Recent Trades – Options

Last week, I wrote two covered calls on the following positions.
IAMGold Corp (IMG.TO)
IAMGold has been the dog in my portfolio. When I first started the position in my portfolio, the stock was paying a healthy 5% yield and had a 5-yr dividend growth rate of 33%. But last year saw the decline in gold prices which started cutting into the operating margins at the company – which resulted in IAMGold suspending its dividends. I have continued holding the position as it is still a great company and continues to be one of the most efficient companies in the sector. However, the weakness has resulted with this stock ending up in the red and I have decided to sell it to move my commodities exposure to some other company. However, instead of directly selling at today’s prices, I decided to write covered call options instead and let the market decide for me. I wrote seven Sep 20th calls with a strike price of $5.00 resulting in a total of $49.00 in premium. If the stock stays below $5.00, I keep the premium. If it rises above $5.00, the option will get called and I sell and exit my position. Considering that this is high season for gold stocks, the likelihood of the stock going north of $5.00 is higher.
The Jean Coutu Group (PJC.A.TO)
The Jean Coutu Group is a great stock, but with a current yield of 1.85%, I feel that there are better options out there. Although the stock has a great dividend growth rate, I have enjoyed a significant jump in unrealized profits. I ended up writing one Sep 20th call with a strike price of $22.00 resulting in a $30.00 premium.This adds $79.00 to my monthly income, which will handsomely bump up my overall passive income for the month of August.Disclosure: My full list of holdings are available here.

 

Recent Buy – Kinder Morgan Inc (KMI)

I added to my position in Kinder Morgan Inc (KMI). Kinder Morgan has been hard to miss if you’ve been watching the business news lately. Kinder Morgan, which was the parent company for Kinder Morgan Energy Partners LP (KMP), Kinder Morgan LLC (KMR) and  El Paso Pipeline Partners LP (EPB), announced that it was consolidating all its businesses under one roof which is Kinder Morgan Inc (KMI).

KMI runs 80,000 miles of pipelines and 180 terminals and is now the third largest energy company in the United States after Exxon Mobil (XOM) and Chevron Corp (CVX). I ended up adding 40 shares to my portfolio (bringing my total to 100 shares in KMI) at a price of $38.50/share. This increases my annual dividend income by $68.80.

Corporate Profile (from Yahoo Finance)
Kinder Morgan, Inc. operates as a midstream and energy company in North America. It operates through Natural Gas Pipelines, CO2—KMP, Products Pipelines—KMP, Terminals—KMP, Kinder Morgan Canada—KMP, and Other segments. The company owns an interest in or operates approximately 80,000 miles of pipelines and 180 terminals. Its pipelines transport natural gas, gasoline, crude oil, carbon dioxide (CO2), and other products; and terminals store petroleum products and chemicals, and handle products, such as ethanol, coal, petroleum coke, and steel. The company was formerly known as Kinder Morgan Holdco LLC and changed its name to Kinder Morgan, Inc. in February 2011. Kinder Morgan, Inc. is headquartered in Houston, Texas.
Recent Buy Decision
Kinder Morgan is one of the best ways to play the energy boom in North America and the decision to add to my position has been an easy one.

  • Kinder Morgan, which was a leader in the MLP industry, has decided to consolidate and bring everything under one roof – which removes all the confusion for the shareholders on which stock ticker to choose.
  • The consolidated company is more focused on cash flow and provides shareholders with increased revenues year after year.
  • With the integration of EPB pipelines, KMI’s 54% of the business now consists of natural gas pipelines (largest in North America) – which I am bullish on.
  • In addition, KMI is the largest independent transporter of petroleum products (2.3MMBbl/d), largest CO2 transporter (1.3 Bcf/d), largest independent dry bulk terminals, and only oilsands pipe serving the west coast.
  • The consolidated company will have a market cap of $140B, even though the stock doesnt reflect that yet.
  • Most importantly – the payout and returns to shareholders. The expected payouts are $2.00 (2015), $2.20 (2016), $2.42 (2017), $2.66 (2018), $2.93 (2019), and $3.22 (2020). If KMI can keep its promise (and it has, in the past) and raise/beat those dividends in the future – that amounts to a salivating income play to investors.

The detailed presentation from Kinder Morgan provides more insight on the future. Click here to access.

Risks
Investing in KMI faces the following risks

  • There have been rumors circulating that the consolidation of the businesses could face litigation from LP shareholders as they are forced to sell their shares and incur taxes. Dividend Growth Investor shared his thoughts recently about the huge tax bills KMP/KMI will face due to the consolidation. Read his post here.
  • KMI assumes $27B in debt that the other entities had taken on.
  • KMI faces some regulatory roadblocks with the Trans Mountain pipeline in Canada, which could incur delays in the project.
  • Any increase in interest rates will result in headwinds for stocks in the sector.

Full Disclosure: Long CVX, KMI. My full list of holdings is available here.

Chatter Around the World – 57

Chatter Around the World is a weekly curated link update of articles related to economics, investing, dividends and personal finance. In these weekly updates, I also capture my blog updates and news related to my holdings.

Global Economy in one chart

New Blog Posts

Let’s dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

General Reads

Dividend Reads

Dividend Stock Analysis

A Frugal Family’s Journey maintains a centralized list of dividend stock analyses from around the community. Be sure to check out the page here.

Have a wonderful weekend.

Image Source: World Bank

Dogs of the Dow

At the end of each year, traders like asking each other a very common question: “Did you beat the market?”. I get the same question every now and then when I talk about investing to others. While it is a valid question and has its value, my focus in investing is not to beat the market. Yes, you read that right – I am not interested in beating the market.
I understand why people ask this question; afterall, if you cant beat the market – why pick individual stocks instead of just buying the whole market using index funds? I think index funds have their place in most portfolios and a lot of people who do not have the time to manage a portfolio, understand investing or even dividend investors looking for broad market exposure (especially in bull markets) should use index funds for their investing needs.

So, if I am not interested in beating the market – how do I measure my performance? Simple – I am only interested in building and growing my income stream. Each year, I set a target of reaching my passive income to a certain level and keep investing until I hit that number to measure my performance. Nothing measures performance as cold hard cash that I see in dividends being deposited in my accounts week after week. But for the sake of this article, I will be exploring the trading strategy that was popularized by Michael B O’Higgins’ book Beating the Dow.
The investing strategy is extremely simple – the Dogs of the Dow are the 10 of the 30 companies belonging to the Dow Jones Industrial Average (DJIA) with the highest yield. The Dogs of the Dow strategy involves investors shuffling around the portfolio to adjust it to have equal allocation to the 10 highest yielding stocks. Why the highest yielders? Because those are the stocks that have fallen out of favor and the stock price has been punished for whatever reason resulting in a high yield. Generally speaking, the companies that belong on the DJIA are blue chip companies that have a solid track record over the years. So, chances of those DJIA companies going bust are extremely low.
The current dogs include AT&T (T), Verizon (VZ), Merck (MRK), Intel (INTC), Pfizer (PFE), McDonalds (MCD), Chevron (CVX), General Electric (GE), Cisco Systems (CSCO) and Microsoft (MSFT). I recently added AT&T (T) – the top Dog of the Dow to my portfolio. The company provides a juicy 5.3% yield and also has a track record of raising dividends year after year.
Do you use this or a similar strategy in your investment portfolio?
Full Disclosure: Long CVX, GE, T. My full list of holdings is available here.

Yakezie Challenge Update

Time for an update on the Yakezie challenge – something I started six months ago.
The goal was to achieve the following and I gave myself six months to achieve it. Here are the results:
  • Reach an Alexa ranking of 200,000 or better – Failed
    • I was not able to reach this goal. The best ranking I achieved was 276,500 in April – which has continued to slip since.
  • Publish 2-4 articles weekly – Achieved
    • This was a resounding success and I have been able to keep up with the publishing week after week.
  • Selflessly promote other blogs and become an active member of the Yakezie – Partially Achieved
    • While I have connected with a few bloggers and promote each other’s blog, I havent been able to be as active as I would’ve liked. I will looking forward to continue connecting with other bloggers in the Yakezie network in the future.
  • Include the Yakezie badge – Completed
    • Done. Included on the site.