I may have purchased my last covered call. My use of covered calls is impulsive and I invariably sell the call just in front of a run-up in price. That cost me about 10% short term gains in two holdings recently. I still like cash-covered puts. However, they are a cash management tool in rising markets, not a means to acquire stocks at a discount to current price.
I'm becoming more adept at rebalancing, thanks to that superb tool from Chuck Carnevale called FastGraphs. I'm paying up for the premium version, which allows me to review valuation any time I want. The chart immediately identifies companies whose P/E ratio has risen above historical norms. I did some selective rebalancing, got myself a couple of industrials I had been thinking about as well as raising my yield a bit.
I think I'm prepared for a pull-back. None of my stuff is significantly overvalued except a few that I trimmed. I'm clearly in the issue swapping mode now, rather than the portfolio building mode. It would be wise to start building the bench, so that I have a short list to pull from when it's time to rebalance. I've been pulling from the dividend champion's/challenger/contender lists thus far.
I don't care what the total return guys say; I love those dividends.
I have a new Schwab account with a few shekels in it, will have to go visit and decide what I'm going to do with it.
ciao
Saturday, April 27, 2013
Saturday, April 6, 2013
I have resolved the DRIP versus targeted reinvestment dilemna. I'm still a DRIPer
I read several treatments of the issue and nothing changed my mind from the current position.
All of my holdings reinvest. That means between 2 and 10% growth in shares in each holding yearly.
Valuation may go up or down, but even if down, it's cushioned by the reinvested dividend. The growth in share count assures that dividends will grow. Since most of the companies I hold also raise dividends yearly, that also produces compounding as the position grows.
Since all positions are growing, the portfolio holdings grow in parallel, making less re-balancing required. A lot of discussion results from concern about whether reinvestment produces less growth in the portfolio because some holdings are over-valued. Those who espouse targeted reinvestment claim that they can purchase the most under-valued holdings in their investment universe which produces greater dividend growth. I'm not convinced.
Most investors will agree that rising earnings results in rising stock price as well as rising dividends.
If rising stock price outstrips rising dividend, then the ability of reinvestment to purchase more shares is blunted. However, if rising earnings also result in rising dividends, one benefits from both factors in appreciation of the value of the position. Then, if one rebalances, one harvests the capital gain and the reinvestment goes into another holding with favorable dividend growth characteristics. The portfolio is reinvesting, even when one is moving money from one holding to another. Both new money and rebalancing are forms of targeted reinvestment, so the portfolio has both forms of reinvestment working simultaneously.
At the moment, most high quality dividend stocks are at fair value or above. The ones that aren't (amongst those I wish to own) already occupy a full position in my portfolio. So, I am accumulating some cash. I continue to get stung on covered calls. One makes money, but if the stock appreciates above the strike price, you lose the difference and the stock is called, or you have to purchase the call back at a loss. I do better with cash covered puts; I either get premium payments or stocks at discount to strike price.
When I can't find stocks I want to own at current prices, purchasing cash-covered puts keeps the cash in motion, and keeps the over-valued stocks on the radar screen, so when they come into acceptable purchase range, then I can purchase or sell an in-the-money put so that the shares will be assigned at expiration of the put.
What has transpired over the last few years is that I have become comfortable with a strategy and knowledgable about how to moniter that strategy. It means I can spend less time worrying, more time studying how to find better performance. It's a nice place to be, compared with where I started
I read several treatments of the issue and nothing changed my mind from the current position.
All of my holdings reinvest. That means between 2 and 10% growth in shares in each holding yearly.
Valuation may go up or down, but even if down, it's cushioned by the reinvested dividend. The growth in share count assures that dividends will grow. Since most of the companies I hold also raise dividends yearly, that also produces compounding as the position grows.
Since all positions are growing, the portfolio holdings grow in parallel, making less re-balancing required. A lot of discussion results from concern about whether reinvestment produces less growth in the portfolio because some holdings are over-valued. Those who espouse targeted reinvestment claim that they can purchase the most under-valued holdings in their investment universe which produces greater dividend growth. I'm not convinced.
Most investors will agree that rising earnings results in rising stock price as well as rising dividends.
If rising stock price outstrips rising dividend, then the ability of reinvestment to purchase more shares is blunted. However, if rising earnings also result in rising dividends, one benefits from both factors in appreciation of the value of the position. Then, if one rebalances, one harvests the capital gain and the reinvestment goes into another holding with favorable dividend growth characteristics. The portfolio is reinvesting, even when one is moving money from one holding to another. Both new money and rebalancing are forms of targeted reinvestment, so the portfolio has both forms of reinvestment working simultaneously.
At the moment, most high quality dividend stocks are at fair value or above. The ones that aren't (amongst those I wish to own) already occupy a full position in my portfolio. So, I am accumulating some cash. I continue to get stung on covered calls. One makes money, but if the stock appreciates above the strike price, you lose the difference and the stock is called, or you have to purchase the call back at a loss. I do better with cash covered puts; I either get premium payments or stocks at discount to strike price.
When I can't find stocks I want to own at current prices, purchasing cash-covered puts keeps the cash in motion, and keeps the over-valued stocks on the radar screen, so when they come into acceptable purchase range, then I can purchase or sell an in-the-money put so that the shares will be assigned at expiration of the put.
What has transpired over the last few years is that I have become comfortable with a strategy and knowledgable about how to moniter that strategy. It means I can spend less time worrying, more time studying how to find better performance. It's a nice place to be, compared with where I started
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