Options - ABBV

I've been spending some time studying option trading for the Dividend Town portfolio. As part of the Dividend Town strategy, I will be using covered calls to generate additional income, and utilize cash-secured puts for additional premium on securities that I want to own. With the exception of a disastrous $SPY put in November, I've done fairly well writing out of the money covered calls.  

I don't want to get too cute or creative with options. However, I will utilize them when I see an opportunity or to hedge one of my existing positions.

• Covered calls - Will write out of the money short term options for a premium.
• Cash secured puts - Sell an out of the money put for a premium.

One option I'm deploying today is a Strangle. A strangle is basically buying a long put and a long call as you believe the underlying stock could change direction. 

In this particular case, I'm buying 2 strangles for $ABBV. Abbvie has had some solid upwards momentum in the last two months. While ABBV has done well in the portfolio and I plan to continue holding, the sudden breakout gives me concern. I see opinions that ABBV is undervalued from Seeking Alpha contributors and yet they're trading at a 52 week high. 

Additionally, if you look below, you can see that they're trading at the top end of their Bollinger bands and their Relative Strength index is peaking in the 80's. None of this is a guarantee of a decline, but I'm feeling confident there's a correction on the horizon. 

My issue is that I do not know which way this is going, but based on my research I am fairly confident that we're going to see movement in either direction. I consider this a hedge against the current holdings.

Short Week in Review

Merry Christmas and Happy Holidays!  This will be a short update due to the holiday, but I'll pick up in the next few weeks releasing some of my picks and analysis. 

This week I've managed to update my Portfolio Tracker on google sheets and I'm pleased with the results.  It's pretty similar to Excel but there are some quirks. Linking between spreadsheets is very different, but there are some positives. Functions like UNIQUE & QUERY, and GOOGLEFINANCE provide benefit even if I haven't unlocked the full potential of them yet.  

Regardless, I want to minimize the effort to update each week and I've been successful in setting everything up for minimal effort. 

Below is an example of the main dashboard to track weekly progress and future growth potential. 

Here's the breakdown of current holdings that  is on the Portfolio link.

Here is the weekly portfolio tracker to ensure that I'm making the right level of progress. This is currently on the website under Progress Tracker.

This week was a small pickup of $34 in dividend income, and $204 of option income selling a covered call for WLK $95 strike price. I acquired WLK selling a cash-secured put for $95 strike price, collecting $134 and exercising around $89. This became my first wheel trade.

I've added a fair bit of cash ($7.3K) to the portfolio in December and pushed the Projected Annual Dividend Income to $8.4K. While I was around those levels a month ago, there was some rebalancing into higher quality stocks based off completion of the screener.

This week I added two positions:

• STOR - 4.5% Dividend Yield - STOR Capital is a publicly traded American real estate investment trust headquartered in Scottsdale, Arizona. Berkshire Hathaway owns 9% of the company.
• CTRE - 4.73% Dividend Yield - CareTrust REIT is a self-administered, publicly-traded real estate investment trust engaged in the ownership, acquisition, development and leasing of skilled nursing, seniors housing and other healthcare-related properties. With a nationwide portfolio of long-term net-leased properties, and a growing portfolio of quality operators leasing them, CareTrust REIT is pursuing both external and organic growth opportunities across the United States.

I also added 10 more shares of XYLD. 

In the last week of the year, I'll spell out my selection criteria, work on 2022 goals and I think we can close out the year with a resounding success!

Hope everybody enjoys their holiday break!

Week in Review

As a new dividend growth investor, one of the mistakes I saw other dividend investors make was chasing yield at the expense of quality. As I've built the foundation for the Dividend Town portfolio, I've tried to avoid that mistake by constructing a high quality basket of companies that will deliver an optimal blend of the following:

• Potential forward growth
• 4+ year consistent dividend growth
• Fast dividend growth
• Targeted portfolio yield of 2.8% - 3.0%
• Lower P/E, value oriented

So far I am pleased with the result. The chart below contains almost all the holdings of the DT portfolio ranked by score measured against P/E ratio. The higher quality stocks require a higher premium.  

DT Portfolio Rankings vs. P/E Score

If you look at the graph below, this compares the P/E vs. the yield. The higher quality companies provide a lower yield but a bigger opportunity for forward growth, while the lower ranked companies command a higher yield. With the exception of NVDA and KMI, each of the companies below has consistently raised dividends annually for 4+ years. 

DT Portfolio P/E vs. Yield

Assuming I only reinvest dividends into these stocks and their dividend growth streak continues, the dividend income per year rockets to $67K per year in 20 years. Not bad!

This week I received $204.09 in dividends, bringing the MTD total to $744.70!  That's a great milestone.

On the trading front things have slowed down as I'm pleased with the overall quality of the portfolio. I did make one upscale in quality however.

• Sold 38 shares of IDA
• Purchased 40 shares of ATO

Options activity has been challenging as I'm still trying to find the sweet spot on covered calls. 

• Rolled over my $60 PFE 12/17 call into a $67 12/23 call as the price crept above the strike price on Thursday. Ultimately PFE closed under the strike price on Friday so this was a miss. Selling covered calls on Pfizer in this environment has been a losing battle. 
• Bought back a $55 12/23 ATVI put. 
• KMI options expired worthless.
• MAIN long-call expired worthless.
• Exercised a $95 cash-secured for WLK on 12/17. The premium was $134.35, and it closed for $92.23 yesterday, so while I did not get the stock at a discount it is considered a long-term hold.

Next week I'll be looking to deploy some contributions and evaluating January option activity.  

Screener logic

Now that I've built up a habit of updating and reviewing my screener each week, I've also started to consider some of the sectors where the quality of holdings could have improved. 

As a reminder, my screener combines data from a variety of sources to assess the ranking. The higher the number (max 25), the better the potential for a higher overall return, dividend growth, and dividend safety.

The primary drivers of the score are:

• Stock Rover Growth Score (Growth score looks at the 5 year history and also the forward estimates for EBITDA, Sales, and EPS growth to rank the best companies across all stocks with adequate data. The best companies score a 100 and the worst score a 0.)
• Stock Rover Quality Score (Quality score compares profitability and balance sheet metrics to find high quality companies. Our computation includes ROIC, Net Margin, Gross Margin, Interest Coverage, and Debt / Equity ratio values. The best companies score a 100 and the worst score a 0.
• SimpliSafe Dividends Safety Score (How safe is the dividend?  Will it be cut?)
• Economic Moat (This is popularized by Morningstar and shows how much of a protective moat a company has. Usually characterized by companies with high ROE)
• Schwab Rating - A-F based on a combination of Growth, Quality, Sentiment, Stability and Valuation. I use this as a second opinion.  

I start with a wide filter from Stock Rover, then I filter a step further looking for companies with 4+ years of consecutive dividend growth and have a Simplisafe rating. Based on that, I have ~476 equities to choose from, all varying degrees of quality. If you look at the chart below, historically the companies with a higher score tend to perform better than companies with a lower score.  Therefore, I'll try to maintain a higher ratio of higher scoring stocks in the portfolio. This now becomes my starting point for analysis as I research companies and start looking for undervalued stocks to rebalance or reinvest dividends.

As I started doing research on my own portfolio management two months ago, the most challenging aspect was choosing what to incorporate into my review process. There are so many tools and experts available, at a certain point you need to pick what feels comfortable to you, and everything else becomes noise. 

While I am no expert, I feel very comfortable with the my process and will be updating the portfolio and changes here as they happen.

Week in Review

Overall good week for the Dividend Town portfolio, despite some mistakes along the way. 

Bad news: I tried to get cute trying to time a dip with an SPY put, wiping out $1.1K in the process and most of the options gains since the start of the portfolio. Lesson learned. 

Good news: Despite the misstep, the portfolio was up 3.14% week over week, compared to DJIA at 3.9% and NASDAQ at 3.6%. For a dividend growth based portfolio with a beta ~.85, I'll take it.  

Dividend income this week was solid at $271, bringing the MTD total to $569. I expect $776 for the remainder of the month. Total portfolio yield on cost is back where it started at 2.98% in October, however there has been some trades to higher quality since then giving the overall portfolio a better forward opportunity for growth appreciation in stock price and future dividend growth.

For options there was little but impactful activity as I closed out the SPY $455P in June from last week for a disastrous loss, and also sold a put for WLK at $95 for 12/17 expiration for $134 premium. This is an attempt to shore up the Materials sector which needs a revamp.

Current open contracts

Trading activity was minimal this week. I sold the position in NEU for the WLK put. On the DT Screener, NewMarket receives a grade of 17 vs. Westlake of 21. I'll continue to shift the portfolio slowly to higher graded stocks based on the weekly iterations of the screener. 

I added 10 more shares of Merck at $72.95 basis. The healthcare sector continues to look undervalued. To determine the fair value in my screener, I use a combination of 6 different fair value calculations from various sources, throw out the high and the low, then average the rest. Based on the DT Grade (which is assigned based on growth, strength, dividend safety and economic moat), I assign a premium or discount to the average. 

In the last 5 years, Merck has reduced their outstanding shares from 2.79B to 2.54B, increased sales from $39.8B to $52.6B, EPS from $3.78 to $5.78, decreased their payout ratio and increased their operating margin from 25% to 34%. They're trading at near a 52-week low as well, with a 3.8% dividend yield which is the high end over the last 5 years and 11 year dividend growth. I'll be very happy to own some more.

What's on the agenda in the next week? I'll be watching the expiring options next week for any intervention, but will likely hold to expiration. I'll be doing some more research to scale up parts of the portfolio where needed, but I honestly think it's in a okay spot. Not 100% optimized, but okay.  

At this point I do not feel the need to do anything in a hurry as changes can now be made gradually as we seek to optimize dividend growth and quality. Time to take a breath and appreciate the effort. 

Week in Review

While a rough week overall, I'm pleased with the Dividend Town portfolio this week. While down -1.54%, compared to the broader indexes the portfolio performed better than the Nasdaq & S&P 500.  

I believe as the market will continue to take gains on excessive growth valuations and the threat of taping and higher interest rates continue, we'll see a return to value. Notice the spiciness on the charts below?  It's a perfect storm of future risk and past trends pointing towards an unsustainable trajectory. 

 

So yes, I'm a bit bearish in the short-term, but I do believe that time in the market beats timing the market. In the last month, I've been actively working to rebalance to more quality & value oriented stocks, and since the companies I'm buying are long term purchases I do not care too much about the up and down fluctuations as long as I'm receiving dividend income.

A good week for dividend income this week to help offset some of the losses.

Option activity was not great. My Pfizer $55.00 call was getting a little close so I rolled over to a $60. In retrospect, this was a poor decision as I should have held longer and counted on theta decay as long as it stayed under the strike price. Lesson learned.  

I also closed out a cash-secured put on STOR for $35 strike price for a net loss of -$151. While I need to expand my real estate sector, I'm not sure what the risk is to STOR because of short-term volatility. I'll likely keep the cash on hand and reassess before EX date later this month. 

I've also purchased 1 long put for SPY $455 for June. Breakeven for this is SPY $422.24. Between covid variants, tapering talk, inflated valuations and even some news about Russia potentially invading Ukraine, there's just a ton of risk that makes me uncomfortable.

There were some trades earlier this week to help realign the portfolio towards stocks that rank higher on the Dividend Town screener. Of the 59 stocks held, 39 make the cut on the final screener. There is a pretty good correlation of higher ranked stocks historically driving a lower yield, but also a larger 5-year overall return. Chase the yield or chase the total return?  I've got a 15-20 year horizon so I'll balance the two.

. 

Next week looks like a good dividend week for $289.95. December itself will yield $776.  

For the to-do list:

• Rebalance a few sectors per DT screener guidelines
• Publish selection criteria
• Delineate non-screener selected stocks in the tracker. 

Ultimately making some good progress. If things go well and I'm comfortable with the screener, I may start a weekly newsletter with the data. 

Have a great weekend!