Buying Cisco, CSCO, For 2016 Portfolio

| About: Cisco Systems, (CSCO)

Today I will add a new stock to my 2016 Portfolio. My principle reason for adding this stock is, of course, income. I like the yield, I like the fundamentals, and I see covered call potential.

Cisco Systems (NASDAQ:CSCO)

Dividend and Dividend Increases

Cisco Systems is the world's largest supplier of networking equipment and stuff. Cisco began dividend distributions in 2011. Investors received $.12 per share that year. This year investors will receive $1.04 per share.

CSCO's dividend yield of 3.32% is well within the range for a 2016 Dividend Stock and the dividend growth is significant. Over the past 5 years, dividend growth has averaged 66% per year.

You always want to see the trend of dividend increases. If dividend growth has slowed recently, you might not be investing in an income stock that will double your income in 20 years. My readers know, you have to double your income every twenty years just to keep up with average expense inflation. CSCO's most recent dividend increase was 23.8%. This is a very good dividend increase.

Since we do not have a 25-year dividend history, risk is higher so take that into consideration. CSCO, in the world of stocks and more important in the world of technology, could be a flash in the pan; but I doubt that the world's largest supplier of networking equipment is a flash in the pan.

Revenue and Earnings Growth

My 2016 Dividend stock criteria include a hurdle of 4% per year revenue growth. The reason I use revenue growth is because revenue growth is the fuel for dividend growth. In Cisco's case it is not revenue growth that is fueling the dividend it is earnings growth.

Over the past 3 years' revenues have grown a meager .44% per year. Revenues are not negative as you see in many sectors but revenue growth is weak to be sure.

Earnings, on the other hand, have increased an average of 4.48% per year.

One would expect a technology company to employ productivity in its favor making more money on the revenue brought in. In spite of the meager revenue growth, I am hoping that CSCO will renew revenue growth and if they do not, I get paid to wait provided the stock doesn't go belly up.

Financial Safety

Debt to equity ratio (D/E) is one of the measures I use to measure the safety of a stock. Business can change quickly and you want a stock that can endure through thick and thin. CSCO has a very manageable D/E ratio of .4505, according to YCharts. Look at how it performed during the 2008 and 2009 crises. The stock price suffered but earnings were positive all along.

Yet, CSCO at $31.50 is near its 52-week high of $31.95. Income investors do not like to pay premium for income. Yet with a price to earnings ratio (P/E) of 14.66, CSCO doesn't seem expensive. MSFT's P/E ratio is 28.27. In defense of MSFT, its 3-year revenue growth has averaged over 3% per year. Not particularly exciting but better than CSCO.

The table below presents all the fundamental data I used to add CSCO to the 2016 portfolio.

Covered Call Situation

I love call potential even more than a higher yielding stock. I am hoping the recent call activity in CSCO will improve to provide additional income that will make CSCO a good fit for the 2016 portfolio. Over the past couple of days' income on January 2017 $33 strike price has increased. January is too far out for me, but I will be looking every day for the opportunity to find a call that delivers 8-10% capital and a minimal 10% total return if the call is exercised. You can see by the examples below that we are not quite there.

Conclusion - A new wrinkle for the 2016 portfolio

I am going to add two lots of CSCO to the 2016 portfolio. This is first time I have used this technique with one of my published model portfolios. I will sell calls on one lot and hold the other. This should be a good experiment to see how it all works out. Perhaps this is a search for yield that will not work out well. This is the beauty of keeping track and reporting on it. You cannot hide!

I will publish all updates to CSCO as part of the 2016 portfolio.

Consider Cisco for the income producing portion of your portfolio.

Disclosure: Long CSCO with calls, expecting to add with additional calls.