The T20YM Dividend Value Portfolio for 2011 and beyond

I am a firm believer in Buffett’s old adage that ‘there are no called strikes in investing’. If an investor is patient the market will eventually err and they will be in a position to capitalize on the mistake. There is no need to chase stocks for the sole reason of owning them. For instance, I love Chevron (CVX) as a company. I feel it is the best integrated oil play on the market- but not at its current $90 cost basis. I will wait for Chevron’s price to come down, or allocate my capital elsewhere.

As a long term dividend investor, I have been twiddling my thumbs since July. Good entry points have been few and far between, with the market slowly, but steadily, grinding upwards. The economies seemingly renewed strength, pro-business Obama, QE2 and a Republican congress has changed my outlook for 2011. Barring any unforeseen macro events, the market wants to go higher and thus it will go higher. I have learned the hard way not to fight the fed.

Taking this all into account, how can we construct a long term dividend portfolio for 2011 and beyond? What companies will benefit from QE2 and an international economic recovery? What companies have lagged the market and offer capital appreciation as well as a stable yield?

Before we get to these questions, let’s take a look at some basics rules I use when constructing a long term dividend portfolio:

1.    Diversification: In any portfolio diversification is essential. Spreading your money across sectors ensures you are not putting all your eggs in one basket. Diversifying a dividend portfolio can be exceptionally difficult as the majority of qualified companies are consumer staples, energy and utilities. Nonetheless, I cannot stress the idea of diversification enough. Look at the dividend investors that were overweight financials in 2009. Furthermore, we want to diversify internationally. Opening our portfolio to different markets hedges our investments against sudden downturns in certain economies and currencies.

2.    Dividend Yield and Growth: When analyzing a Dividend Growth companies I am looking for a yield greater than 3%, with a payout ratio lower than 50%. A company with consistent dividend growth as well as a low payout ratio is often financially secure and well managed. Good places to start looking for these companies are The Drip Investing Resource Center’s Dividend Champion list (here) or the S&P Dividend Aristocrat list. For the sake of this article I am not limiting myself to these lists as I am building a dynamic portfolio of dividend paying stocks.

3.    Value: I am always looking for value. I am looking for stocks that are selling for a discount to their peers or previous multiples. We are looking for beaten down stocks not beaten down companies. The dividend yield from these companies allows us to sit on the stock as the market eventually realizes the company’s true value.

I want to start the portfolio by focusing on 6 separate sectors: Basic Materials, Finance, Consumer Staples, Energy, Healthcare and Utilities. This should give me broad exposure to the market while focusing my attention on the traditionally best yielding sectors.

Without further ado, I present The T20YM Dividend Value Portfolio:

T20YM End of Year Update

It’s been an interesting month for the T20YM Portfolio. I successfully cycled into the Financial and Banking rotation before the explosion upward. This has made up for some of my losses in GLD and GOOG. I have been going for singles and doubles via Option Trading rather than home runs. This isn’t exciting, but it has been working. I will take making money, over losing money any day of the week.

Portfolio wise, I have a broad based BRIC ETF portfolio in place. I would like to add EZA and TUR on pullbacks. I am also adding to FXI on current weakness. This ‘surprise’ China tightening isn’t very surprising. They have been telling us this was going to happen for weeks.

The fixed income/preferred portion of the portfolio continue to lag. If I wasn’t overweight in PGF I would add another 100 shares. I’m not concerned about foreign bank preferred. The monthly yield is there and the ETF should be trading around $20.

I have started building my individual dividend portion of the portfolio. I plan on doubling the CIM position by the ex div date. This REIT is more attractive than NLY for multiple reasons. I think there is less risk here and it might be a position I hold long term. DEO is a small position that I will continue to build on weakness. I believe it is one of the better foreign Dividend Growth stocks and a free cash flow machine. I will look to add to the position under 72.00. WY is trading below tangible liquidation value and is looking to TRIPLE its dividend in 2011 as its transitioning to a REIT. It’s a very cheap play on housing. The dividend will allow me to hold the shares until the inevitable recovery. Other names I plan on adding to by year end are ABT and TOT.

Words of Wisdom.....

T20YM Update: Emerging Markets and GLD

What a strange, strange week.

If you were looking for volatility, you got it. Up one day, down the next. Mr. Market is one fickle son of a bitch. The selloffs, by my calculations, were overblown. An Irish debt crisis… how long have we known that this was coming? Other than driving the price of the dollar through the roof, this has very, very little effect on US equities. The total GDP of Ireland is equal to the state of Nevada. In the grand scheme of things, this is a drop in the bucket. When/if we get to Spain, then we can start to get worried. The idea that the world stock market is selling off because of Ireland is ridiculous. People need to put on their big boy pants and stay in the game.

The second big worry we have was North Korea shelling a South Korean island. Again, I think the markets’ reaction to this noise was overblown. This happens on a monthly basis in Korea. This type of border clash is not war; it’s the North Korean’s form of negotiation. Even IF there was full scale war on the Korean peninsula, this would not be a reason for every market in the world to tank… The conspiracy theorist in me thinks this was just an extension of the US/China trade war. China politely asks North Korea to fire a few shells at the south, the Asian markets tank, the US Dollar sky rockets and Helicopter Ben and the whole QE2 experiment turns into a gigantic waste of time and money.  This is classic Cold War politics. If the President Obama wants a trade war with China, he will quickly realize they won’t be playing by the same rules. If this is truly a start to a Trade/Cold War with China, then we will have something to worry about. As I see it now, both our economies are too intertwined to isolate the other.

Over reaction to macro events is often a strong sign at a 'top' of a market. I'm not saying this is a long term top, but a small pullback prior to year end is in the cards. 

I have been looking for an entry point to add some Emerging Market exposure to my portfolio. Last weeks volatility offered me a few decent entry points. I started some small positions in some broad based foreign ETF’s. I chose to put some money to work in China, India, Brazil, South Africa, Turkey and VWO. My current portfolio is as follows:

Symbol	Qty	Price Paid	Market Value
DVY	50	$47.97	2,409.00
EPI	75	$25.31	1,845.00
EWZ	30	$74.62	2,244.30
EZA	20	$69.98	1,355.80
FXI	50	$43.76	2,160.00
IAU	100	$12.64	1,329.00
IDV	50	$33.12	1,607.00
JNK	50.70756	$39.57	2,013.09
PFF	50.55118	$39.58	1,987.67
PGF	111.2868	$18.07	1,989.81
TUR	20	$71.16	1,361.80
VWO	50	$46.11	2,280.00
GLD Dec 18 '10 $134 Call	10	$2.61	1,800.00
SLV Dec 18 '10 $26 Call	10	$1.11	1,100.00

As you can see, I have a few some short term option plays on Gold and Silver. I am down on the GLD position, flat on the SLV. I am having trouble pegging the moves in gold. It seems to have a mind of its own. One thing I do know is that it likes to go higher. This is a perfect environment for GLD, it either tops here or pushes to 1500. Two weeks for me to find out.

Quantitative Easing Explained

Just a little humor for a Monday morning.....

Good luck during this volatile week.

Best,

C

Top 100 Dividend Stocks November 2010

Top 100 Dividend Stocks November 2010

Check out this great article by the Intelligent Speculator. I plan on buying a few of these companies on pullbacks.

The QE2 Cometh....

How I’m playing the QE2

First, I have learned to never fight the fed. This seems cliché, but it’s the honest to god truth. Bernake gave us a free ‘put’ on the market; it would be asinine to over think the situation. In the short term I think we head higher, in the long run my outlook is not so positive.

My trades for the last week have been fairly simple. I’m shorting the TLT via puts. Long term treasuries are going to be hammered. I’m long commodities via calls: CVX, NG, GLD. Dollar goes down, these go up. I’m long leaps on C, these were too cheap to pass up. I started a small position in PCL, another commodity play with a decent dividend. Short bonds, long commodities.

I also took a flyer on BIDU today at the close. POMO Is going to hit the market everyday for the next month. I think high beta names are going to pop.

The dollar is going to lose value fast. Make sure you put it too work in something that will sustain value.

Someone needs to gag Chambers.

This is like a broken record. CSCO reports decent earning, Chambers gets on the conference call and tanks the stock. Two quarters ago, he proclaims ‘this is as good as it gets’ stock sells off… Last two quarters he gets on the conference call and tells us the sky is falling. If I was on the board, I would gag this guy after earnings… Lucky for me I picked up some Nov 24 puts for .50 cents. I expected a selloff, but not of this magnitude. When Chambers talks- short the stock.

All quite on the T20YM Front.

Sorry for the delay in posting, it’s been a quite couple weeks on the trading side. I have been licking my wounds after the Google debacle. That error took a considerable bite out of my trading capital. I have been making small moves here and there and have had some success. I have not initiated any new long term positions since I last updated the portfolio. I am personally finding it difficult buying at the current levels, but I have been saying this for 100 points on the S&P. Sooner or later I will have to stop being so stubborn. I guess there are no called strikes in investing.

Since I have nothing profound to write, I guess I’ll list some take away s from the last two weeks:

•        I hate the VXX. Anytime I have used the VXX to hedge an investment it steals my money. I feel like I am donating to the stupid tax when I open a position. It does a terrible job at mirroring the VIX in general. If I am worried about volatility, I am either going to outright short the market or do nothing. I will not buy this again, I’m better off spending the money on scotch.

•           QE2 is here and I am not fighting it. I am not saying people should push all in on equities but you should increase your exposure. The U.S. dollar is losing value faster than Cavaliers after Lebron. The easy trade is long commodities (gold, oil, ag), short long term bonds (TLT puts, TBT), and play the high growth names (CMG, AAPL, NTAP, etc). I want to be clear, I don’t agree with quantitative easing, and I don’t think this ends well.  

•           Elections are over and the red tide cometh. I’m pretty sure we will see Bush era tax cuts extended for all. Additionally, I think we will see the capital gains and div tax extended. This is a positive for the market. Let’s hope the Republicans keep their promise and try to reign in spending. We need to get our fiscal house in order.

•           I have a few small option plays on NTAP Nov 55 Calls. Looking for direction Monday or Tuesday. I also have a spec play on Nov BP 44 calls. Word came in late Friday of a potential bid for the company by XOM. We will see how they play out.

•           I am going to increase my commodity exposure with either REMX or GLTR.

• Can you believe the Giants won the World Series? are we in bizzaro world? Some crazy Giants fan made a boat load on that bet. 

It’s been a crazy week at work and school. Look for me to be more active after midterms.

Good luck to all,

C

My Current DIV Portfolio

Lately I have been having trouble identifying companies that have attractive long term entry points. I still don’t believe that this market is going to run forever- I think we are due for a major pull back within the next six months. This is when I plan on jumping back in on individual stocks. But what if I’m wrong? What if we continue to rally through the elections, QE2, and then the holiday season? I would hate to have money collecting dust under my mattress.

I decided to invest 20k into broad based high paying Dividend paying ETFS. I figure this will be a good solid base for my portfolio.

Currently I am invested in:

  

Symbol	Description	Yield	Average Yield
INGBX	ING GLOBAL BOND A	6.31
PGF	POWERSHARES FINANCIAL PREFERRED	7.16
PFF	ISHARES S&P US PREFERRED STOCK INDEX	7.37
JNK	SPDR BARCLAYS CAPITAL HIGH YIELD BOND	9.82
IDV	ISHARES DOW JONES EPAC SELECT DIVIDEND	4.33
IAU	ISHARES COMEX GOLD TRUST	0
DVY	ISHARES DOW JONES SELECT DIVIDEND	3.53
			5.50

This portfolio gives me broad exposure to equities, preferred shares and bonds from across the globe with an average yield of 5.5%. I included a small position in gold in the portfolio as I view the commodity as hedge against both inflation and deflation (go figure). I think any portfolio in this market should have some exposure to this commodity.

Depending on how my financial situation shapes up in the next few months, I will hold onto these ETFS and add single equities as opportunities arise.  

On a separate note, you will rarely see me buy growth stocks outright. I would rather spend my money on long term investments with little beta that appreciate over time. This allows me to play the momentum stocks with options- as it allows me to control a greater amount of shares with less exposure. Stocks that have momentum are great trades, but are not great investments.

All the best,

CM

Some quick trading updates.

It’s been a while- sorry for the lack of updates. It was a busy trading week for me. I took upward of 10k out of my AAPL trades. I sold a bit too soon (around 308) on Friday. I definitely left 10-15 grand on the table on Monday before earnings. This eats at me a bit, but I had a made a commitment to get out if it ran to 305 prior to earnings- as it was setting itself up for a sell off after earnings announcement.

Let me be clear- I don’t think there should have been a sell off. That was a MONSTER quarter. 20 BILLION dollar quarter. It beat EPS by nearly .60 cents per. Crushed on IPHONE and MAC sales and missed slightly on IPAD (which is a new product so these analysts really have no clue what to project) and really, IPODS are Christmas gifts-but other than that, who really cares about IPODS? Not me. Gross Margins getting ‘squeezed’ is a red herring, AAPL warned about this last quarter and it should come as no surprise. They still blew out the quarter and continue to add to free cash flow and penetration into foreign markets. Profit taking, I can understand. But I’m looking for $400 after the holiday earnings. Get back in while it’s below 310.

Now for a trade that went BADLY. After GOOG announced I figured we would have a huge run up AH and then a minor sell off the next day. We quickly traded down to $592 and I went long 30 OCT 600 puts at a $8 per cost basis. My thinking was that GOOG was setting up to be pinned UNDER the 590 strike price as large money couldn’t be long the $600 calls. I bought igh and sold low. The stock slowly marched back to the 598 range and I got out for a considerable loss (most of the AAPL gains for the last week). BIG MONEY wanted this stock pinned at $600. This was a stupid trade on my part, one I won’t make again.

Other than that, PGF is being unfairly punished in the current financial sell off. PGF are preferred FOREIGN financial shares. If you are looking for a good entry for this great ETF, here you go. Under 18 is a bargain.

I am going to post my portfolio updates later today. I have decided to make a run of the mill ETF DIV portfolio for the short term. I will add with individual companies as pullbacks allow. I don’t like entry levels at the current prices.

All the Best,

C

Damn you GOOG, damn you.

Option Mondays: AAPL again....

Another Option Monday and I am sticking with what has been working. Last week I purchased 5 AAPL Nov 270 Calls at $24.45 per and 5 AAPL Nov 280 Calls at $17.25 per. To date the trade has been fairly profitable (I’m up nearly $4,000) and I think it has considerable more room to run. Every day we are greeted with more good news- Target, Wal-Mart, Verizon, China Telecom, Apple TV, etc. Every day we get more and more analysts upgrades- the new median target price is $352, everyone is expecting a blowout quarter. This seems like easy money. That is what is starting to worry me.

AAPL reports earnings on the 18^th and anything less than a blowout quarter will cause a profit taking selloff. To be clear, I think AAPL is going to post a blowout quarter. This is a company that is firing on all cylinders. The China roll out went better than expected. This could be its 20 Billion dollar quarter and for the sake of my call options, it better be.

So my plan for the week is to sit on these options. I will take a profit if AAPL hits $305 before earnings- that is very feasible. There could be a lot of managers playing catch up come Monday. Other than that I intend on holding these past earnings and adding to my holdings on any weakness. The fundamentals are there, the momentum is there, the technicals are there, let’s hope the market agrees with me.

Wish me luck.

Best,

CM  

Options on AAPL: Sometimes it’s better to be lucky than good.

I am going to be completely honest. For the last week I have watched every TICK on the AAPL charts. My eyes were on the verge of bleeding. I didn’t lose any sleep (the whiskey saw to that) but I couldn’t clear my mind. I couldn't get the weight off my shoulders. It was consuming.

I made a mistake, a big one.

I bought into AAPL at exactly the wrong time. I went long 10 AAPL Oct 290 calls at peak volatility in an up market. I figured the run to $300 was in progress and there was no derailing the train. No need to rehash the past (see previous posts) but AAPl plummeted in the next week. I compounded my error by trying to catch a falling knife. I went from being long 10 AAPL Oct 290 calls at $9.80 per, to long 35 AAPL Oct 290 calls at $4.90 per, and down $9,000.00. I was dollar cost averaging myself into the poor house. Day after day, the technicals were telling me to get out, but I was waiting for that one bounce to exit. It was two weeks until expiration and every indicator was telling me to sell- but I held on.

I pushed in again- doubled my position and DCA down to 70 AAPL Oct 290 calls $3.85. Monday was terrible and I was down $15,000.00 or so. As a normally disciplined value investor, you can see how troubling this was for me. I had dug myself in a gigantic hole and was starting to look at things in my house that I could sell to remain whole. I put on a happy face and kept plugging away at my day job, school and family. The whole time this trade/loss was eating at me.

I was confident the stock was due for a bounce, I just didn’t know how much more punishment I could take. It was trading at 14x forward cash adjusted EPS. 14! This is one of the greatest growth stocks in the S&P. The only barrier to entry in this stock is its price tag, if it were to split (say 5-1), the price would immediately skyrocket. None of these facts matter. It did not matter that it was getting upgraded daily. It did not matter that its international expansion was proceeding at breakneck speed. All that mattered was that BIG MONEY (hedge funds, MM’s) were exiting the position at the end of quarter for huge gains. The stock was in trouble. I was one day from folding, hey the world needs ditch diggers too.

Then came the Tuesday morning, and a rising sun from the east changed the whole landscape. Japan had lowered its rates and entered into its own round of QE. This was the spark that the market needed. We rallied over 20 points on the S&P handily breaking through the previous 1150 resistance. AAPL was up nearly 10 points. I had reversed my entire loss for a decent sized gain. I had gone from zero to hero in one day. I should be flying high, but I am not. I am merely relieved.

AAPL Options: Time is forcing my hand.

Where have I been?

Last week, I continued with my AAPL trades. Problem is, I am on the wrong side of them. Currently I control 35 Oct 16 290 AAPL calls at roughly 5.90 an option. I am clearly going to take a bath- the question is ‘how much’? The stock has become irrational. The charts have become bearish. Yet the story and the fundamentals remain intact. AAPL is trading at cash adjusted 14x future earnings… The Forward PEG ratio is >1. The expansion into foreign markets is ahead of schedule. My guess is Big Money is just profit taking, shaking out the trees, and setting up for another huge profit after earnings (Oct 18^th).

Problem is, time is not on my side. The market can remain irrational longer than I can remain solvent. The chart is getting uglier and uglier…

With theta eating my aaples, I figure this trade has 3-4 more days MAX. On any signs of weakness, I am out. On any spike I am unloading half the position. This one did not go my way, so I am going to take my medicine and move on. I just hope it doesn’t kill the patient.

Any thoughts on where we are heading in the next week? I would love to hear any rational thoughts.

Best,

CM

Option Mondays: AAPL decisions, decisions.

Over the last month I have been actively trading AAPL options. I have been moderately successful (I think I have cleared over $3,500.00). On Friday I bought 10 0ct 290 Calls at 9.80 and 5 Oct 300 calls at 4.50. IT was early in Fridays session and the volatility was still high- simply put I paid 30-40 per contract too much. AAPL traded sideways for the remainder of the day and I took a small loss.

Monday was no better. A weekend of time decay and a .40 loss coupled by low volatility pushed my loss into the $1,600.00 range. I chose to hold tight, figuring we have 2-3 more days until the end of quarter and some money managers might push AAPl to 300.

Then, there was today…. We were up nearly $2 premarket, and then on market open the floor fell out from under us. I watched the stock drop almost immediately into the $275 range. I had no clue what was going on. My first thought was maybe Steve Jobs died at exactly 9:30 am, I quickly found out that wasn’t true. I took in the possibility of profit taking- but it couldn’t be to this scale. The Cook to HPQ rumors were ridiculous and HPQ’s stock wasn’t rallying so there was a disconnect there. The RIMM pad is cool- but Research in Motion was down 5% as well so that wasn’t it. I chalked it up to a HFT raid on AAPL. Cook rumors, RIMMs pad, they smelled blood and they turned on the computer early- bombarded the stock with sell orders, took out stop orders, and dropped AAPL by 20 points. I watched my AAPL options plummet 6-7000 in the matter of seconds.

These scenarios flashed in my mind in a matter of seconds. I decided the best course of action was to double down. I pushed in on margin and doubled my position in Oct 290 calls at a 4.80 price per contract. This dollar cost averaged my position down to roughly $7.00. SO as it stands now I am long 20 AAPL Oct 290 Calls at 7.02 per. There were points in the day that I could have banged out for a modest loss, but I chose to stick with the position. The fundamentals are there, its trading at 14X cash adjusted earning heading forward. It is exploding in foreign markets and it reports on Oct 18^th.

The charts are starting to worry me.

Gordon Gekko "Greed is Good"

I tend to agree with the majority of this statement. Although, we could argue semantics on the term 'greed', I think the premise is correct.

We all have to stay hungry and take advantage of the options given to us.

9/23/10 Update: AAPL, NLY and Family

What I’ve been up to this week:

I initiated a small position (110 shares) of Annaly Capital Management (NLY) for myself. I don’t look at this as a long term investment (5-10 years) but as long as interests rates remain subdued- and I think they will for the next couple of years- NLY should be able to maintain its RIDICULOUS 15% Dividend Yield. Its Ex-Div date is rapidly approaching; this might be a good place to park some short term cash.  I’m looking to DRIP these dividends moving forward until I cash the position out.

On the Option front, I was monitoring APPL for the last few months waiting for a break out to my $300 price target. I believe it was mostly being held down by the 1130 resistance level. Once we spiked above the 1130 level, I bought 10 Oct 280 calls which I cashed out later in the day for a gain of $1,250. Once the move above 1130 was confirmed, I bought 10 AAPL 290 Calls at $5.05 per contract. I still hold this position and am currently up considerably. The momentum is still there, so I am going to ride this horse as hard as I can.

Additionally, I was asked by my mother (in law) to help put some of her savings to work for her. She is retired, and living on a fixed income. She knows I am not a financial advisor, but I’m always willing to help a family member. Plus, by viewing what she was PAYING someone to do for her- she is going to be better off taking some advice from me. So when you see some Bond Funds and ETF’s in my portfolio, you will know why. Overall, I think my mother’s portion should yield about 6.5% in very stable investments. Furthermore, I am maintaining 20% cash for her in a money market account to hedge my bets.

We are holding the 1130 level on the S&P, this is crucial if we are going to make another leg up.

It’s also been a very busy week at my real job, at home and with school. Burning the candle at both ends.

All the best,

CM