Posted on October 4, 2016
in cash flow
It’s a big day here at Rising Returns – today I sold my first option contract. I sold a call option on Flowers Foods (FLO). A typical contract is for 100 shares and since I own in excess of 100 shares of FLO, this is referred to as a covered call. Selling a covered call is a fairly typical way to experiment with options trading, due to the fact that as long as I hold my shares through the contract’s expiration date any obligation I may have on that date is already covered.
If you find yourself wondering what that all means, fear not. Here’s a high-level explanation.
As I mentioned above, sold a call option on shares of FLO that I already own. What is a call option? Well, I have agreed to sell shares in FLO to a counter party on an agreed upon date at an agreed upon price. In this case, I’ve agreed to sell 100 shares of FLO to a counter party on April 21, 2017 for $17.50 share. The counter party (the person who bought the contract) is under no obligation to exercise the contract. On April 21, 2017, if shares in FLO are trading below $17.50, the contract will most likely expire worthless and I will get to keep my shares. If FLO is trading above $17.50/share on that date, the contract will likely be exercised and I will sell my shares at $17.50 and the new owner will lock in an instant profit.
So, why would I do this? Simply put, I wanted to experiment. I’ve been interested in covered call trading for a long time and have never taken the plunge and sold a contract. So I decided to try it out. When anyone sells a call they collect an option premium, which must be paid by the counter party as the cost of buying the right to purchase shares at a given price on a given date. Here are the numbers for my specific situation:
100 shares of FLO at a cost basis of $15.26/share or $1,526 total.
Option premium collected: $.40/share, or $40, less $6.95 transaction fee and $.75/contract fee. Net option premium of $32.30.
If my shares are called away and I have to sell them at $17.50/share, I will make a profit of $2.24/share, or $224, plus the premium of $32.30, plus another $32 (a little more because of reinvestment, but $32 is close enough) in dividends collected between now and April for a total profit of $288.30 on an investment of $1,526 which equals an 18.89% return. I bought the shares in August 2015 so that roughly works out to a 28.6% annualized return. Someone check my math on that, but that’s not too bad.
If my shares are not called away, then I’ll still collect the $32.30 option premium and $32 in dividends and go on my way a happy man.
This strategy really works if you are planning to hold on to the shares throughout the contract period and would not have otherwise sold them. The downside is that you are giving up potential excess capital gains by putting your shares at risk of being called away, but if the strike price is fair then why not collect a little extra juice instead of just sitting on shares?
Have any of you experimented with this strategy? Obviously this trade was pretty small potatoes, but that’s ok. It’s a good way to gain some experience with the strategy.
Posted on February 29, 2016
in dividend investing
Now that we’re two months into 2016, I thought I’d take a minute and check on the status of my 2016 goals. Below you’ll find my 2016 goals reiterated, with my status updates in blue.
- $2,750 in dividends
In 2015 I earned just over $2,000 in dividends. Check out the chart image below to see how this has grown since 2012:
It may be a little hard to tell, but from 2012 – 2013, my dividend income increased by 1,015%, from 2013 – 2014 it increased by 264%, and from 2014 – 2015 it increased by 157%. For 2016 I’m aiming for an increase around 35%. This is achievable and could very well be exceeded, we’ll just have to see how the year goes. I admit that this is kind of a small goal and not very aggressive. I wouldn’t be surprised if I beat this one easily this year.One thing about this year – if the markets continue to be slightly depressed, as they are now, this could be a great opportunity to load up on quality stocks at uncommon prices. That’s a fantastic way to really get the dividend machine rolling. Look for opportunities to make smart entrances into great companies that are being unfairly punished this year.
2016 goal #1 will be more of a challenge than I originally anticipated. I finally got smart and cleaned up my portfolio (a post for another day) and as a result I closed positions in two junky bond funds that I was in because they paid out a pretty high monthly dividend. Those positions lost around 25% – 35% over the last couple of years, but I basically broke even when I closed the positions due to dividends received. Lesson learned – don’t chase yield. At this point, I’ll be happy to match or just slightly exceed the approx. $2,000 in dividends I received in 2015. We shall see how this plays out during 2016.
- $3,500 in side income. I’ve got a couple of small side projects that I work on right now. Both of these have been more effort than they’re worth, from a purely financial standpoint. Last year I probably took in about $2,500 from these two projects. I could see this number being anywhere from $2,500 to $10,000 this year – it really depends on a few different things – some are within my control, some are not.
2016 goal #2 is underway. I anticipate picking up the bulk of this in the 4th quarter of 2016. As of today, I’m approximately 0.5% of my way to hitting this goal. I’m fairly optimistic that I’ll meet or exceed this number.
- Pay off the car loan. We bought a 3-year old Subaru Forester in June 2015. We decided to finance $10,000 because the money was so cheap and those dollars could be more productive in actual investments and not in depreciating assets (side note, I hate the fact that rapidly depreciating assets are called assets). We’ve already retired approximately 28% of this debt and I anticipate paying it off completely in 2016. Mostly just because it’s annoying and while it’s definitely true that our money could be more productive elsewhere, I’m also pretty happy to clean up the balance sheet a little bit.
2016 goal #3 is on target and I feel pretty good about achieving this goal. When I originally posted this, I noted that we had retired approximately 28% of the original debt. We are now up to just a shade over 40% paid off. We should be on track to make this goal by year-end.
- Figure out what to do with money I’m holding in trust for my daughter. We have a bit of money from grandparents and great grandparents that we are currently holding in trust for our daughter. This is currently sitting in a savings account. I have delayed setting up any kind of custodial account because I wanted to figure out the best approach, but the time has come to actually do it. I’m not at all convinced that a 529 or ESA make sense – I think the tax advantages are actually pretty slight and the purposes are too specific for my liking. I’m leaning toward establishing some sort of custodial trust account that would be turned over to my daughter when she reaches a certain age, something like 25 or 30. I’m not 100% sure yet.
2016 goal #4 is partially achieved. As noted in this post on opening a custodial investment account, I opened the custodial account and transferred most of my daughter’s cash into the account. I made investments into CL, HSY, JNJ, KR, and SBUX on her behalf. I also left her a chunk of money in cash in a savings account. The idea is that those positions will be held (and added to) until she has reached an as-yet-undetermined age, at which point control of the assets will be turned over to her. In order to fully achieve this goal, I need to still explore a trust arrangement.
- Optimize my holdings in my employer-sponsored 401k. I contribute enough to my 401k to get my full employer match. Right now that money is split up between several funds that are offered – some are ok, none are great. I’m not in love with mutual funds. I actually don’t like them very much. But I want to research what my options are here and make the most intelligent allocation that I can. There may even be a self-directed option. I just haven’t taken the time to really look.
2016 goal #5 is probably about as complete as it’s going to be. I looked into this. The bottom line is that like most employer-sponsored retirement plans, mine isn’t great. I’ve made my selections and am as happy as can be with what’s available to me. I’ll keep investing in this plan up to the point of receiving the full match from my employer, and any money I want to invest after that I can do on my own – I have several vehicles for doing that: traditional and Roth IRAs as well as a regular taxable investment account.
So there’s my update. Mostly on track. A couple minor setbacks. I’ll check in again later in the year with another update on my 2016 goals.
Posted on January 21, 2016
in dividend investing
Everyone knows the markets have taken a serious hit just a few weeks into 2016. The S&P 500 opened 2016 at 2,038.20 and as of this writing is sitting at 1,827.92 – a drop of over 10%.
That’s not nothing. But just because the markets are falling, you don’t need to worry or panic. IF you’re following your investment plan and it’s a good plan.
Just yesterday I wrote about opening a custodial investment account for my daughter. I purchased shares of CL, HSY, and JNJ for her. Each of those stocks are off 4.89%, 1.33%, and 3.13% from when I bought them. What does that mean?
It means that if I still believe in the fundamentals of those companies, if I still believe in the power of those companies to generate an increasing stream of earnings year-over-year, if I still believe in the management teams of those companies, if I still believe that consumer demand for those companies’ products will remain strong, I should probably buy more shares while prices are down.
The day-to-day, week-to-week, month-to-month prices of stocks is almost irrelevant to me, once I’ve purchase a stock. I don’t buy companies with the intention to sell them at a profit. Buying at a fair price is a major part of my analysis, but I don’t work super hard at buying at the lowest possible price. There are a couple of reasons for this:
- It’s impossible to know where the bottom is. Could drop 3% tomorrow. Could be up 7% tomorrow. I have no idea. Anyone that says they know what the market or an individual stock will do tomorrow either has inside information and the capital to impact the market, or is a liar.
- As I said before, I don’t generally buy with the idea of selling at a higher price. Yes, I probably will sell shares at some point down the road. Probably for more than I bought them for. But that’s not concern #1.
- The movement of stock prices is really just a reflection of what someone else is willing to pay for a share of that stock at one point in time. It’s a market, prices go up and down. Often, people are willing to pay prices that are in no way related to the fundamental value of a company. Often, people are not willing to pay prices that accurately reflect the fundamental value of a company. The market may be efficient (debatable), but people are irrational.
The most important thing for me to do is to remember what I’m really buying: future earnings. For example, each share of JNJ that I purchased for my daughter will return $3 each year in the form of dividends. JNJ has historically increased that dividend payout each year. Next year it might return $3.10 for each share. And that’s only the portion of earnings reflected in the dividend payment, which goes right into the shareholder’s pocket – or in this case, gets automatically reinvested into more shares. That dividend is just a piece of the whole earnings pie, which should be growing each year.
I thought it might be useful to remember that when you’re looking at your brokerage statement or at your account online and you see that the markets are falling each week – don’t fret! Try not to see it as an absolute dollar amount, try instead to see it as a representation of future earnings, which should be going up, up, up – and that number will often be out of sync with the stock price.