Investing

Buying Only Stocks that Pay Dividends

I recently ran across a video at Kitco’s Video News page that featured an interview with Kevin O’Leary who is a Canadian entrepreneur who founded SoftKey, a software company that eventually acquired The Learning Company before selling out to Mattel.  Apparently, he is also on the show Shark Tank on ABC which I have heard about but never bothered to watch.

I don’t think it is important to watch the full video, but I do think that he made one very important point which I will share with you and which I am working on implementing:

• Never buy a stock that doesn’t pay a dividend!

It is really quite simple and makes a lot of sense.  He doesn’t look at earnings when evaluating a stock.  He looks at free cash flow and wants to make sure that some of that cash is being returned to the owners (the shareholders) of the company.

A Transition in Thinking

I am starting to see from where he is coming.  Much of the market’s return has been the result of dividends.  Just take a look at the following graph which I found at The Market Oracle:

If this graph doesn’t convince you of the importance of dividends, which account for over half of the S&P 500′s, then how about I show you another graph that looks at the performance of the Dogs of the Dow vs the S&P 500.  In case you didn’t realize it, the Dogs of the Dow are those stocks in the 30 from the DJIA that have gotten so beat up in terms of price, that their dividend yield is among the top 10 of those 30 stocks.

No Lost Decade for Dividends

So had you been holding stocks that paid dividends, there really would not have been a lost decade.  You would have received consistent payments of cash to add to your portfolio enabling it to grow and make money.  You can just look at the graph and see that the S&P 500 lost money during the decade that saw two major shocks.  And yet, stocks that paid dividends (namely, the Dogs of the Dow) actually made money.

Fortunately, it is possible to teach this old dog some new tricks.  That is why I am simply working on changing all the stocks in my retirement accounts to dividend paying stocks and tracking my dividend income this year.  I did manage to hit my goal for the 1st quarter.  Over the next 25 years, I will allow those accounts to grow and reinvest those dividends into more stocks.

In fact, I will probably buy some more STX and INTC this week since they have been holding up quite nicely during this recent market decline.  I will also watch the ONXX $46 puts get exercised on Friday so I can start my purchase of Nucor (NUE) next week.  I won’t get the dividend for this quarter, but should be in a position to pick it up in the third quarter.  The same holds true for INTC and STX since the ex-dividend date has passed.  Nevertheless, adding to these positions is just a good idea.

Obviously, I will continue to publish the quarterly update on the dividend progress and see if it continues to grow.  According to the charts above, it should be a great plan!

What is the Gold Market Trying to Tell Us?

Regular readers of this blog may or may not know that I follow the gold market fairly closely.  I am not a gold bug per se, but I do feel that gold is a decent store of wealth as opposed to the greatest investment as some would have you believe.  On the other hand, I don’t think that it should be dismissed entirely since it can have some purpose in a broad investment portfolio.

If you have been watching the gold market recently, you have probably noticed that the price has dipped below $1600 per ounce.  The gold market has historically been one that has been responsive to inflation expectations due to money supply or geopolitical concerns or even financial crises and a loss of confidence in fiat currency.

But with the gold price having backed off from a high of over $1900 per ounce last August and September, is there something that we should be expecting?

Global Industrial Slowdown?

Here is a recently published article that suggests gold is correlated with global industrial production.  That would seem to make sense as inflation, while technically a monetary phenomenon, seems to respond as a result of increased demand as well.  When the labor pool is tight, wages increase leading to a broad increase in prices.  Likewise, when the cost of oil and transportation and all the other goods that use oil in production increases, the gold market seems to respond to those inflation expectations.

If this is the case, one has to wonder whether the gold market is foretelling some global economic slowdown.  Is there another recession on the horizon?  Is China slowing down and are concerns about growth coming from that area of the world?  Is Europe really going to become a major headache?

On the other hand, is it simply the fact that there is no sign of inflation in the near future and that growth will continue albeit at a more moderate pace?  Is this simply a period of consolidation in the gold market?

There is a seasonality to the gold price and summer tends to be a slow time in regards to the price.  Is this a factor in the current pull back?  Will the price for an ounce of gold make another strong run in the fall?

To be perfectly honest, I really don’t have a clue.  So, what am I doing with this information?

Buying More Silver Wheaton Stock

I am buying more Silver Wheaton stock.  Silver typically follows the gold price although with some added volatility.  This has provided me a decent opportunity to purchase some more SLW which should make a nice rebound should seasonal factors be playing a role or should global economic activity improve.

I have already increased my share count by 6.5% this past month and am looking to add some more when I sell some calls and collect the premium.  Hopefully, I will have enough cash to do this during June.  I should be collecting some dividends from Seadrill and AK Steel during the month of June so that should help with the needed cash.

The key will be to maintain patience and add to positions when the stocks are down and pare back when they spike.  I plan on using the same technique with Silver Wheaton and by extension, the price of gold and silver.

What do you think is happening with the gold market?

GMCR–The Case for Protective Puts

You may have heard that Green Mountain Coffee Roasters stock took a big hit earlier this week when they missed earnings and put out a disappointing forcast for the remainder of the year.  In fact, the stock lost almost 48% of its value in one single trading day.  Ouch!  Now if you have been long the stock, that is a major hit to that portion of the portfolio.  Granted GMCR has been a momentum stock for some time now, so it isn’t unexpected that the gains would slow at some point.  However, it can still make for some sleepness nights knowing that one day could wipe out so much value.

Sleep Better At Night–Buy Some Protective Puts

If you are investing in the stock market (and especially in individual stocks), you need to have some plan for these events when they occur.  There are many ways to do this from not buying individual stocks and going only with indexes, to diversifying across several stocks and sectors, to using stop losses, to buying put options.  I would like to address the concept of risk management from the perspective of put options and share what I do with my retirement account.

If you have been reading this blog for a while, you know that I invest my retirement account in some individual stocks many of which might be considered risking (ironically, GMCR only shows a beta of 0.8).  Take for example, my investment in Onyx Pharmaceuticals (ONXX).  This is a stock that I bought after selling Imclone which was bought out several years back.  I purchased ONXX as a potential buyout candidate for which there is still potential.  The most recent run up is due to buyout rumors again.

Over the past year, ONXX (with a beta of 1.2) has traded from $27.17 to $47.80 per share.  With this most recent pop, I decided to buy some protective puts at a strike of $46 expiring in the month of May in two weeks.  So far, that looks like a good decision since ONXX is now back down under $43 per share.  Since my overall cost in the stock is $43.57 even after the purchase of the puts, I have guaranteed myself a profit.

Then, I will be able to purchase back the same stock for less and either sit on the cash or purchase even more shares of ONXX in preparation for the next pop.  I will usually pay for the put options by selling some covered calls creating a collar.

I have found the technique of buying puts, selling calls or selling stock when it pops and buying back calls, exercising puts, and buying more stock to be fairly effective in mitigating losses and decreasing volatility in my retirement portfolio.

Hopefully, I won’t one day discover that the stock that I am holding has dropped by almost 50% in one day.  But if it does happen, I know that I will sleep well because I would have owned some protective puts.

Oh, and by the way, a stop loss order would not have helped with GMCR this week.  If you don’t know why, be sure to ask.

Readers:  I am guessing that most of you use indexes for your risk management, but for those who do pick individual stocks, what do you do?