Team Alpha Retirement Portfolio: Raising Cash To Increase Income

Includes: BKCC, BMY, CVX, JNJ, KKR, O, T
by: Regarded Solutions

My previous article focused on buying when others were selling, to add more shares and increase our income. This time I would like to address the issue of raising cash, when we are low in reserves, to also increase our dividend income stream.

Keep in mind that the ultimate goal of the Team Alpha Retirement Portfolio is to strive to continuously increase our income. To either support our lifestyle, or to reinvest to grow our income when we need to begin withdrawals. There are times when our cash reserves are at a level that requires us to replenish at least a portion of it. The big issue is IF we no longer have a paycheck, how can we do it?

As of today, the Team Alpha Portfolio made some additional buys while some of our core stocks were on sale. I added shares of Johnson & Johnson (NYSE:JNJ), Chevron (NYSE:CVX), Realty Income (NYSE:O), and AT&T (NYSE:T).

The portfolio consists of Ford (NYSE:F), Chevron, Apple (NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson, AT&T, General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NYSE:CSX), Realty Income, Coca-Cola (NYSE:KO), Annaly Capital (NYSE:NLY), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Newmont Mining (NYSE:NEM), and Wells Fargo (NYSE:WFC), and Intel (NASDAQ:INTC).

Here is what our portfolio looks like right now:

Stock #Shares
XOM 100
JNJ 105
T 120
GE 500
BKCC 600
PG 100
KO 100
NEM 200
WFC 200
O 240
KFN 600
NLY 400
CSCO 400
CVX 55
BMY 100
MCD 100
CSX 200
F 300
INTC 200

Our cash reserves have now dropped to $727, which is too low for a total portfolio value of roughly $146,000. I never like going below 5% in this cash reserve bucket, so something has to happen.

Several Ways To Generate Immediate Cash

Without getting too technical, there are 2 options strategies that will give us cash right now; selling calls against existing positions, and selling puts against shares we want to buy.

Both actions will give you cash immediately. The drawbacks are not the end of the world, but need to be considered.

  • Selling covered calls might mean that if your strike price is hit by options expiration, your position will be sold automatically, at the option price you sold. For example; you own JNJ and the current price is $88.00 per share. The option chart shows you can sell calls with a $90.00 price target, expiring late September. If the share price reaches $95.00/share by the expiration of the options, your shares will be sold at $90.00, and $5.00 per share will be left on the table. You will not have lost money, but you will have minimized your profits and lost the position.
  • Selling puts against shares you want to purchase also will give you immediate cash. The key issues are twofold; you are obligated to purchase the shares if your strike price is met, even if the price of the stock drops further, by the options expiration date. Also, the amount required will be set aside by your brokerage to cover the entire purchase. That means those assets will be frozen and cannot be accessed by you.

There are steps you can take to avoid some of these issues and you can refer back to this article, and this article as well, for more detailed information. These are very basic options strategies and are easy to implement. You must, however, have an agreement with your brokerage to enable you to take these actions, prior to doing so.

The other action that we can take is selling some or all of an existing position. For this portfolio, that will be the action I take right now.

In reviewing the portfolio, I notice that we have several financial stocks that we have an abundance of shares in; BKCC, and KFN. I will be trimming these positions by 100 shares each, which should give us roughly $2,000 in cash. Since both of these companies are very similar, we can take that cash and wait for an opportunity elsewhere. We will also maintain a sizeable position in each, for the dividends currently being paid.

By the same token, we have decided to take advantage of the drop in price of JNJ to increase our position. We also own BMY which is a dividend winning stock, but has a yield of 3.2%, overlaps with JNJ, and has not risen in value as much as other stocks over the same period. We can raise about $4,100 while banking a $900 profit from our original purchase price of $32.00 per share.

By selling these shares now, we will have a total of roughly $6,800 in cash, or 5% once again, and I believe that the money can be better deployed elsewhere, when the time is right.

The Bottom Line

Taking these actions gives us much needed cash, prunes two positions that are similar, and books a profit from the sale of a position that has underperformed, with a relatively low dividend yield.

Combining our purchases from today, along with the actions to be taken on the next trading day, will actually increase our overall yield on cost by a few ticks, and increase our income by a few hundred dollars per year.

Not a lot at first, but longer term will be significant, with reduced risk from the dividend opportunity stocks we trimmed back.

Disclosure: I am long AAPL, BKCC, CSCO, CSX, CVX, F, GE, INTC, JNJ, KFN, KO, MCD, NEM, NLY, O, T, WFC, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions of the author is not a recommendation to either buy or sell any security. Please remember to do your own research prior to making any investment decision.