Value Dividend Fund: First Month Update

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Includes: AAL, ABBV, ADT, AEO, BGCP, CC, CLF, CVS, DAN, DK, ET, FL, KEM, R, SKT, THO, TRTN
by: Alex Pickrell
Summary

Currently, 17 positions are held in the fund.

Performance was strong for the month, beating every index except the NASDAQ.

Based on historic data, this out-performance is likely to continue.

In my previous article I outlined the beginning of my new fund focusing on undervalued volatile dividend stocks that have lucrative option premiums, which allows us to collect income while waiting out any short-term headwinds in strong companies. You can find a link to that article here.

One month ago, I had written an article outlining a new fund I created involving selling covered calls on volatile, undervalued dividend stocks. The main criteria for selecting stocks for the fund was the following:

1.) Positive Earnings and Revenue Growth.

2.) Never pay more than 15x Forward Earnings for a stock.

3.) Sustainable Payout Ratios

4.) 3.5% Portfolio Yield

5.) Buy in quantities of 100 and sell Jan 2020 calls at strike approximately 20% above where the stock currently trades

Currently, the fund has 17 total positions, shown below.

Source: Alex Pickrell

Only two of the positions were added in the last month, Triton (TRTN) and ADT Inc (ADT). You can find the case I made for Triton here.

As you can see, as of the closing bell Friday, the one month return without including options premiums or dividends has been 4.27%.

Source: Alex Pickrell

This equates to slight under-performance of the S&P 500 for the month. However, when you factor in for the 5.82% option premiums received for the Jan 17th 2020 calls sold on the positions and dividends that are scheduled from the time of initiating the position to January 17th of 3.14%, the adjusted return for the month is 5.27%.

Obviously, this number could change if there are dividend cuts or increases, and it will be retroactively adjusted if needed.

This out-performance is likely to continue, especially throughout longer time-frames.

The image below shows the S&P 500 returns by year going back 40 years, with the average yearly return of 9.87%.

Source: Alex Pickrell

With the adjusted model adding 3.15% to any year where returns were less than or equal to 25% and capping maximum returns to 28.15%, the average return significantly outperforms the S&P 500, 12.33% to 9.87%

One thing to note here is that 25% is used to calculate the upside strike price to adjust for the full year compared to only 9 months. The 3.15% for options premiums is used because that is currently the average of the 270+ companies currently in my master list of stocks.

Even using a conservative 3% for the premiums and 20% for the upside strike, the adjusted returns still outperform the S&P 500.

Source: Alex Pickrell

Based on this, one could assume that someone with little skill at picking stocks would still be able to outperform simply by buying a representative sample of S&P 500 stocks and selling covered calls at 20-25% upside strikes for average premiums of 3-3.5%.

Going Forward

Currently, 21 stocks in the database have total yields of over 8% with sustainable payout ratios.

Source: Alex Pickrell

One bittersweet part of the market’s performance over the past month is that it has left less stocks at attractive prices.

Out of the 21 stocks above, positions have already been taken in all of the following except Tapestry Inc (TPR), MPLX LP (MPLX), Knight-Swift Transportation Holdings Inc (KNX), Enbridge (ENB), HollyFrontier Corp (HFC) and Goodyear Tire (GT) with no plans to take positions in any of the remainders.

As always, if any purchases are made between now and next month, I’ll be sure to write an update with the investment thesis for the company.

Disclosure: I am/we are long KEM, BGCP, CLF, ABBV, THO, DK, ET, AEO, FL, SKT, R, CC, Dan, AAL, CVS, ADT, TRTN. 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.