Seagate Technology (STX) is one of the stocks that I am holding in my retirement account. I purchased it as part of my focus on dividends since it had a 4% yield at the time. The stock increased in price and I ended up selling it in late June for a 23% annualized profit. But I immediately repurchased it again and instituted my hedging strategy since I still fell like the stock had some decent potential for further gains.
Well this week, STX reported earnings. It seemed at first like investors were going to be disappointed as the stock had opened down over 5% from above $30 per share to the mid-$28 range. But gradually, the stock began to improve and closed right at $30 per share even though the broader market was down for the day.
Why the Strength?
Well in addition to reporting earnings and giving a somewhat disappointing outlook, Seagate announced that they were increasing their dividend from $0.25 per share to $0.32 per share! Assuming that the dividend remains at that level for the next year, the yield on the stock at $30 per share is just over 4.2%. I think that investors may have figured that out and realized that maybe it is worth the investment to get a decent return with the potential for some capital gains.
Now if you are like me, then you can have your dividends and hedge the stock also. Right now, I am sitting on protective puts at $25 and $27 per share with outstanding calls at $28 and $30. My basis for all the shares I own are $27.16. If STX remains above $30 per share for the next eleven trading days, then they will all be called away at an average of $29 giving me a $1.84 profit. Plus I will get the dividend since the ex-dividend day is August 10th.
It is possible that my $28 strike calls could get exercised before then if someone wants to try and capture the dividend. However, they would have to make sure that it is worth it when compared with the price paid for the option and the amount of capital required to exercise. Even so, I would still have a profit at that price.
I was encouraged to see that the dividend seemed to help stabilize the stock and provide a floor for the shares. Of course, it isn’t that surprising since a significant portion of historical stock market return can be attributed to dividends. It only makes sense that stocks of companies that return money to shareholders would be in demand and perform well over time.
I am really excited to write this dividend income report especially after having put together the numbers. As you know (or maybe you don’t), it has been my goal to increase the dividend income coming into my retirement account and get familiar with dividend investing as a prelude to retirement. It has been my belief that I shouldn’t be saving with the goal of living off my savings when I retire. Rather, I plan on investing in assets that produce income and living off that income.
My goal for the first quarter was $1500 which I was able to meet. For this quarter, that amount was increased by $300 meaning that I was supposed to make $1800 during these past 3 months. I planned on being able to increase the dividend payments because I am moving from stocks that don’t pay dividends to stocks that do and increasing the amount that I have invested in those stocks by selling covered calls and using the proceeds to buy more stock.
First, check out the graph of the results:
As you can see, there has been a great increase since making a conscious effort to focus on dividend income. You can also see that I met my goal of $1800 for the quarter. In fact, I crushed it with $2143.23! That is over $700 per month in passive income during a time when the stocks in my portfolio didn’t do all that well.
But it really doesn’t matter if the stocks do very well or not. When it comes to retirement income, I am looking for solid companies that will be sending out a steady income stream. I just need to make sure that the worst case scenario (company bankruptcy) doesn’t hurt the portfolio too much. Otherwise, I should expect some ups and downs in the value of the portfolio, but consistent dividend payments.
Now this quarter, I have a goal of getting $2100. It seems like that should be pretty easy, but I did get two dividend payments from Silver Wheaton during the quarter (not exactly sure why) and an extra small dividend from Seadrill. Those payments will have to be made up with additional shares. But I did add some Nucor stock which should help with that. I am fairly confident that I can make it to my next target.
I can’t wait for the next report!
- Summertime is dividend time, research shows (mysanantonio.com)
There has been a lot of option activity in my retirement accounts recently so I wanted to take some time and explain how to calculate the return on investment (ROI) using a real example of a trade that I did yesterday. As you know, I am working on increasing the exposure that my portfolio has to dividend paying stocks. Well, one of the stocks that I was looking at was Nucor (NUE). I was able to purchase some shares using the proceeds that resulted from the exercise of ONXX $46 puts last week.
My goal is to get a 1% return per month on my retirement account on average. Part of this should come from the increased focus on dividends while the rest will come from capital gains and covered call premiums. I believe that this is an achievable goal on average, although there will be times when the value will fluctuate above or below that target.
So, here is what I did yesterday. I started by purchasing the June $32 strike put options for $0.49 per share. Then I picked up the stock itself for $34.70 and put in an order to sell the June $35 strike calls at $1.10. This was about 5 cents above the ask at the time, but I figured that given the normal daily volatility, it would get filled if NUE approached $34.90. This did occur so at the end of the day, this is what my basis looked like before commissions:
$34.70 for the stock + $0.49 for the puts – $1.10 for the calls = $34.09
So, $34.09 per share is the amount that I have in the stock. Now commissions can have a big impact upon return, and I always hate it when those aren’t figured into the equation. I keep an Excel spreadsheet and add them in automatically based upon cash in and cash of the account. When I add in commissions for trading, my basis becomes $34.15322 ($34.16) per share. This is the number I will use for the calculations, but it is a little cleaner to look at the numbers without when you are learning.
Return on Investment If Called
If NUE is at or above $35 per share on June 16, 2012, it will get called away. If that is the case, let’s calculate the ROI for these four weeks. The general formula is the amount of profit divided by the amount invested (basis) multiplied by 100 to express in a percentage and would look like this:
($35.00 – $34.16) (profit)/ $34.16 (amount invested) * 100 = 2.459%
This meets my criteria of gaining 1% in a month. But what if the stock does not increase and does not get called out?
ROI if Not Called
This is a little more difficult situation to calculate because you really don’t know if there will ultimately be any profit. This is where the 1% monthly criteria comes into play for me. I want the premium income itself to equal 1% of the basis. So in this case, I use the amount of price reduction of the stock price for my “profit” and the basis as the amount invested to make the equation look like this:
$34.70 (purchase price) – $34.16/ $34.16 * 100 = 1.58%
The Nucor trade meets my criteria for 1% monthly.
Now what happens if the stock drops like a rock. Obviously, these percentages mean nothing. But this is where tracking a basis over time becomes useful. Ultimately, if the stock drops below $32 rapidly, I will not be in any additional danger of loss since I own the put options. I can add additional shares to the position each time meeting the above criteria. Eventually, the stock will stabilize and the ‘ROI if called’ will get realized.
By managing the position and adding shares at lower prices, it is possible to not lose money on a declining stock and break even.
So, if one-third of my stock picks fall into each category, the overall net impact is that the 1% monthly target will be met on a portfolio wide basis. The fact that I am starting to work with dividend stocks should help to minimize the volatility. That is the goal anyway.
- Protecting Your Portfolio When Selling Put Options (grandpermonth.com)
- How to Make $1000 Per Month Selling Put Options (grandpermonth.com)