By Rocco Pendola
For Part One of this series, see Creating a Growth and Income Dividend Portfolio With $150,000, Part One.
Before I fill up the relatively conservative portion of the portfolio with dividend growth stocks, let's review the early performance of the two stocks that kicked off the portfolio in Part One.
- Purchased 1,000 shares of Pandora (P) @ $9.91. Thursday's closing price: $10.58. Value: $10,580. Performance: +$670 or 6.8%.
- Purchased 1,500 shares of Starbucks (SBUX) @ $50.73. Thursday's closing price: $51.72. Value: $77,580. Performance: +$1,485 or 2.0%.
So far, so good.
Let's not get too carried away, though. At this point, Q3 has much to do with this success as my stock picking abilities.
Now, I have $63,995 to spend on dividend growth stocks to round out the portfolio's core.
I'll list each new position and then discuss my rationale for the decisions. All entry prices, as of Thursday's close. And, of course, I accompany each stock position with covered calls.
- LONG 500 shares of Comcast (CMCSA) @ $35.25. Cost: $17,625.
- LONG 500 shares of Disney (DIS) @ $52.60. Cost: $26,300.
- LONG 300 shares of Duke Energy (DUK) @ $64.66. Cost: $19,398.
That's a total expenditure of $63,323, leaving $672 left over. We'll take that balance and add it to the $14,683 we have to spend on short-term, speculative option trades in the forthcoming Part Three of this series. So, the cash balance in the portfolio stands at $15,355.
The covered calls I wrote against the P and SBUX positions brought in a total of $525. I will not bank covered call income until the position closes.
Some investors do not like the idea of writing covered calls against long-term, buy-and-hold positions. I happen to think it's the only way to go. You can (easily) more than double the income you generate from dividend payers using this strategy consistently.
Certainly, times will come when you leave money on the table. A stock runs past your strike. You get your shares called away. No sweat. That's when you turn around and sell puts in an attempt to get back in the position. Or buy on a dip.
With that in mind, we'll write 5 CMCSA October $36 calls @ $0.36 each, 5 DIS October $55 calls @ $0.22 apiece and 3 DUK October $65 calls at $0.75 per.
Add it up and that brings in $515 worth of income, bringing the running covered call pot to $1,040.
The rationale for the DUK position is pretty straightforward. I like to use utilities as defensive positions.
DUK has underperformed American Electric Power (AEP), a model portfolio stock that has returned roughly 11.4% for subscribers to the Paid2Trade Options Investing Newsletter. I don't expect DUK to trail a peer like AEP for much longer. In fact, right now, it reminds me a bit of AEP when I first started buying that stock late last year/early this year.
As for the two media stocks - CMCSA and DIS. Old media and new media are, by leaps and bounds, my favorite spaces to cover. I feel like I have had a pretty solid handle on media, entertainment and telecommunications stocks.
In the space, these five are absolutely the best-positioned companies. They all own key live sports programming and a few have other equally as valuable assets under their watch.
Of course, we all know about Disney theme parks and the ESPN franchise, not to mention ABC. Comcast owns the NHL's Philadelphia Flyers through a subsidiary, NBC and it also owns a regional delivery system. That's as close as it gets to the monopoly Rogers and BCE have going in Canada (yes, I say monopoly because do not believe for a second that they're actually in true competition with one another).
Both Disney and Comcast could roll on as is and be just fine. However, I expect more, particularly from Comcast. They'll find a way to work around regulators and expand the empire.
In this decade, media companies must jockey for position. That means gobbling up the last bits of prime content - live sports and heritage brands like HBO. DIS, CMCSA and TWX are, far and away, the three best situated firms in the United States. I rode TWX to a nearly 20% gain in the option newsletter's model portfolio. Now, in this portfolio, it's time for DIS and CMCSA to continue the magic.
Next week, in Part Three, I get aggressive, putting the rest of the cash towards shorter-term speculative options plays.