The September expiration date for the covered call option contracts that I wrote for Medtronic, Inc. (NYSE:MDT) and Microsoft Corporation (NASDAQ:MSFT) this past July has come and gone, and, as expected, those shares all got called away. This leaves me with a decent pile of cash to reinvest in some other companies, the stocks for which have better yields than either MDT or MSFT. I wrote about what my updated plans were for these funds last week, but as usual, as time rolls by and the market unfolds, my plans have adjusted accordingly.
What I Thought I'd Do…
The time has come to make decisions and place limit orders, and to report to you, Dear Readers, what those are. In the "September Update" article, I had indicated that I would purchase the following stocks. The first column describes the percentage increases in these existing positions in my IRA these purchases would provide, the second shows resulting percent allocation of my portfolio's total, and the third their yields at that time:
Crescent Point Energy Corp
Making these purchases would have increased the dividends I would receive from the added shares of these stocks by 87.9% over the projected annual dividends that I could expect to get from repurchasing the shares of MDT and MSFT that had been called away. That's not bad, considering my main priority for my portfolio is to grow the income that it generates so that I can replace my paycheck with the dividend income from my eventual portfolio by the time I retire.
However, several commenters on the "September Update" article pointed out that the future does not look too bright for Exelon's dividends, citing a number of reasons as well as analyst projections that indicate EXC's dividend may decline. So I gave the matter considerable thought, and decided that there could be a better way to redistribute the funds from MDT and MSFT getting called away.
What I'm Actually Doing…
Once again, I consulted the My Mad Method [MyMM] spreadsheet to see what would be better options for my now-available cash rather than increasing the currently 3.10% Allocation of EXC in my IRA's portfolio. Not much has changed since the last article in terms of MyMM Rankings, Delta Ratio Readings and Rating Signals, so I took a closer look at where I could spread the funds that I would have expended on buying another 25% of EXC in such a way that I might increase the amount of projected annual dividends even further than the original 87.9% increase over MDT's and MSFT's projected annual dividends.
I'm still going to be buying the same amounts of SPLS and CSCTF.PK, but decided to buy quite a bit more of COP than I'd originally intended. COP still has a great weighted MyMM Rank out of the 38 stocks remaining on my "superlist" (the combination of my watchlist and portfolio list), resulting in a "Buy!" Delta Ratio Reading and a "Definitely!" Rating Signal. So instead of increasing my existing position of COP by 176%, I'm going to increase it by 240%, which will raise its allocation of my IRA's portfolio total to 4.27%. With a healthy yield of 4.6%, that will give my expected annual dividends a nice boost.
That still left a good portion of the funds that I had previously allocated to EXC to be spent in other places. Rather than try to initiate a small new position in a stock I didn't already own, I instead decided to split the remaining amount between two stocks that I currently held, but felt could use an increase in their % Allocation of my total portfolio.
The first thing to draw my attention was AFLAC, Inc. (NYSE:AFL), which I'd recently added to my portfolio. However, my initial purchase of AFL resulted in it only taking up a 2.32% Allocation in my portfolio, which is less than I want to eventually hold of this Dividend Champion. AFL has the #1 unweighted MyMM Ranking on my superlist, and when I apply a 20% weighting factor to the "percent allocation" metric, its MyMM Rank only drops to #6 out of 38.
So I decided to increase my current position in AFL by 18.2%, which will bring its % Allocation in my portfolio to 2.74%. I'd like to bring it up to 3.00% or a bit higher, if possible, but right now it has a Delta Ratio Reading of "Screaming!" despite being considered undervalued in terms of other metrics (and opinions), so taking a small bite now and waiting for a possible better price for more seemed the prudent thing to do. In addition, AFL is currently only yielding 2.74%, and my primary goal with this exercise was to increase the amount of dividends that I would have gotten if I'd purchased more EXC, which wouldn't be happening if I spent any more money on AFL now.
Finally, what jumped out at me next was that, despite having a relatively high percent Allocation in my portfolio of 4.28% already, BreitBurn Energy Partners, L.P. (NASDAQ:BBEP) is yielding 9.41% and "only" has a Delta Ratio Reading of "Too High." So I decided to increase my existing position in BBEP by just 8.0%, which will bring its percent Allocation in the portfolio to 4.62%. This is still below my self-imposed 5% threshold for any one position to hold, but this small addition of this high yielding stock should give my total future dividends a nice boost, too.
These changes will result in the following increases in these existing positions (including updated yields as of this past Friday's close):
Crescent Point Energy Corp
BreitBurn Energy Partners
The important result of making these changes is that the expected annual dividends that the new shares in these companies should produce represents an increase of 107.7% over the annual dividends that MDT and MSFT were producing, netting me about 20% more in income than my previous plans for these funds.
I've placed the limit orders for these purchases, so hopefully by the time you read this article those orders will have been filled.
That does it for September, 2012. There have been some other developments in my portfolio related to positions that I was still holding at my former brokerage firm, but as those funds won't be available to me until later this week at the earliest, I'll save the details of what's going to happen next for an October installment of "What Next To Buy, And Why?"
Disclosure: I am long AFL, BBEP, COP, CSCTF.PK, EXC, SPLS. 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.
Additional disclosure: Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.