As promised, I wanted to take a look at and share with you my stock dividend plan for 2012. This is for my retirement accounts which are individually directed but aren’t receiving any additional funds. My future retirement deposits are being made in my new 401(k). As I had mentioned, the plan was to increase my dividends to $1000 per quarter, but I think that it will happen in this last quarter of 2011 so a set of new goals will have to be made. Once I share these, I will explain how I plan on meeting those goals in the upcoming year. I feel this is a valuable exercise since eventually my retirement plan is to live off dividends and real estate rental income without touching the principal. Of course, I will also insist on being debt free prior to retirement.
New Dividend Goals for 2012
I plan on shooting for $1500 in the first quarter and increasing that total by $300 per quarter through the end of the year. That means $1800 for the second quarter, $2100 for the third quarter, and $2400 for the fourth quarter which breaks down to $800 per month on average. Some of these numbers seem doable, but others seem like a stretch. Of course, I will only know as I make the necessary adjustments and track the results periodically. So, how do I plan on achieving these goals.
Current Stock Holdings
Right now, I hold the following shares: SLW, AKS, SDRL, ONXX, DRYS, AKAM, STX, INTC, GME.
Of these, ONXX, DRYS, AKAM, and GME do not pay out any dividends. The first part of the plan will be to replace several of these with stocks that do pay out dividends. I recently bought some shares in STX and will buy some more once AKAM ends up being called away. As you may know, I do sell covered calls on many of the stocks that I hold and AKAM could be called out this Saturday when expiration arrives. It will be called away at a profit so I am not upset with allowing it to go. This means that AKAM will be replaced with STX.
ONXX is being shopped around and made a nice run recently. I want to work with it a little more and increase my profits by selling some January calls. Ultimately the plan will be to replace those shares with Nucor (NUE) since I will be getting rid of AKS. Even though AKS pays out a dividend, it is not as much as the Nucor dividend. This is the second part of the plan, namely replacing the lower yielding stocks with ones that pay out more in the same industry. With this switch, I will still maintain the exposure to the steel industry for when the world comes out of its slump and inflation rears its ugly head.
GME is also likely to be called away this week assuming European debt doesn’t blow up in the next five days, and I will be using the proceeds to add to my Intel holdings. I also plan to add to my SDRL holdings with the AKS proceeds when I can manage to exit with a profit. That might take another month or two.
I will be making no changes with DRYS for the moment since I am really trying to work with the covered calls as part of another technique that I am trying. Suffice it to say that I could get rid of the stock if necessary to achieve my goals, but now is not the time.
All in all, about 36% of my portfolio will be moving from non-dividend paying stocks into dividend paying stocks. I would expect that by the end of the year, I will be coming awfully close to my goal of $2400 for the quarter. I hope to generate some more funds for the account by selling covered calls and using the proceeds to add to my positions. If I can do that, reinvest the dividends, and have some of the companies increasing their dividends next year, it may not be long until I am making over $1000 per month in dividend payments. Another couple decades of growth should mean that by 2038, I won’t need to worry about Social Security!
Readers: What do you think? Does the plan sound reasonable? Do you have any investment plans for 2012?
One of the best ways to make money when investing is to buy low and sell high. It doesn’t always need to occur in that order, but it should happen. Of course, it is possible to invest for income but even when buying for income, buying at lower prices will yield more profit. That is why patience and the ability to wait for better pricing of investments is an important character trait to possess. Allow me to share two examples.
The Housing Bubble
It is very apparent in hindsight to everyone that housing prices were ridiculous at the top of the bubble. The level of affordability for the average individual was at historic lows which meant that demand was unsustainable. Those who had the ability to recognize this or got priced out of the market involuntarily were able to wait and saw better prices return when demand dried up. These individuals will have the opportunity to buy at lower prices and stand a much better chance at profit than those who bought at the top.
Anyone who chased prices in housing and bought at the top now find themselves underwater. They made the classic mistake of buying into the hype, were not patient, and are now paying the price. They bought high and will be forced to sell low instead of the other way around. One of the best times to invest in real estate is now that the bubble has burst.
A Personal Example
Another example that is a little closer to home involves my trading in the stock, Silver Wheaton. Many of you know that I trade options and hold puts in all the stocks that I hold in my retirement account. Such was the case with Silver Wheaton (SLW). On option expiration day this month, I was in Honduras with incredibly limited access to the internet. I could tell that my October $35 strike puts would be exercised since SLW was well below that point when I left on Thursday. That was the case and so I had a lot of cash in my portfolio.
I wanted to repurchase the stock, but by the time I was able to get on the internet the following Wednesday, SLW had bounced back a little and was showing some strength. I put in a limit order for the next day at a price that I thought was reasonable but the stock continued to increase and just went up. The same thing happened to me again the next day such that SLW was trading over $35 by the time I returned home.
I know the price of silver and thus SLW is volatile so I decided to wait and see if I could get a better price. I had already sold at $35 so any repurchase below that price represents profit in this particular transaction. I tend to buy in bits and pieces essentially dollar cost averaging over days when entering a position anyway so it isn’t too hard to be somewhat patient.
Well on Monday of this week, I was able to buy back 25% of my original position at $34.50. Yay! A sale price. Even better was Tuesday when I got another quarter of my position back at $32.60. I even sold some covered calls on that same day for the November $35 strike price on the shares that I had just purchased over those two days for $1.25.
What this means is that I sold at $35 and bought back at a combined price after averaging the purchase prices and subtracting the option premium of $32.30. Now if I get called out again in two weeks in November at $35 per share, I will earn a profit of $2.70 per share or a little over 8% for the month! If I don’t get called out, I will sell more calls for December but also be buying more shares with the left over money that I still have from the October sale. Either way, I will profit.
I have been investing in stocks since 1999 and have learned quite a bit over that time. One of the biggest lessons is patience. Never chase an asset price whether it be real estate, stocks, gold, or anything else. Wait for the price to match your assessment of value. Chances are pretty good that the price will decline at some point in the future, and you can pick up the asset at a much better price. If not, there is some other opportunity that will present good value. Don’t get focused on a particular stock or piece of property either. There are many out there from which to choose.
The goal of investing is to profit. It is not to say that I own this particular property or that particular stock. The owners of a landfill can make just as much profit as the owners of a pharmaceutical company. Be patient, find or create value, and profit. I have chased stocks in the past, and I can tell you, it always ends poorly.
Readers: How has lack of patience hurt your investment performance? Have you had success from being patient?
I recently wrote about how I will be undergoing a change in my work structure and will be getting a match with my 401(k). A lot of people refer to this as “free money” although you can easily make the argument that it truly is part of my compensation and has to be figured into the overall equation.
But just this weekend, I received some free money that was truly free and came from a source that I never would have suspected. Interestingly enough, this source involved my current 401(k).
Selling Covered Calls
Some of you know that I have been trading options for over a decade, not professionally but for my own retirement accounts. I am able to do this since I have a self-directed account with Fidelity which allows me to trade options. You can follow some of my trading in Silver Wheaton stock at OptionsDude.com.
Well it turns out that with this most recent options expiration day, I had sold some covered calls on SLW with a strike price of $40 per share. I figured that since SLW stock had closed well below that at $39.54, those calls would have expired worthless. Imagine my surprise when I logged on this weekend and found that they had been exercised! Someone had purchased Silver Wheaton from me at $40 per share when they could have purchased it in the open market for less.
Not Free Money Yet
But it really wasn’t going to be free money yet until I could buy back my stock at a price less than $40 per share. I figured it would be possible on Monday but not guaranteed. Typically the daily range of stock will encompass the previous day’s closing price so I felt that the odds of me getting back into my original position at $39.50 were pretty good unless there was a major gap upwards.
So Monday morning, I watched the action of the gold and silver prices as well as the futures for the stock market and the before market trading of SLW. I entered a limit order at $39.50 and ignored the market while at work. I was able to check periodically throughout the day and found that indeed my limit order was filled meaning that I had received a gift of 50 cents per share. Yippee! Free money!
But what would have happened if my limit order was never hit? The number of shares involved was only 22% of my total. I would have waited for SLW to decline in price since it is very likely that it would have sometime in the near future. I was happy with a 50 cent per share discount. I was also happy if the stock kept going up since I would benefit from the increase.
I was in a position to benefit no matter what the stock did. An increase meant additional profit on my existing shares. A decrease meant a discount on the purchase price to re-establish my original stock position. There was no reason to chase the stock.
Now I was in a different position with my ONXX trade. I will be updating that and how I handled the situation in the next week or so at the Options Dude blog. It was a totally different set of circumstances so I managed my trades quite differently.
Getting Started in Options Trading
I have been asked about options trading and will probably write my next post on the topic. It may end up being a long one or need to be split in two. I am also working on a fairly comprehensive website/blog that will cover the topic and would like to get an e-book together. But it seems like it may be some time before I can get that done since I am incredibly busy. I may have some more time during the winter months, but we all know how that typically goes. I wish I had 36 hours per day.
Readers: Have you ever gotten some money that was quite a surprise? Are you interested in learning more about options trading? Any other comments or questions? Anyone interested in guest posting so I can have more time at OptionsDudeAtoZ. Feel free to comment and thanks for reading.