It is with some sadness and a heavy heart that I bring to you this last quarterly dividend report. I had been making it a point to increase my dividend income and had been doing a good job of it this year, but circumstances have forced me to change direction. You see, the dividend stocks were in my retirement account which I am taking as a lump sum to pay off some outstanding tax debt. I will probably write more about that decision later.
So in preparation for the distribution, I did allow some of my stocks to get called out so the dividend income is a bit lower compared to last quarter. But had I not had to make this decision, I am sure that I would have been able to meet my goals for the rest of the year. At least that’s my story and I’m sticking to it.
You can see from the graph that the income was down from the first 2 quarters of this year. Like I said, I allowed SDRL and STX primarily to have some shares called away without buying those back which I would have done if the portfolio had kept going. But since I knew that I was arriving at this decision to liquidate, I just went with the cash and have been totally in cash since mid-September.
Nevertheless, I think it was a good experience to focus on dividend income over the past 12 months. This is exactly what I will need to do someday when I retire, namely wring cash out of my investments so that I don’t have to tap into the principal.
Now, my focus will be to eliminate a bunch of other debt so that I can aggressively invest and put together a nice portfolio of cash spewing assets. But for now, I think debt elimination will provide a better return on my investment since the interest rates are high enough and the savings are all tax free. So that’s where I will be putting my energies which means that you can be looking forward to debt reports. Yippee!
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.
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!
I can’t help but remain somewhat pessimistic regarding the outlook for the stock market. I know that everyone says the economy is getting better, but I am concerned about a few things. First, the Dow is having a very difficult time breaching the 13,000 mark. It is proving to be very solid resistance.
Second, I can’t help but think that there is going to be another recession. I am siding with the Economic Cycle Research Institute (ECRI) on this one. Growth has been slowing down, and I just don’t see anything that will encourage growth to pick up going into the summer. Speaking of which, it is only a few months before May when the old adage, “Sell in May and go away” becomes a self-fulfilling market prophecy.
Finally, the increase in gas prices has been noticeable. You can debate whether or not this is causation or correlation or coincidence. Personally, it doesn’t matter to me. I view it as a decent strike against the economy going into the summer and fall so am looking to defend the portfolio. In summary, then I see four risks facing the stock market heading into summer:
- Technical resistance at DOW 13,000
- Slowing rate of growth
- “Sell in May” phenomenon
- Increasing gasoline prices
You might also add some uncertainty regarding the general election since the market supposedly dislikes uncertainty. Nevertheless, I will be relying on a few main techniques to help protect my portfolio heading into the summer months.
First and foremost, I have been making a shift into dividend stocks over the past 6 months. Purchases of Intel (INTC), Seagate (STX), and Seadrill (SDRL) have been especially good to me while paying out 4% to 8% yields. These stocks have been responsible for a nice increase in my quarterly dividends. My goal is to continue to add to these positions and a decline in the market will not be that unwelcome in aiding my purchases provided that these companies don’t decrease payouts.
Selling Covered Calls
I am also continuing to sell covered calls which is part of my on-going management of my retirement accounts. The difference is that I will be selling more at-the-money (ATM) and even some in-the-money (ITM) calls in order to prepare myself for a decline. I have already seen SDRL start to lag and so will probably sell some lower priced calls heading into April during this week sometime. Onyx Pharmaceuticals is another one which has exhibited some weakness and will also need some ATM or even ITM calls sold to raise some cash.
Buying Protective Puts
I also have put options protecting my stocks. I may very well tighten those up going into the summer and make sure that the difference between the strike price of the option and the market price of the stock is less than it has been recently. Between the lower strike calls and the higher strike puts, I should be quite adequately protected from a declining stock price.
I sincerely hope that I am wrong about both the market and the possibility of recession later this year. I hope the sovereign debt crisis in Europe gets pushed from the headlines and that growth continues at a decent pace. I hope that gas prices don’t influence vacation or spending plans this summer. I certainly wouldn’t mind seeing a strong bull market this year, but I am starting to prepare for the opposite.
Readers: What is your outlook for the economy and the stock market? Any evidence to share either for or against my position such as strong auto sales, IPO strength, etc? Will the election play a role? Feel free to discuss.