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  • 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
  • Stress Test For Dividend Growth Investors [View article]
    "Returns of "bonds" for the next 30 years will be significantly less than the past 30 years and investors face increased risk to earn those reduced returns." - six

    An alternative to bonds would be to use your cash as the backing for selling puts on DGI stocks into the market at prices below the current levels. If the puts expire worthless you keep the premium (surrogate interest payment), if not, you own the DGI stock shares, which you can hold for the dividends, or try to sell at a small profit (eventually). Then repeat the process.

    You can sell a July 95 put on JNJ for about $0.72 (as of close on 5/11/15). That would net you $72.00 per $9,500 in cash backing. Repeat 4 times a year and you collect $288.00 on that $9,500 or about a 3% annual yield.

    Rather bond-like returns and the cash just sits there in your account the whole time. Worst case is you buy shares of JNJ at a ~6% discount to the current market price.

    {The premium on the July Put has only two months remaining. With 3 months to go the premium would be more like $1.10. I'm assuming the extra $0.38 of premium is used to pay commissions. Lower commissions would increase the returns accordingly.}
    May 11, 2015. 07:44 PM | Likes Like |Link to Comment
  • The Shocking Truth About Share Buybacks [View article]
    "I actually own 0.00000032% of LMT. So, for example, if LMT bought back 10% of their shares, I would now own 0.0000032% of the company. I donĀ“t believe that I would "see" any benefit to this action." - Silverbug2

    Wouldn't the per share profit increase by 10% the following year (other things held equal)?

    You might benefit in two ways:

    1) If the market holds the P/E at the same level, then your price per share could increase by 10% , maybe even more

    2) The company could increase the dividend significantly depending on what percentage of profits paying the current dividend requires. For instance, if current dividend levels require 10% of profits, adding another 10% of profit per share through buybacks would allow the company to double the dividend from the same profits while maintaining current investment levels. Who wouldn't like that? Imagine how the stock price might react as a result.

    As Chuck rightly explains, buying back shares at prices below the current NPV of future profits is a plus for shareholders. Buying them back at prices above that level hurts shareholders.

    If you would be willing to buy shares of LMT for $100 (a gross exaggeration of an undervalued stock) wouldn't you think it's a good thing for the company to do likewise, provided they don't spend money needed to continue growing the company?
    May 10, 2015. 02:24 PM | 2 Likes Like |Link to Comment
  • Stress Test For Dividend Growth Investors [View article]
    "simple ... own about 60 percent in stocks and 40 percent in bonds in retirement. ... In your scenario the portfolio would be worth about 700,000 instead of 475,000." - correct way to invest

    Assuming that the price of your bond ETF doesn't drop too. The shares of TLH that you buy today at $135 might also drop if the cause of the sudden market meltdown is sharply raising interest rates.

    Where is the article describing the panic of bond holders selling in the face of 25% losses on their 'safe' holding which pays them 2+% yield on their purchase price?

    That would lower the end value of your 60/40 holdings to around 600,000.

    I would also add that at least DGI'ers have a plan for what to do under those circumstances. The relatively few stocks which cut dividends are replaced, the rest are held or accumulated.

    What does the typical 60/40 investor do when the portfolio hits 600,000 besides hold on, and how is that any better a plan than DGI? (that's a rhetorical construct intended to illustrate a point) There is no such thing as a 'perfect' investment strategy. Even high-flying growth stocks can crash and burn. Quadrupling your money in AMZN, while it loses money, won't last unless you have the proper plan for selling before it's price tanks. (See 1999 tech stocks for the object lesson there.) Those who bought CSCO when it 'broke out' to new highs at $40 in 1999 are still sitting on 25% losses 16 years later.

    Investors have to do something with their money under every circumstance. Why is it "OK" to hold DGI type stocks through a correction in an index ETF, but not individually? I think that Dale Roberts' recent articles on index skimming (as he calls it) show that it's possible to outperform an index through careful selection of its individual index holdings.
    May 10, 2015. 01:25 PM | 2 Likes Like |Link to Comment
  • A Potential Double With A Huge Margin Of Safety [View article]
    "Goro is a good company as far as miners go. The only problem is they only have another 3-4 years of production, then what?" - HanYOLO

    This is the primary concern in holding GORO, IMHO. Can they replace production with reserves in the ground fast enough?

    Based on some of the early drill results they are reporting, it looks like they should be able to do just that:

    Note that some of their early results have promising numbers. Samples near the El Aguila open pit and currently producing La Arista mine show as much as 12 g/t of gold and it is located within a mile of the current La Arista (producing) mine. That's over 1/3 troy ounce per ton of ore. And it's right next door to the currently operating mill, so the cost of putting it into production will be on the low side. (As a comparison, most open pit mines can be economically profitable at around 1+ g/t.) If they aren't completely incompetent they should be able to extend the official mine life with more infill drilling over the next few years. Doing so will give them the time needed to finish the drilling at their other properties nearby, which are also showing some impressive initial drill results.

    Otherwise, GORO is sitting on more than $22 million in cash and gold/silver bullion (after paying down the $2 million equipment leases owed). Cash flow was positive after dividends and drilling in 2014 and with the completion of their new mill, they should see a reduction in the cost of production too.

    There is a lot of potential upside to compensate for the risk of running out of ore to mine, and you get paid over 3.5% in dividends to wait and see what happens. If production can be ramped up, that dividend might start growing and take the share price along with it too.

    Of course that's all my opinion based on the company presentation linked above. Interested parties might want to look it over for themselves.
    May 10, 2015. 12:27 PM | Likes Like |Link to Comment
  • Should You Replace Bonds With Cash? [View article]
    "Treasury bonds represent systemic risk insurance, among other things, while utilities do not." - bale002

    Because governments never get so far into debt that they default on their bonds:

    Meanwhile, sound utilities like SO can manage to go 30 years without cutting their dividend (and actually growing it by 12+% CAGR over that span).

    Personally I believe the risk of Treasury default is higher than the risk a sound utility will be replaced any time soon. I've gone without electricity for a couple summer weeks in the hot southern US. It sucks. As long as air conditioners are available, people will pay their electric bill.

    As for the Treasury, I have yet to see any sort of viable plan to eliminate the deficit, much less repay the debt. One day Uncle Sam's 'free pass' will stop and systemic risk will be turned on its head. And quite likely, for many quarters after that event happens, SO will send dividends to its shareholders.

    The relative risks are something each investor will need to evaluate for themselves, yes, but dismissing sound utilities out of hand only serves to reduce the options available.
    May 9, 2015. 02:35 PM | Likes Like |Link to Comment
  • Should You Replace Bonds With Cash? [View article]
    Why not consider replacing bond funds/ETFs with utility shares?

    The iShares 7-10 Year Treasury Bond (IEF) ETF yields 2%.
    Southern Co (SO) yields 4.8%. SO generates more than twice the yield and has a Morningstar credit rating of A-. With a little patience you could have picked up SO with a 5.5% yield back in 2010.

    Since IEF's inception in 2002, SO has also provided the better total return with 8.5% CAGR vs. IEF's 5.8% CAGR.

    Granted, utility shares will be a bit more volatile in price, but the price is also growing faster over time than bonds, so losing a bit more here and there still leaves you farther ahead than the bonds would.

    It's worth considering, even if you eventually decide that substituting utilities for bonds isn't your cup of tea.
    May 9, 2015. 08:53 AM | 1 Like Like |Link to Comment
  • A Potential Double With A Huge Margin Of Safety [View article]
    Long GORO and dripping for over a year.

    Average price is around $3.67. I'm hoping they begin raising the dividend again and then, just maybe, we'll see a price closer to $10/share (that's probably wishful thinking, but might as well aim high).
    May 6, 2015. 02:09 PM | 1 Like Like |Link to Comment