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  • Dividends At A Reasonable Price - Part 2 [View article]
    "Meanwhile the other book, "Understanding Options" by Michael Sincere is work to read and understand. Compared to the 2 hours to thoroughly understand Derek Foster's book. I've spent 6 hours and am only 2/3 in. I could read it all again as there's so much information that is brand new to me and I'd learn a lot a second time through." - Inzkeeper

    The second book is probably unneccessary. Options are so versitile that you can replicate almost anything if you use them in the right manner.

    My suggestion would be to focus on understanding selling puts as outlined in the first book. After that, learn about the mechanics and costs of trading options in your account.

    Then put on the thinking cap and sketch out a plan you consider 'reasonable' and try it on paper. If you have a broker who is willing to explain the details, even better. Once you think you've got it figured out from start to finish, give it a shot on a single option position to get a feel for it.

    Personally, if you can figure out how to collect more than the stock's dividend amount per share in a year of put selling (after costs), then you're ready for prime time IMHO.

    Best of luck and don't hesitate to ask questions here if that feels more comfortable.
    May 24, 2015. 08:56 PM | Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]

    For anyone interested, here is a simple spreadsheet I built to help the younger folks do some investment 'what-iffing' over a 30 year investment period.

    You can use it to estimate how much you need to save, at a given estimated CAGR, over 30 years to replace your current inflation adjusted income.
    May 24, 2015. 01:05 PM | 4 Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]
    It sure drives home Dave's point about time in the market. Additionally, the end result only reflects a single initial investment. Start adding more investments from savings each year and the end results can really add up over a lifetime.

    If you start investing when you're 30 years old, or younger, and select from quality DGI stocks at good value prices, then weeding out a few disappointments now and then won't ruin the result. As the table shows, even a "go-to-zero" choice among other good performers will only reduce performance of other good choices by small amounts over time.

    Replacing a "go-to-zero" when it is only a "go-to-70%-er" will minimally impact the CAGR in 30 years. The key, as Dave points out, is to get started and keep at it. The bigger winners will smooth over your goofs in the long run.
    May 24, 2015. 12:22 PM | 3 Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]

    Save your pencil Dave. Here's a short table showing what Earl Setser described.
    The first column is the number of stocks purchased initially.
    The second column is the total initial investment @ $1,000 each.
    The third column is the final amount of the portfolio 30 years later (all the same as the initial 5 position @ 15.2% CAGR amount)
    The last column is the CAGR for each portfolio size given those inputs.

    It is interesting to see that having 5 very good performers and 15 "go-to-zero" performers still gets you to a 10% CAGR over 30 years (see the 20 stock case at the bottom of the table).

    # _______ Initial $ _______ End $ ____ 30 Yr CAGR

    5 ________ $5,000.00 _ $348,774.22 ___ 15.20%
    6 ________ $6,000.00 _ $348,774.22 ___ 14.50%
    7 ________ $7,000.00 _ $348,774.22 ___ 13.92%
    8 ________ $8,000.00 _ $348,774.22 ___ 13.41%
    9 ________ $9,000.00 _ $348,774.22 ___ 12.96%
    10 ______ $10,000.00 _ $348,774.22 ___ 12.57%
    11 ______ $11,000.00 _ $348,774.22 ___ 12.21%
    12 ______ $12,000.00 _ $348,774.22 ___ 11.89%
    13 ______ $13,000.00 _ $348,774.22 ___ 11.59%
    14 ______ $14,000.00 _ $348,774.22 ___ 11.31%
    15 ______ $15,000.00 _ $348,774.22 ___ 11.06%
    16 ______ $16,000.00 _ $348,774.22 ___ 10.82%
    17 ______ $17,000.00 _ $348,774.22 ___ 10.60% >= S&P 500
    18 ______ $18,000.00 _ $348,774.22 ___ 10.38%
    19 ______ $19,000.00 _ $348,774.22 ___ 10.19%
    20 ______ $20,000.00 _ $348,774.22 ___ 10.00%

    I marked the 17 holdings case as equaling the VFINX (S&P 500) return per Earl's comment.

    Wow indeed.
    May 24, 2015. 11:32 AM | 6 Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]
    "Invest in from 2-5 funds/ETFs with a blended expense ratio not to exceed 0.1%. That will keep you out of trendy and expensive funds that might sap returns. (0.1% is $10 in annual fees per each $10,000 invested--the equivalent of one round-trip stock trade, more or less.) Auto-reinvest and rebalance if any fund gets too lopsided due to gains. And don't dismiss quality bonds." - WallStreetDebunker

    And so the Debunker of Wall Street's advice to investors is to do exactly what Wall Street says.

    The Irony abounds.
    May 23, 2015. 10:44 AM | 15 Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]
    "I find a link today where he finally admitted to buying something back in Sept 2014, ILF. Annualized gains? Minus 34% in a raging bull market, and he wants to tell us how to invest? He should have just gone with an index fund. ... Ha!" - Chowder

    He must have picked it up for di-worse-ification purposes, right?

    Surely his other positions made up for it.
    May 23, 2015. 10:22 AM | 5 Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]
    "Your comment is exactly the reason that S/A needs a DELETE button, and/or a DIS-like button." = IZZKUBE2.5

    SA originally DID have a dislike button, but they removed it after numerous interpersonal feuds broke out over disagreements. There also used to be an "Ignore" button which would replace the comments by the person you chose to Ignore with asterisks (it didn't remove the comments, but you weren't able to read them - though everyone else could).

    SA used to keep track of the "top commenters" by some like/dislike ranking, but the feuds turned that into a mockery. I was once spammed with hundreds of dislikes out of spite by someone who disagreed with me over some topic. That person went back through all my prior comments and dis-liked every one. Before that point I was in SA's top 25 ranking based on their scoring system, but the plethora of spammed dislikes moved me down several thousand spots.

    I guess SA decided it wasn't working and they did away with the dislikes as it was rendered meaningless by fools who misused it.

    To paraphrase the late, great George Carlin:

    "Never argue with a fool. They will only bring you down to their level and beat you with experience."

    Dave Crosetti's response is probably the most effective. Say "Thanks for your opinion, my opinion differs." and let it go. Eventually the trolls get bored with not causing a ruckus and move on.
    May 22, 2015. 05:43 PM | 10 Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]
    Thanks for the story Dave, and the lesson on putting Time to work for you. I always enjoy reading your articles.

    I've never been to the Grand Canyon, but my first trip to Yosemite was very similar. On my first day there I arrived at 6 am and drove up to the southern rim overlook. The only way I could manage to look straight down to the canyon floor 3000 feet below was to crawl on my stomach up to the edge (after making sure that nobody was behind me - and I was the only one there, LOL). Yikes! The wall of the canyon drops back behind the edge, so it looks like there isn't even a wall to bounce off on your way down.

    The impact of the scale of things didn't hit me until later in the day when I drove down to the floor of the canyon and realized that the teeny-tiny little trees I had seen from the rim were actually 80 feet tall. Double Yikes!

    If you get the chance, go see Yosemite too. It's a beautiful place. You'll need several days to take it all in.
    May 22, 2015. 01:35 PM | 3 Likes Like |Link to Comment
  • Dividends At A Reasonable Price - Part 2 [View article]
    "While other brokerages do assess a regular commission (as if the shares were purchased normally) when the shares for sold puts are assigned, neither I nor any of my investing acquaintances pay any "exercise fee". " - Hilo

    I'm just reading off the TDAmeritrade website. I haven't bought or sold an option since 2009, and those were purchases which I used as a proxy for being long or short over the span of a few months. I didn't exercise anything, so no fees.

    As I explained above, I don't have a big enough DGI portfolio to sell puts at this point. Maybe in the future, but that would only be for "entertainment" purposes probably. ;-)


    Selling puts really isn't rocket science. The worst case scenario is the stock price tanks and you have to buy shares at the strike price with a built in loss from day 1. If you're happy buying that particular stock, at that particular strike price (and you REALLY don't care where the price goes afterward), then selling a put is a way to collect money while you wait for the stock's price to fall.

    You are litterally selling insurance on the stock's price and collecting a premium for accepting the downside price risk another holder doesn't care to worry about (and, oh by the way, buying a great stock at a great price to boot).

    If you can get a fee / commission structure you are happy to pay, then it's a no-brainer. Give it a shot as soon as you feel comfortable with it. The process is about as exciting as watching paint dry once you collect the initial premium.

    You might want to use options with a date more than 2 months out though. The 'optimal' duration of the options will vary with market conditions. Hilo sounds like an experienced put seller, perhaps he can offer some guidelines for picking which puts to sell.

    Good luck! Be sure to keep us informed of your foray into 'higher finance.'
    May 18, 2015. 03:44 PM | 1 Like Like |Link to Comment
  • Dividends At A Reasonable Price - Part 2 [View article]
    "subtract the commission on the options from the $47 received for the sale of the put. In my case, that commission is typically a hair under $6 per option trade. It gets cheaper if I were to trade more two or more of the same option at the same time." - Christinebitg

    Agreed. I purposely avoided commissions to focus solely on the mechanics of selling puts. Taking commissions into account is also a must.

    Commissions are one reason why I don't personally use options except as an outright position trade (perhaps to hedge my portfolio against a falling market). In order to really make money selling options you need to minimize the commissions and trade in larger lot sizes.

    Selling a single put at $47 in my TDAmeritrade account would only net me $36.26 after commissions ($9.99 + $0.75 per option). That's 22+% of the premium collected. Ouch. In addition, there's another ~$20 charge for exercise too. I'd be down to keeping $16.27 of the $47 if the first option I sold was exercised.

    Selling two $47 puts would net me $82.51 (12+% in commissions), plus the possible $20 exercise fee, but would require $15,500 in cash backing. That's far too big a position for a single stock in my DGI portfolio.

    {Paying a $6 commission would be a big improvement for my option trades.}

    You are correct. If Faye can't get commission-free option trades, she might not want to do it at all. Still, collecting most of the premium is better than collecting nothing. It's worth looking into the matter to see if it makes sense to get paid _something_ while you're waiting for the prices to come down into your buy zone.

    Even the $16 net premium I would collect is more than the money market fund pays at 0.01% APR, but it's quite a bit of work for just $16.

    I just put my money into an under / fairly valued DGI stock instead and use my free time for other things worth more than $16 to me. :-)
    May 17, 2015. 10:26 PM | 3 Likes Like |Link to Comment
  • Dividends At A Reasonable Price - Part 2 [View article]

    Selling cash covered Puts may be what you're looking for. A simple overview of selling puts to buy 'discounted' shares can be found here:

    Each Put covers 100 shares of stock. If your Put is exercised by the purchaser you will buy all 100 shares at the agreed strike price.

    Here's a simple example using PG (since you wanted to add some shares at lower prices):

    PG closed 5/15/15 at $81.05. You want to buy it for less.

    Option quotes on PG can be found here:

    I'd suggest considering puts with at least a month or more to go, so use the drop down selector to choose the July 17, 2015 expiration.

    Scroll down to the Puts section. On the left is the 'Strike' column. That's the share price you will be able to buy shares at. Naturally, the closer to the current price, the more you will receive for selling a Put. It's a trade-off, accept a higher strike price to get more for selling the put.

    Let's say you are happy with a $77.50 strike (~a 5% discount) to buy your 100 shares, for a total of $7,750. Your broker may require you to hold $7,750 in cash as collateral for your Put sale.

    The current Bid for a July 77.5 Put is $0.47 (that value will change over time so don't expect what you see to match the value when I wrote the comment).

    That means you can sell 1 July 77.50 PG Put and get paid $47 (100 shares x $0.47). You get that money at the time you sell the put.

    Once you sell the Put you just wait. One of two things will happen:

    1) If PG's price stays above $77.50 the Put will expire after July 17, 2015 and you get to keep the $47. Your $7,750 earned 0.6% in two months, or 3.6% per year (if you repeat six times), without buying PG. You get paid to wait for PG to drop in price.

    As Dave Crosetti would say: Wash, Rinse, Repeat.


    2) PG's price drops to below $77.50. The person who bought your put could decide to sell those 100 shares to you for $7,750 (regardless of the market price). You also get to keep the $47 premium. The risk you face is that PG shares might continue lower, which for a DGI isn't as big a deal. You got them for ~%5 below current prices, plus a 0.6% premium payment.

    Selling Puts is like writing a short term insurance policy for someone who already owns the stock. You negotiate the strike price (price at which you'll buy the stock), the premium amount (amount you get paid to make the deal), and the duration of the contract.

    Hope that helps a bit. Selling Puts is a good way to earn money on your cash while waiting for your stock to drop in price.
    May 17, 2015. 02:58 PM | 1 Like Like |Link to Comment
  • The Shocking Truth About Share Buybacks [View article]
    ""If LMT reduced their share count by 10% and the dividend pool remained the same, your dividend would increase by about 11%."

    No, it wouldn't. ... Dividends are declared by the Board of Directors.
    If the BoD does not raise the dividend, then reducing the share count will not raise the dividend." - RAS

    It would depend, actually. Technically Robert is right, until the BOD increases the dividend nothing changes. However, the BOD might have a larger pool of money available, per share, to pay in dividends. That might make any dividend increase they decide to make a bit larger than if they hadn't bought the shares back at a good price.

    For instance:

    JNJ pays $3.00 per share in dividends. JNJ has earnings of $5.59 per share. There are 2.77 Billion shares outstanding at a current price of $102.30.

    JNJ's current dividend pool amounts to $8.31 Billion. Earnings are $15.4843 Billion.

    In July 2014 JNJ announced a $5 Billion share buyback program with no time limit. There were 2.82 Billion shares outstanding at the time. In almost a year JNJ has bought ~50 Million shares back. The average price over that span has been around $102.25 (range of 95.1 to 109.49). $5 Billion into 50 Million shares is an average cost of $100 per share.

    As an educational exercise, let's assume the market dropped 60% in the last year and JNJ shares were available at $50 during that time. If JNJ had bought ALL their shares at an average price $50 instead of $100, they would have purchased $5 Billion / $50 = 100 Million shares, leaving 2.72 Billion share outstanding (50 Million fewer than above).

    Since the share price doesn't impact operations JNJ would still have a dividend pool of (at least) $8.31 Billion, or $3.055 per share, which is 1.8% higher than the current $3 per share dividend payment.

    These circumstances would enable the BOD to increase the dividend by 1.8% without any increase in earnings. That might allow them to enact an 8.8% dividend increase instead of a 7.0% increase in the near future.

    Every time the BOD can buy shares at a discount they can afford boost the dividend a bit more than usual. Each of those incremental increases compounds over time to the benefit of long term shareholders.

    As Robert correctly points out, until the BOD enacts the change, it is only an opportunity to benefit shareholders. However, the share buyback at value prices provides the extra earnings per share necessary for the BOD to do so at almost no cost to the company's operations.
    May 17, 2015. 01:28 PM | 3 Likes Like |Link to Comment
  • The Shocking Truth About Share Buybacks [View article]
    "I thought complete knowledge is the same as the sum of the differences of opinion. How could it be any more complete than that?" - 18214212

    Holding a different opinion is one thing, acting on it is another.

    One group of holders, after a 10% drop, might be thinking "OMG. I need to get out before I lose any more of my investment."

    Another group, after the same 10% drop, might think "The company's performance is still good, but with the lower price the shares are a great bargain now."

    It's not hard to imagine that group 1 might sell some of their shares to group 2 at prices slightly below the current market levels as a result.

    The critical piece of the puzzle is what change in information led to the selloff? If the company has a dividend payout ratio of 40% and misses quarterly revenue estimates by 5% yet still manages to beat earnings estimates, then one could easily imagine the above reaction by the two groups identified.

    I've picked up several great DG stocks under similar circumstances. Quarterly numbers fall a bit short for a great company, the shares drop almost reflexively, and I buy, only to see the price rebound and continue higher over the following quarters as 'normal' performance reasserts iteself.

    The knowledge available is the same for everyone, but the differing opinions are what drive the reactions at a wide range of prices.

    So at which point in time is the price "right"? I don't know, but I understand that the price I pay really only matters at the moment I click on the BUY button.
    May 16, 2015. 10:17 AM | 4 Likes Like |Link to Comment
  • Should I Have Followed My Advisor's Advice ? A Look At 4 Year Performance [View article]
    "I then found S/A and put together a plan ... and started my own DG Portfolio with TD Ameritrade and then within a year moved all our investments over. Her last words to me were something to the effect of "you'll be back, they all come back eventually".
    ... Nope, not going to happen. ... I have my plan and get dividend income put into our checking account monthly and have not had to sell one single stock to pay for retirement income and don't plan to. And no fees." - Dividend Nut

    Roger, that's Awesome! I'm still a handful of years away from retirement yet, but I'm always cheered by stories like yours, Bob's, and all the others who adopted DGI investing principles successfully. Thanks for sharing.
    May 14, 2015. 09:46 PM | 4 Likes Like |Link to Comment
  • Should I Have Followed My Advisor's Advice ? A Look At 4 Year Performance [View article]
    Great idea for an article Bob! A back test against a 'real-life' DGI portfolio.

    Not surprisingly, your super-safe DGI holdings outperformed the MPT approaches offered by professionals while providing as much or more income.

    I realize you detailed the actual withdrawals for your real portfolio, but that sort of makes your comparison an apples-to-applesauce one. Here are the numbers if you simply mimic the alternate approach withdrawals from your DGI:

    Pre-Jan 1 Amount _ Withdrawal ____ Jan 1 Amount __ Returns _ Dec 31 Amount
    $250,000.00 ____ $10,000.00 ____ $240,000.00 ____ 6.25% __ $255,000.00
    $255,000.00 ____ $10,300.00 ____ $244,700.00 ___ 16.52% __ $285,124.44
    $285,124.44 ____ $10,609.00 ____ $274,515.44 ___ 18.49% __ $325,273.34
    $325,273.34 ____ $10,927.00 ____ $314,346.34 ___ 14.35% __ $359,455.05

    The end value in that case is nearly 15% higher than the best alternative offered.

    The oft repeated assumption that DGI can't provide TR like MPT can is beginning to wear a little thin around the edges, it seems.

    Well done! Thanks, as always, for the update.
    May 14, 2015. 07:07 PM | 8 Likes Like |Link to Comment