!

      Delete

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