Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘monthly income’

Compounding Returns with Option Selling

You have undoubtedly heard it said before – compounding returns is the eighth wonder of the world or man’s greatest invention. But to an investor it is a great wealth builder. While many income investors think of compounding dividends, this can also be accomplished by option sellers by compounding the option premium received by selling either put or call options. I think about the premium received as soon as the option is sold can be readily reinvested or compounded immediately.

Here is the formal definition from Investopedia:

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest.

The “Rule of 72” is an easy way to calculate how long it will take to double you money based on compounding returns. For example, an investor has a dividend stock paying an annual 5% dividend. Using the rule of 72, dividing 72 by 5 indicates the investor will double his money in 14.4 years. Not bad for a dividend producing asset. Now, let’s compare this to selling options. If you make 2% per month on average, you can double you money in 36 months (72/2=36). This is only 3 years compared to 14.4 years for the 5% dividend stock! Which investment do you want to pursue?

This is the theory behind our strategy to sell puts and covered calls at get rich investments. We can generate consistent income on a monthly basis that will provide us the opportunity to compound our money and returns at a faster pace than the buy and hold dividend investing.

Learn how to compound your money and the best stocks to use in this strategy to double your money.

Get started today with the Monthly Income Report.

The Secret to Great Investment Returns

People ask me all the time what is the real secret to great investing returns.  They have lost faith in the talking heads on TV who are selling their latest investments hyped as the place to be in today’s market.  Often times these investments only separate the investor from their money. I have a proven strategy that is more rational so any investor can generate income by investing in great companies. My premise is cash doesn’t lie so when you have it in hand (or in your investing account), you know you have made money.  Probably the two most important attributes to making money on a stock investment is (1) buying a great business model; and (2) buying at the right price. I constantly see investors buying a great business but at a price too high to ever generate a return.

I have this thought leadership built into my investing strategy. One, I only buy great blue-chip stocks that have validated profit margins and competitive advantages. Many refer to these stocks as market dominators because they have well recognized brands such as Walmart, Intel and others. Two, I look to invest in these great companies at the right price. My research will point me to these stocks trading below fair value. These are the companies that will give us market beating returns with lower than average risk.

We further lower the purchase price by selling puts on the great stocks we want to own. Each month or so, we will sell a put options at the money to collect premium income. This premium income lowers the purchase price with each sell until the stock gets put to us. For example, selling an option put for $1.00 per contract in 3 consecutive months gives the investor $3.00 or $300 in cash. If the stock is trading at $40 per share, the put selling drops the investors cost to $37 per share ($40 – $3 = $37) In the meantime, the investor is earning an average of 1-3% each month in income.

This is the power of this strategy – creating income streams while buying great businesses at a discount price.

Learn more here: Monthly Income Newsletter

 

Covered Call of the Month – 26% Annualized Return on this Stock

You have heard all of the old adages about investing such as there is no free lunch and many more.  In general, these saying suggest that higher returns will always require higher risk of some type.  Still, money managers and hedge funds continue to attempt to ink out higher returns on a risk adjusted basis through a numerous variety of customized approaches to stock selection, asset allocation, hedging strategies and so on.  For them, this is the holy grail that generates higher returns than their competitors or market averages.  In my opinion, investors can simplify this process through covered call writing.

Covered call writing consists of selling call options on stock whose shares you own.  This strategy places the investor somewhere between stock ownership and fixed income investments.  While the investor owns shares, they also create income from the premium received from selling call options on those shares.  While this strategy will not produce wealth overnight, it does produce a steady stream of income while owning shares of stock.  This strategy is designed to produce an annual return in the area of 15% on conservative stocks and higher as investors write calls on higher volatility stocks.

Covered Call of the Month

Celgene (NASDAQ: CELG) ended the last trading session at $95.02. So far the stock has hit a 52-week low of $66.85 and 52-week high of $96.15. CELG has had an S&P Capital IQ 5 STARS (out of 5) ranking since 10/23/2008. On 1/13/2014 S&P Capital IQ equity analysts set a 12-Month price target of $104.00 for the stock. Celgene stock has been showing support around $93.83 and resistance in the $95.89 range.

For a hedged play on this stock, consider a Nov ’14 covered call with a 95 sold call for a net debit in the $89.77 area. The strategy has an 81 day duration, provides 5.53% downside protection and a 5.83% assigned return rate for a 26.25% annualized return rate (for comparison purposes only). This strategy has a 4 Key (out of 5) Low Relative Risk ranking.  

How to Get 50% of Your Stock Purchase in Monthly Income Installments

A covered call trade is a very simple instrument to increase your monthly income. The basic idea is to sell a call option for every 100 shares of stock you own.  By selling the call option, the investor receives a premium which is what our investors call monthly income or monthly dividend payments.  We sell new call options each month to create new income – month after month.  This is in addition to the current dividend paid by stocks on a quarterly basis.

Here is an example of what subscribers to the Get Rich Monthly Income Plan achieved in 2013:

Subscribers purchased Holly Frontier in January 2013 for $46.35 per share. So purchasing 100 share of stock will cost a total of $4,635 plus commission costs.  At this time, HFC was paying a $0.30 per quarter dividend for a dividend yield of 2.59%.  This is a nice yield on a fairly stable stock but it gets even better.  In addition to the $1.20 in quarterly dividends, HFC paid $2.00 more per share in special dividends.  This increases the total dividends to $3.20 per share in 2013.  The addition of special dividends increases the stocks annual dividend yield to 6.9%.  Wow, a 6.9% dividend yield is great in this low yielding stock market!

But it gets even better for Get Rich Monthly Income Plan subscribers.  They sold a call option on each 100 shares of HFC stock they owned each month of 2013.  Based on our results, this created a total of $1,985 for the entire year.  This created an average monthly income of $165.42 by selling the call option which created the covered call trade.  The total premium income of $1,985 is about 40% of the total cost of entering the trade – $4635 at the beginning of the year.  Therefore, investors received nearly half of their initial investment in HFC back during the year through a simple monthly covered call trade.

Now, subscribers can add the three sources of income – quarterly dividend, special dividends and covered call income together to create a Monthly Income Plan.  In total, subscribers received $2,305 in additional income from owning 100 shares of HFC stock in 2013.  This is an average of $192 in additional income each month of 2013. And, the $2305 in income is 50% of the total amount of the initial investment in 100 share of HFC!

Dividend Growth with 60% Upside

Trinity Industries (TRN) – Stock Summary

The stock pays a modest dividend yield of 1.07% but it has significant dividend growth potential in the coming years.  The Company has a 5 year average dividend growth rate of 13.40% with dividend growth of 36.36% in the last year.   The dividend will continue to grow as the EPS growth for next year is projected to be 27.23%.  EPS growth in the last quarter was 59.49% compared to the same quarter from a year earlier.  The stock has an equity summary score of 9.9 out of 10 for a VERY BULLISH outlook among analysts.  The stock is reasonable priced with a price to sales ratio of 1.07.

The stock is projected to have earnings of $5.92 in 2014.  Based on a PE of 15, the stock has a 12-month price target of $89, an increase of nearly 60% in the next year.

Trinity Industries, Inc. has declared a quarterly dividend of $0.15 per share on its $1.00 par value common stock. The quarterly cash dividend, representing Trinity’s 199th consecutively paid dividend, is payable January 31, 2014 to stockholders of record on January 15, 2014.

Recent Earnings

Trinity Industries, Inc. announced earnings results for the third quarter ended September 30, 2013, including the following significant highlights:

  • Record quarterly earnings per share of $1.26, a 58% increase year-over-year
  • Anticipates fourth quarter earnings per common diluted share of between $1.24 and $1.34 and raises full year 2013 earnings guidance to between $4.55 and $4.65
  • Rail Group receives orders for 5,610 new railcars during the third quarter resulting in a backlog of 40,050 units with a value of $5.1 billion
  • Structural wind towers business receives orders with a value of $442 million, extending production visibility through 2015
  • Company repurchases approximately 540,000 shares of its common stock during the quarter at a cost of $23.9 million
  • Available liquidity at the end of the third quarter of approximately $1.2 billion

Trinity Industries, Inc. reported net income attributable to Trinity stockholders of $99.6 million, or $1.26 per common diluted share, for the third quarter ended September 30, 2013. Net income for the same quarter of 2012 was $63.2 million, or $0.80 per common diluted share.

New Developments

Trinity Industries Inc. announced on 1/10/2014 that it  has acquired the assets of WesMor Cryogenic Companies through a newly formed subsidiary.  WesMor specializes in the manufacturing, repair, and rehabilitation of cryogenic containers that store and transport LNG and other industrial gases with initial expected annual revenues of approximately $25 million. The transaction includes the acquisition of a manufacturing facility in La Porte, Texas, and three service facilities located in La Porte; Slidell, Louisiana; and Port Washington, Ohio.

Recently, equipment finance company Element Financial Corporation (ELEEF) announced that it has entered into a strategic alliance agreement with Dallas-based Trinity Industries, Inc. (TRN) , a railcar manufacturer and lessor, to provide lease financing for up to US$2 billion worth of railcars over the next two years.  Under the terms of the Agreement, Element will be presented with “preferred opportunities” to enter into lease financings for a diversified fleet of railcars, including new railcars to be manufactured by Trinity , existing railcars from Trinity’s lease fleet as well as secondary market purchases.

Trinity Industries, Inc. recently announced that its subsidiary, Trinity Railcar Repair, Inc., has acquired the assets of Seaboard Railcar Repair (“Seaboard”). Seaboard provides a full range of services for both tank and freight railcars ranging from standard maintenance and program modifications to specialized cleaning, blasting, lining, painting, inspection and testing. The transaction includes the acquisition of two maintenance facilities located in Oklahoma and North Carolina with access to a number of major railroad interchanges. The assets and results of operations of this acquisition will be reflected in the Rail Group for financial reporting purposes.

Trinity Industries, Inc., headquartered in Dallas, Texas, is a diversified industrial company that owns a variety of market-leading businesses which provide products and services to the industrial, energy, transportation, and construction sectors. Trinity reports its financial results in five principal business segments: the Rail Group, the Railcar Leasing and Management Services Group, the Inland Barge Group, the Construction Products Group, and the Energy Equipment Group.

The Right Chemistry for Growth and Income with 42% Upside Potential

What more can an income investor want than a dividend growing at 35% per year and price upside potential of 42% in the coming year.  This is exactly what is possible to owners of Celanese Corp. (NYSE: CE), a global producer of industrial chemicals.  While the current dividend yield is only 1.0%, it will likely continue to grow as EPS is projected to increase 14% in the next year.

The Company has increased its dividends by 140% in the past year and boasts of a 5-year average annual dividend growth rate of 35.1% per year.  The current payout ratio is 21.24%.  Celanese announced a 100% increase in the company’s quarterly common stock dividend on July 25, 2013.  The dividend rate increased from $0.09 to $0.18 per share of common stock on a quarterly basis and from $0.36 to $0.72 per share of common stock on an annual basis.

Celanese posted adjusted EPS of $1.20 per share in Q3, up from a $1.12 gain during the same quarter last year and beating the Capital IQ consensus by $0.05 per share.  Revenue for the manufacturer of thermoplastic polymers slid 1.0% year over year to $1.64 billion, roughly in-line with analyst forecasts.

Looking forward, CE said it expects per-share earnings to continue growing during FY14 through new products and productivity improvement.  Celanese has expanded its polyacetal manufacturing footprint in Asia through investments in joint venture projects in Malaysia, Korea, and Saudi Arabia.  The company signed manufacturing agreements with Malaysia’s Polyplastics Asia Pacific Sdn. Bhd, Korea’s Korea Engineering Plastics, and Saudi Arabia’s Ibn Sina.

We think Celanese can generate above-average revenue growth from geographic expansion and the development of new applications for its products. Due to its size, CE also enjoys a cost advantage in many of its markets. We believe the engineered plastics business has solid long-term growth fundamentals, and that acetate tow remains a stable cash-generating business. Additionally, the European economy seems poised for gradual recovery in 2014.

We look for operating EPS to rise to $4.55 this year, from $3.80 in 2012. Further growth is expected in 2014, with EPS forecast to reach $5.20.   Based on a PE of 15, the 12 month target price is projected to be $78, an increase of 42% from current trading levels.  The Stock has an equity summary score of 8.6out of 10 for a Bullish outlook among analyst.

Celanese Corp. is a global producer of industrial chemicals and has the number  one or two market share in a majority of its products.  Celanese strives to focus its businesses in areas where it has a clear and sustainable competitive advantage to generate long-term earnings growth.  It also continually seeks to optimize its business portfolio to achieve industry, cost and technology leadership while expanding its product mix into higher value-added products. CE’s geographically balanced global footprint is another aspect of its strategy that should fuel future earnings growth, and its global presence is aligned with the current and expected growth of its customers.

The strong cash flow results allowed Celanese to more actively utilize their balance sheet, deploying$96 millionof cash in the quarter to purchase approximately 2 million shares.  Celanese also maintained a cash balance of$1.1 billionand net debt balance of less than$2.0 billion.

The company will cease all manufacturing operations and associated activities at the acetic anhydride plant in Roussillon and at the vinyl acetate monomer (VAM) unit in Tarragona by the end of 2013, and Celanese will proceed to decommission both facilities.

The need for these closure projects emerged from an assessment of Celanese’s overall corporate strategy, which included an assessment of the company’s global manufacturing facilities. Specifically, in support of the company’s acetyl portfolio, the manufacturing footprint strategy favors integrated production sites that provide critical economies of scale.  Celanese expects savings from these closures to be in the range of US $20-30 million in 2014.

Covered Call Trades of the Month

Investors have been bracing for anything that could reverse at the last minute the market’s year-long rally, which saw the Dow and S&P 500 hit record highs again this week. The S&P 500 is up 26 percent this year and registered a sixth week of gains on Friday.  However, income investors seeking to trade covered call investments have been performing well too.

Below are two successful trades from the past month listed in the Monthly Income Plan at getrichinvestments.com .  Each month, income investors are creating income streams from selling covered call options against high quality stocks.  Here are some winning trades from the current newsletter:

Covered Call on USG Corp (USG)

STRATEGY: Look at the Nov 27 covered call. For each 100 shares of USG stock you buy, sell one Nov 27 covered call option for a $25.50 ($26.65 – $1.15) debit or better.

Actions: USG is currently trading at $27.66 at the close on 11/15 so the 27 call we sold is ITM.  These shares and call options will be called away.

This is a 5.88% return for one month and an estimated 70% annualized return.

 

Covered Call on Flour Corp (FLR)

 

STRATEGY: Look at the November 2013 77.5 covered call. For each 100 shares of FLR stock you buy, sell one Nov 2013 77.5 covered call option for a $74.89 (77.19 – 2.30) debit or better.  That’s potentially a 3.49% assigned return.

Actions: FLR is currently trading at $79.36 so the 77.5 call we sold is ITM.  These shares and call options will be called away on Friday (11/15).

This is a 3.49% return for one month and an estimated 42% annualized return.

Pfizer offers a Total Yield Stock Play with an Increasing Dividend Payout

While income investors constantly seek out stocks with growing dividend yields, they can also benefit from share buybacks.  The share buybacks present an opportunity for investors to get capital gains in addition to current income.  Currently, 80% of S&P 500 companies are buying back shares. Combine this with dividend yield and you can get a total yield of greater than 10% in 2014.  We are presenting a series of stocks worth a look.

Pfizer (PFE) has a projected share buyback yield of 14% and a current dividend yield of 3.49%.  This provides investor a potential for a total yield of 18.2%.  The stock has a 12 month price target of $33.

Investors were pleased to hear that the company intends to increase its dividend payout ratio to 40% (from 33%) by the end of 2013. The company returned about $15 billion to shareholders in the form of dividends and share buybacks in 2012. Pfizer intends to use the proceeds from the sale of the Nutrition business on additional share repurchases and other value creating opportunities.

On 7/30/2013, the Board of Directors authorized a new$10 billion share repurchase program to be utilized over time. This new program is in addition to the$3.1 billion of authorization currently remaining under the previous share repurchase program.

Pfizer posted second quarter 2013 earnings of $0.56 per share, 5% below the year-ago earnings. Revenues, which fell 7% to $12.9 billion, missed the Consensus Estimate of $13.1 billion. Revenue growth was impacted by the loss of exclusivity of certain products and purchasing patterns for Prevnar/Prevenar in some markets.  Pfizer maintained its outlook for 2013. Revenues will be hit by genericization and the expiration of a few co-promotion agreements. The company s pipeline needs to deliver given the Lipitor loss of exclusivity and the upcoming loss of exclusivity on additional products in the next few years.

We expect revenues in 2013 to decline about 12%, primarily reflecting the classification of the animal health business (divested in June 2013) as a discontinued operation. We also project lower sales of established drugs, largely due to ongoing generic erosion in off-patent Lipitor, Detrol and Xalatan, as well as the expiration of certain co-promotion agreements.  However, we project continued gains in Lyrica muscle pain therapy and Celebrex arthritis treatment. We also forecast good growth from emerging markets, new oncology agents such as Xalkori and Inlyta, and from the recent launches of Xeljanz and Eliquis.

In July 2013, PFE announced plans to internally separate into three distinct business segments, two innovative units and one value business.  The first innovative unit will comprise drugs with patent exclusivities beyond 2015. The second innovative segment will include vaccines, oncology agents, and consumer healthcare.  The third value unit will consist of mature drugs, and joint venture products. We believe the new structure should provide investors greater transparency of PFE’s different businesses, and represents a prelude for a potential eventual split-up of Pfizer into three separate firms.

Covered Call of Month – October Expiration

For subscribers to the Get Rich Monthly Income Plan, the monthly covered call trades all provided positive income from the selling of call option.  One of the better trades was FedEx (FDR) as the setup is shown below.  The covered call trade used a strike price of 120 as the stock closed well above this price on 10/18.  The trade provided a one month gain of 3.9% for covered call traders.

 

Covered Call on FedEx (FDX)

STRATEGY: Look at the Oct 120 covered call. For each 100 shares of FDX stock you buy, sell one Oct 120 covered call option for a $114.53 (116.83 – 1.30) debit or better. That’s potentially a 3.87% assigned return.

TREND:   The technicals for FDX are bullish with a strong upward trend. The stock has support at $107 and is above resistance. The company reported earnings today, Wednesday, September 18. S&P rates this stock 4 STARS (out of five) – buy.

BLANKET PUT: As a protective option to the covered call, you can buy the Jan 2013 110 Put for $3.20 to limit your stock downside to $110.00 per share. This put is not required for the covered call trade but serves as additional protection for those seeking to limit downside. You should sell the put when you exit the covered call position.

 

RESEARCH NOTES:  S&P maintains buy opinion on shares of Federal Express (FDX). We keep our FY 14 and FY 15 EPS estimates at $7.04 and $8.66. We raise our 12-month target price by $10 to $127, 18X our FY 14 estimate and towards the middle of its 10-year historical range of 9X-34X reported EPS. Q1 EPS of $1.53, vs. $1.45, is $0.02 below our estimate but $0.03 better than the Capital IQ consensus. FDX reaffirms FY 14 guidance of EPS growth of 7%-13%. We expect FDX to benefit from an improving global economy and its ongoing restructuring plan, and anticipate continued investor rotation into logistics stocks on good economic news.

Look at Pentair as a Total Yield Stock Play

While income investors constantly seek out stocks with growing dividend yields, they can also benefit from share buybacks.  The share buybacks present an opportunity for investors to get capital gains in addition to current income.  Currently, 80% of S&P 500 companies are buying back shares. Combine this with dividend yield and you can get a total yield of greater than 10% in 2014.  We are presenting a series of stocks worth a look.

Pentair (PNR) has a projected share buyback yield of 22% and a current dividend yield of 1.47%.  This provides investor a potential for a total yield of 23.47%.  The stock has a 12 month price target of $70.

Pentair Ltd. recently announced that it will pay a regular quarterly cash dividend of $0.25 per share on November 8, 2013 to shareholders of record at the close of business on October 25, 2013. Pentair had previously announced on April 29, 2013 the approval by its shareholders of an ordinary cash dividend of $1.00 per share to be paid out of Pentair’s capital contribution reserve in four equal quarterly installments of $0.25 in each of the third and fourth quarters of 2013 and the first and second quarters of 2014. Pentair has increased its dividend for 37 consecutive years.

Pentair paid dividends totaling $0.88 per share in 2012. Pentair paid dividends of $0.23 per share in each of the first and second quarters of 2013 and $0.25 per share in the third quarter of 2013.

Pentair (PNR) is a global diversified industrial company, which makes and markets water and flow control devices and electrical and electronic enclosures, recently doubled in size after merging with Tyco’s flow control unit.

We project close to 3% organic sales growth in 2013, driven by the water & fluid solutions segment and, to a lesser extent, valves & controls, while technical solutions remains soft. We see favorable trends continuing in global energy (oil & gas and mining), food & beverage and North American residential, with more modest growth in emerging regions. PNR should benefit globally from its expanded distribution via its merger with the Tyco Flow Control unit. We still see headwinds in Western Europe.

We expect gross margins to expand by at least 0.5% in 2013 to above 33%, on supply chain and repositioning cost savings, and a more favorable mix, while commodity input costs remain generally stable. We see adjusted EBITDA margins widening by more than 160 basis points to near 16.5% in 2013, reflecting volume leverage and improved productivity, and $105 million in cost synergies.

Share Some Winning Cash
Archives