Strategy execution and sector cleanup

Spent some time executing some trades to rebalance the portfolio according to the updated Dividend Town screener. While some of the choices I had before were just okay, there were some better options available at a fair price.

Sold:

• GLW Corning
• CBT Cabot
• OMC Omnicom
• TU Telus (60 shares)
• VZ Verizon (13 shares)
• LEG Leggett & Platt
• WHR Whirlpool
• SJM Smuckers
• FLO Flowers
• HRL Hormel

Bought:

• TXN Texas Instruments
• UFPI UFP Industries
• LOW Lowes
• WSM Williams Sonoma
• PG P&G
• TGT Target
• LCID Lucid (Growth Stock)
• NIO Nio Inc (Growth Stock)
• ATVI - Sold a $55 put for 12/17

This week we'll have $297 of dividend income, most coming from below with some income from IDA tomorrow.

So sectors that are complete are below. Going forward I'll rebalance quarterly as needed, but I'm not looking to change things too much. I'll plow additional savings and dividend income into any sectors or undervalued stocks. I'll use the Dividend Town screener to find the undervalued stocks each week so I can ensure I'm getting value with every purchase.

• Communications
• Consumer Cyclical
• Consumer Defensive
• Healthcare
• Technology

There are some good choices in the other sectors, and I want to really think about Energy before locking that down.  

Week in review

For those that celebrate, I hope everyone had an excellent Thanksgiving week with family! 

Here in Dividend Town most of the week was spent with family, but we made some progress towards goals. Speaking of goals, check out the published goals for 2021. Mid-late December I'll publish next year goals and it will be off to the races. 

Here's the progress made this week:

• Published a goals page
• With the exception of the real estate sector, the Dividend Town Screener is complete and ready to implement. 
• No dividend income this week.
• Increased the Yield on cost 2bps to 3.15%. 
• Acquired a few shares this week:
• 20 shares of $O at $69.70
• 15 shares of $CVS at $116.26
• 14 shares of $GLW at $39.25

With the first iteration of the DT screener complete, I will be committing to using to using the screener to make selections for the portfolio. Now where it will get interesting is balancing growth for yield. 

Of the initial ~980 initially screened dividend stocks, I assign a score based off a variety of metrics. Those metrics and comprised of:

• Growth metric
• Quality metric
• Dividend safety metric
• Moat metric
• 2nd opinion metric

After arriving at that score, I filter again based off:

• 4+ years of increasing dividends
• Has a Dividend Safety metric

After all this, I have 365 different equities. On a score of 0-25, compared against the 5-year dividend adjusted return, we start seeing some trends. 

5 Year Div adjusted return vs. DT Score

CDGR vs. DT Score

Dividend Yield vs. DT Score

The goal will be to choose from the higher DT Score stocks in each sector, then balanced for total portfolio yield of ~2.8% - 3.0%. Each stock has a blended fair value from a few sources that I'll look to clear as well. 

Fair value is also weighted based on DT Score, so I'll pay a small premium vs. the FV and I'll have a hurdle for lower valued DT Scores. 

I'll be looking across a few sectors today and will rebalance slowly over the next month into higher quality companies. 

Covered Calls for Beginners

Along with putting together a rock-solid dividend portfolio, another aspect that was appealing was generating additional returns from covered calls and puts. To help with understanding, I purchased a copy of Covered Calls for Beginners by Freeman Publications.

My experience with options was fairly limited to watching people on Wall Street Bets make absolute killings or get killed. Since I'm fairly risk averse, I have no desire to commit to risky bets. 

This book is a great introduction into the world of covered calls. While there is some inherent risk to selling covered calls, I like that the risk can be managed effectively. Some of my takeaways from the book:

• Since I'm building a portfolio of high-quality assets, the volatility risk for Home Depot is less than something like a Tesla.
• Understand the greeks:
• Delta is how much the option's price changes vs. change in the security. It can also be used as a proxy for the probability of being in the money at expiration.
• Gamma can be used to measure the stability of delta. Higher gamma represents higher risk. 
• Theta measures the time decay. As an option gets closer to the expiration date, the rate of theta accelerates.
• Where this book was VERY helpful is understanding the rate of return on covered calls. I've put together a spreadsheet to help calculate the annualized options yield before I make these decisions.
• This was more helpful than I realized. What I've learned over the last month is that since I'm writing covered calls on less volatile securities, the premiums are relatively small. Since I've been conditioned on options being big winners or losers, I have a bias when looking at those small returns and dismissing it. Now that I can analyze the annualized return before taking a position and see the benefit of an additional 8-20% return.
• Understanding exit strategies!
• Obviously we want our covered call options expiring out of the money so we can keep the full premium. Some of the bloggers I follow that employ similar strategies roll over their options, so when should I do that?
• One Percent Rule - If the value of the option is worth less than 1% of the security, sell and rewrite.
• 2 & 20 Rule - If in the first two weeks you can buy back your option for <20% of what you paid, then buy it back and rewrite.
• Looking at my current covered calls, I wrote 1 contract for LEG a $45 strike price 12/17 expiration earlier last week. Cost basis was $1.19 a share. Today, it's worth $0.225 a share. Based on the above rule I take the profit and rewrite.

Overall this is a good book to start feeling comfortable with covered calls. I've also done some research online and I've found the site Option Strat is superb for helping understand various options strategies and the associated risks. 

Week in review

I've made some good progress this week on a few various items. It's been important to see this as a journey and make incremental steps each week.

• 
  39 of the 59 holdings are now in the DT Screener. 5 are rated Super Stars, 9 are Excellent, 6 are Fine, 16 are Okay and 3 are Poor.
• Prior week 29 of the 62 holdings were in the screener, so this is an improvement.
• The screener still needs tweaks adjusted for sectors. For example, Utilities sector generally ranks low relative to other sectors due to low value & quality scores. 
• Technology, Financials and Consumer Cyclical have been rebalanced and will remain relatively unchanged unless I add positions.
• Consumer Defensive, Healthcare will remain relatively unchanged.
• Dividends have finally started arriving from the initial portfolio investment mid-October. This week we received $254.54!  
• ABBV - $61.10
• HAS - $36.72
• ABT - $4.50
• HRL - $6.13
• ABT - $1.35
• KMI - $87.21
• O - $22.66
• ZION - $22.04
• ONL - $12.83
• I opened up 4 options this week, 2 covered calls and 2 cash secured puts.  I will count these as options income/loss as received/closed. Any equities secured via cash secured puts will be listed at the strike price.
• 11/19/2021 STOR 12/17/2021 32.50 P Sell to Open $78.69
• 11/15/2021 LEG 12/17/2021 45.00 C Sell to Open $119.35
• 11/15/2021 GLW 12/17/2021 39.00 C Sell to Open $99.35
• 11/15/2021 MAIN 11/19/2021 50.00 P Sell to Open $409.35
• Sold positions in the following:
• BancFirst Corporation BANF
• Bar Harbor Bankshares BHB
• VanEck JP Morgan EM Local Currency Bond ETF EMLC
• Goldman Sachs Group Inc GS
• Hasbro, Inc. HAS
• iShares Gold Trust IAU
• Lincoln National Corporation LNC
• ManpowerGroup Inc. MAN
• Invesco Optimum Yld Dvsfd Cmd Str No K 1 ETF PDBC
• SouthState Corp SSB
• Store Capital Corp STOR
• Zions Bancorporation NA ZION
• Acquired positions in:
• 3M Co MMM
• BlackRock, Inc. BLK
• Visa Inc V
• Allstate Corp ALL
• Intercontinental Exchange Inc ICE
• Polaris Inc PII
• Main Street Capital Corporation MAIN
• Global X S&P 500 Covered Call ETF XYLD
• Received spin-off shares of:
• Orion Office REIT Inc ONL
• Accumulated additional positions in: 
• T Rowe Price Group Inc TROW
• Increased the Average Yield on Cost to 3.13% from 2.97%.
• Had two dividend increases:
• Realty Income - O - Increased dividend by 4.2%, increasing annual income by $11.52.
• Aflac - AFL - Increased dividend by 21%, increasing annual income by $18.20.
• Another $1K contributed towards the portfolio.

Items to work on:

• Take another look at Industrials, Communications and Materials. 
• I need to spend some extra time understanding Utilities and Energy. I need to better understand the components of what makes a solid pick in these. 
• Continue too tweak the screener for better representation of sector quality.

Overall some good progress this week. 

Activity this week

Glancing over some of the activity this week, I realize there was a lot of movement in the Dividend Town portfolio.  I'll spend some more time this weekend detailing out some of trades, but overall I'm pretty happy with the first rebalancing efforts in the Financial and Consumer Discretionary sectors. 

Investing the time to create a comprehensive screener was worth the effort. While by no means perfect, being able to blend multiple sources of trusted data creates some friction in your thought process and assumptions. You start looking at some of your prior choices and start to question yourself.

For example, take a snippet of the Dividend Town screener below. When I looked at my initial Finance sector purchases, the first question is why didn't they pass the initial pass of my screener.  Does the company have a great yield but no growth?  Do they have good growth but huge debt?  Is there a concern about their quality relative to other sector picks?  As you keep digging and asking more questions, you come to the realization that just like your teenage years, you realize that your choices weren't quite as optimal as you like.  

Unlike your teenage years, there's no reason to get attached to these relationships. We can identify the flaw in our original logic, find the best alternative and correct the action. We learn, adjust our process and models and move forward.  

This week I've also had some options activities, selling two covered calls and selling one short-term put. I've wanted to put some MAIN into the portfolio with extra cash, so I sold one $50 put earlier in the week due today. 

So this weekend I'll document all the trades this week, work on listing out the options activity, and hopefully get some time to start tweaking my energy sector. My energy screener is all oil & gas. Will the industry continue to look like that in 20 years?  Probably not, so it might help to put a broader lens on when researching companies here. Are there any alternative energy companies that pay dividends?  Are there any indexes that cover a blend of traditional and alternative companies?   

 

 

Financial Sector Rebalance

After completing the first initial version of my Dividend Town screener last weekend I spent some time tweaking the Tech sector. Fortunately most of the holdings acquired on the initial purchase were in great shape. 

After updating weekly data in the screener this morning and comparing to the Dividend Town portfolio, it was pretty clear my Finance sector needs some work. Of all the current holdings, only one made the initial cut of the screener, TROW. 

Current Holdings

I must admit that the initial purchases had some methodology, but it likely wasn't well thought out. As long as we learn from our mistakes there's always time to course correct. Let's look into a one of these to see why they don't make it into the new screener.

• Aflac - Love the duck. What else do I love? 
• Love the yield. 2.32%
• Love the 5-year dividend growth rate: 7% per year.  Up 14% per year for the last 20.
• They'll go ex-div on Nov 16th and likely hike up their dividend yield by 6%,
• Good value at 10.9 P/E vs. Financials at 13.2.
• Low earnings payout ratio, growing EPS since FY16. 
• Reduced shares outstanding by almost 1/3 since 2011. 

So what's the problem? What's missing? Oh. No growth. Flat as a board. Now I'm not the sharpest guy, but I believe their main revenue come in two sales channels: insurance premiums and duck plushie proceeds. I don't have that segment breakdown, so we'll assume primary sales are premium related.

Google Trends for Insurance Claims in US

So if operating margin is level for 5 years and net profit margin growth is mainly driven by a lower tax bill, what's the draw? 1) Strong balance sheet, 2) Share repurchase with cash proceeds, 3) Rinse and repeat?  

Based on what I'm seeing, I would be betting on a sales flattish company to continue to manage expenses effectively, mitigate any higher insurance payout ratios with no revenue growth backstop and plow remaining cash into share buybacks. Core competency is managing expenses for share appreciation, not growth.

Price to Book (5 yr)

While I'd rather have more growth potential, there is something here to be said about generating additional value in share price. We saw nothing has really changed in the last 5 years, however Price/Book ratio tanked in March 2020 and the price has been rerating towards that 1.4 - 1.5 range ever since.  If I'm betting the P/B continues to rerate to 1.3 then there should be 15% upside along with a nice yield over the shorter-term.

Looks like it's worth holding onto in the interim but will watch closely. For everything else, my Dividend Town screener is suggesting some higher quality stocks.  They are lower yield, a little higher P/E but dividend growth rates & revenues are accelerating nicely and look undervalued or at value. We'll hold onto TROW, AFL and rebalance the remainder of the Finance sector on Monday.  

Tech Rebalance

NVDA compared to DJIA (black) & Technology Sector (green) from 10/15 - 11/08

Today I rebalanced the Technology segment due to some rocket growth in NVDA. When I mean rocket growth, I'm talking 41% after ~3 weeks of holding. Now trading at a 110x earnings, I feel comfortable taking some profits here and reallocating to some . . less wild evaluations. This is Dividend Town, not YOLO Town! 

With some of the profits, I've diversified into 10 shares of LRCX and 60 shares of APH. While both have experienced solid growth in the last 5 years, Lam Research comes with a more 'value-oriented' 20 P/E ratio and, 38% 5-year compound dividend growth rate and a Safe rating from SimplySafeDividends. Amphenol has a higher premium on earnings at 34, 15.7% 5-year CDGR and a Very Safe Dividend Safety rating. While I think the Semiconductor space has more room to grow, I think some diversification is healthy. 

So the moves today were as follows:

• Sold 17 NVDA for $5.2K
• Sold 200 CHS for $1.3K
• Sold 187 AVT for $7.5K
• Bought 10 LRCX for $6.1K
• Bought 60 APH for $4.9K   

I'll take $2.9K net in cash to redeploy as I rebalance some of my other sectors according to my Dividend Town screener in the next few weeks.

I'll also hang onto 15 shares of NVDA at a cost basis of $218 a share. Despite the crazy P/E, they are still a top-notch company to hang onto for growth in the portfolio. 

Tools of the Trade

I've spent the last 2-3 weeks building out a version of a Screener for stocks. To be honest, most of that time was agonizing over what tools to use and how to get what I needed without breaking the bank. Without further ado, here are the tools of the trade:

• SimplySafe Dividends - $399 annually - I'm a HUGE fan of the website! It's incredibly simple to use, a quick view of your portfolio, has some great screeners and of course Dividend Safety Stock Ratings. 

• Stock Rover - $200 - $250 annually - I've only played around for a week, but already this will be worth the investment. Screeners are top notch, as are the Research Reports. Tables and graphs are very dynamic and more opportunity to grow.  
• Bloomberg - Currently on the promo billing, but top-notch reporting for business.
• OptionStrat - $180 annually (monthly version) - Top notch visualizations and makes options easy. Will be using for covered calls and puts for additional income. 
• Schwab - Additional screeners.  

Based on these and a few other tools, the Dividend Town screener 1.0 is complete. I will make tweaks and adjustments to ratios / formulas as needed. 

Next stop is re-adjusting the current portfolio based on the quality metrics I'll be using to drive strategy. This will not be done in a day, but I will start with the Technology sector. While I'm overall thrilled with the performance of NVDA so far (36% gain in less than 30 days), it's the 69 P/E that's a little spicy for me. And with the theme of the portfolio, it's barely a dividend stock.

So for this week, we'll swap out NVDA and Avnet for some higher quality Amphenol and Lam Research Corporation. Both of these are rated as Super Stars on my screener. With these moves, I do not anticipate any further changes in the Technology sector until an end of year review.