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Nothing Bad Ever Happens In The Stock Market
There's always a silver lining in every situation. You simply need to know where to look for it, or be willing to search for it.
Notice the word "happiness" running throughout each possible scenario. Merriam-Webster's dictionary defines happiness thusly:
Definition of happiness
1. obsolete : good fortune : prosperity <all happiness bechance to thee - William Shakespeare>
2. a state of well-being and contentment : joy
b : a pleasurable or satisfying experience <I wish you every happiness in life.> <I had the happiness of seeing you - W. S. Gilbert>
3. felicity, aptness <a striking happiness of expression>
beatitude, blessedness, bliss, blissfulness, felicity, gladness, joy, warm fuzzies
Plainly, happiness is a subjective condition that can be defined in many ways. These multiple definitions lead us to conclude that a state of happiness can be achieved in more than one way.
If you are maximally flexible, you may be among the few who recognize that your satisfaction with your investment plan does not have to rely on one particular outcome in the stock market.
In fact, maximum flexibility to accept all possible outcomes can result in a maximum happiness quotient. Next to an IQ intelligence quotient, an HQ, or happiness quotient, can be easier and more personally satisfying to achieve.
If the stock market rises, I get richer and I'm happy
This is the condition of the stock market that is easiest to understand and is a condition sought by the majority of investors. In fact, because the condition of the stock market over very long periods of time is usually reflected in rising prices, investors who tie their happiness to a rising market are rewarded with ever-higher stock prices over time. They get richer and their happiness quotient increases, especially during bull market conditions that we've experienced the last eight years.
As a clear example, we can look at AT&T's (NYSE:T) performance over the past eight years, from the bottom of the financial crisis on March, 9, 2009 till today.
AT&T's Price, March 9, 2009 Till February 13, 2017
Certainly, the investor who bought near the financial crisis lows at around $21.00 per share has enjoyed the almost eight-year ride. There were a few bumps and bruises along the road, but for the most part the stock price has been on a pretty steady upward climb. Buyers at the low have seen their investment dollars double in this name.
Investors who have owned T for even longer periods of time and held on to their shares during the debacle can rightly congratulate themselves for holding on to these high quality shares. Doing so allowed them to participate in the same 100% rebound in price from the bottom. Those who bought and held feel just as rewarded for their decision.
Happiness quotient: 100%
If the market falls 20% or more in a bear market, I'm happy to pick up the bargains.
In this phase, as a stock price erodes, either following the general market trend down or for company specific negative developments, investor anxiety in the average investors gets turned up a notch. At the negative 10% level, most investors begin to question their original decision to buy the stock in the first place. At the 20% negative mark, selling picks up speed in conjunction with increased investor nervousness. At 30% negative, panic begins to take hold. At 40% negative or greater, investors are virtually throwing the baby out with the bathwater.
The Financial Crisis Debacle - Time To Shop The Bargains
AT&T Price: January 1, 2008 Through March 9, 2009
AT&T participated fully in the lurch of the market's madness that was the financial crisis and the worst recession since the Great Depression. Its stock price fell from the $42.50 level and was virtually cut in half at the March 9, 2009 level of $21.72.
Investors with a long-term perspective and some understanding of historical patterns were able to see this 50% lopping off the top as what it really was: a 50% sale, plain and simple. New buyers at that low were able to pick up high quality stock on the cheap and were able to buy themselves twice the amount of income for the same amount of dollars invested as the 2008 investor.
Investors who bought the stock on January 1, 2008 were entitled to the $.355 quarterly dividend paid on January 8, 2008. On an annual basis, this came to $1.42. Based on the $42.50 price they paid, their annual yield came to 3.34%.
AT&T continued to grow revenue and profits throughout the bear market and recession, and shared those profits with shareholders in the form of continually rising dividends. They continued to raise the dividend each year. By March 2009, the company was paying a $1.64 dividend. At the March 2009 lows, this dividend represented a 7.54% yield. This yield was substantially more than double the yield available just 14 months earlier.
AT&T Price and Yield
New buyers were rewarded with the chance to buy high quality at enormous value prices. A 50% off sale, taken advantage of, brought more than 100% more income to the income investor. It also rewarded them with a 100% capital gain on their shares. Earlier buyers, who decided, correctly, to hold their shares through the debacle, were rewarded with a 100% price recovery in their shares, and a consistently rising income stream.
Today's annual dividend of $1.96 gives those buyers at the March 2009 lows a current dividend yield today of 4.73% at today's stock price, and a yield on cost of an enormous 9.2% based on their cost at $21.72.
Happiness Quotient: 100%
Should the market simply go sideways, I'll simply accumulate my dividend checks and be happy with that.
Stock prices can also drift for long periods of time, slipping along sideways, going nowhere fast.
Like the hamster making much ado about nothing, putting out lots of energy but not getting anywhere, a stock's price can meander sometimes for months on end. The tug of war between buyers and sellers can seem at a standstill. In chess, it's referred to as a stalemate. For a long period of time, there's no winner or loser.
This can be seen in AT&T's stock price throughout much of 2004.
AT&T, 2004 Price Movement
For a year, the stock price never strayed more than 8%, up or down, from the $25.50 trend line. If you were in it strictly for capital appreciation, you'd have been disappointed with T's performance that year. But what if you had objectives greater than capital gains alone? What if you were able to appreciate the fact that this company continued to pay out a generous dividend, regardless of price movement? It may have marked time going nowhere in price, but all the while it continued to reward you with excellent dividend income.
In 2004, the company paid out an annual dividend of $1.25 to shareholders. At the trend line price of $25.50, this brought investors a dividend yield of 4.90%. That's a yield that is greater than today's current yield of 4.74%.
While the stock price went sideways for the better part of a year, investors attuned only to capital appreciation might have been disappointed in 2004. But the investor who is focused on all the possibilities can realize the silver lining. In this case, the investor was able to do a lot better than the hamster and continued to see his dividend paid like clockwork at a very respectable return of 4.9% on his money.
Happiness Quotient: 100%
Squeezing Additional Income During Sideways Markets
The most conservative strategy aimed at squeezing additional income from stock investments is covered call selling. This is the process that entails the owner of stock selling the chance to other investors of buying his stock, usually for a price higher than the investor paid for his shares. The buyer of the call pays the seller of the call a premium for this privilege.
If the stock price moves up to the strike price, the buyer of the call usually exercises his option and takes possession of the shares. The option seller collects the strike price for his shares and the premium the buyer originally paid him.
If the shares do not rise through the strike price, they are normally not exercised by the buyer. In this case, the covered call seller keeps his shares and keeps the premium he was paid when he wrote the option.
The more volatile the market is, and the more volatile a stock's price is, the higher the premium paid. Also, the longer the option, and the closer it is to the strike price, the higher the premium paid.
Writing A Covered Call: The Mechanics
For example, today, if the holder of AT&T shares wished to generate income in addition to his dividend, he could sell an out-of-the-money call with expiration on May 19, 2017 and a strike price of $42 on 1,000 shares for $.53 a share, or $530.00.
If AT&T does not reach this strike price by May 19 of this year, the options will expire worthless, the call writer will keep his shares and the already earned premium of $530.00 credited to his account. That $530.00 will stay in his account. He has earned the premium by virtue of the obligation he has to deliver his stock if it is called from him.
Should the investor be able to do this trade every three months over the next year, and should AT&T's stock drift in a tight range, going nowhere, as it did in 2004, the shareholder could be in a position to earn a similar premium each time.
$.53 X 4 = $2.12
Added to his $1.96 annual dividend, the call writer who sees more than one way to generate income from a stagnant price might realize:
$2.12 premiums + $1.96 dividend = $4.08 income for 2017
It becomes quickly apparent that the call writer could earn more this year from writing such a call than from the dividend itself.
The annual income from 1,000 shares, using this technique, would rise from $1,960.00 on the dividend alone, to $4,080.00 collecting the dividend and premium, combined.
At Friday's closing price of $41.38, the $4.08 total collection produces the following earnings yield for 2017:
$4.08/ $41.38 = 9.86%
Happiness Quotient: 200%
Strategy Session - AT&T At A Better Price and Yield
If we are willing to exercise patience, instead of having price dictated to us by the market, we can set our own price targets that will fulfill our particular goals for yield and income with AT&T with the help of the Real Time Portfolio Tracker.
In order to manage this portfolio in real time and stay on top of all of our positions, I use the Real Time Portfolio Tracker. When dips occur, I'm able to easily monitor the impact on each equity's dividend yield. This always helps in the process of layering in slowly with gradual share additions to help grow income further going forward.
Real Time Portfolio Tracker
Here, I've used the tracker to input various target prices. Because the app calculates prices, dividends yields and investment cost all in real time, it is simple to let the app manipulate target prices to quickly arrive at the results we're seeking.
Our past purchase of T cost us $33.20 per share and gave us a yield of 5.9% and income for the portfolio of $491.96 per year on the 251 share position.
If we're willing to wait for a price compression of 1.73%, as indicated and circled in red, in column I, we can see that this will result in the yield rising from the current 4.82% to a yield of 4.90%, circled in red in column L, Yield on Cost. However, if we are a bit more patient, and decide to buy shares for $39.20 each, we could obtain a better yield of 5.0%.
For the same 100 share position contemplated, we are able to see the effect on our investment cost with each price contraction, also circled in red in Column G.
In real time, the app also feeds us with important metrics that include the current value of each of our positions, the percentage change in value from our buy price, current dividend yields, yields on cost based on our buy price, the dollar income each constituent contributes to overall portfolio income, the percent of income each represents and our capital gain from each position as well as the total portfolio.
This is one of many ways we monitor the Fill-The-Gap Portfolio in real time and make adjustments to holdings as opportunities present themselves. Bulking up our AT&T position at a better price will save us 3.8% in investment cost and give us a more generous yield.
Here are some other examples of high-quality dividend growth stocks from the FTG Portfolio where we exercised patience, set targets and were successful in establishing positions at yield and income levels that we chose.
The Fill-The-Gap Portfolio At A Glance
The first article was entitled, "This Is Not Your Father's Retirement Plan." This project began with $411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
The FTG Portfolio Constituents
Constructed beginning on 12/24/14, this portfolio now consists of 19 companies, including AT&T Inc., Altria Group, Inc. (NYSE:MO), Consolidated Edison Inc. (NYSE:ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (NYSE:MAIN), Ares Capital (NASDAQ:ARCC), Reynolds American, Inc., Vector Group Ltd. (NYSE:VGR), EPR Properties (NYSE:EPR), Realty Income Corporation (NYSE:O), Sun Communities Inc. (NYSE:SUI), Omega Healthcare Investors (NYSE:OHI), W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), The GEO Group (NYSE:GEO), The RMR Group (NASDAQ:RMR), Southern Company (NYSE:SO) and Chatham Lodging Trust (NYSE:CLDT).
Because we bought all of these equities at cheaper prices since the inception of the portfolio, the yield on cost that we have achieved is 6.55% since launch on December 24, 2014.
FTG Portfolio Close, February 13, 2017
Aside from much greater income and yield, the FTG Portfolio continues to outpace and outperform the major market indices in 2017 on price alone, just as it did in 2016. While the Dow Jones is up 3.29% to date and the S&P 500 index is up 3.99%, the FTG Portfolio is running ahead of the pack, showing a 4.27% gain.
Clearly, there are many ways to derive happiness and a sense of contentment and fulfillment from the ways in which we invest in the stock market.
Some of us will be content with capital appreciation, seeing our stocks rise to higher levels than what we paid for them. Others will derive great joy in picking up the bargains of all the discarded, high quality shares of investors who have abandoned them for their own reasons. Other investors will be happy to continue receiving their income and seeing it grow, regardless of where the stock is valued by other investors at different points in time.
Still others will find the silver lining in each of these scenarios and be able to experience that 100% happy quotient through any and all stock market cycles.
Perspective is everything. Happiness is where you find it.
Being patient, being proactive and setting targets can result in much higher income and capital appreciation than otherwise would be the case. What is your happiness quotient?
Author's note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
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As always, I look forward to your comments, discussion and questions. Please share your thoughts. In what ways have you been able to derive happiness and contentment from your investment plan? What is your happiness quotient?
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am/we are long T, MO, ED, VZ, CTL, MAIN, ARCC, VGR, EPR, O, SUI, OHI, WPC, GOV, GEO, RMR, SO, CLDT.
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.