Covered Leaps

Selling covered LEAPS (Long Term Equity Anticipation Securities) is a popular way for stock market investors to generate income with their stock portfolios, without necessarily having to sell their stock.

Covered Leaps are very similar to covered calls.  What sets leaps apart from regular options is primarily the length of time until they expire – a leap has a much longer time before it expires, vs. standard options you may already be trading.  This gives the option seller the advantage of receiving more premium money up front when the option is sold, due to the relatively long time to expiration.

The way investors use covered LEAPS  to make money is by selling a leap option contract, using stock already held in their trading account as collateral.  If this sounds familiar, it is just like writing a covered call.  Thats right, LEAPS represent 100 shares of stock, just like a regular call or put option.  The main difference between a regular options contract and a LEAPS contract is the length of time to expiration. 

There are several advantages that covered leaps have over normal stock covered calls.  First, you receive a larger premium up front.  This is due to the longer time to the option expiration date.  Next, if you are executing a covered call strategy where you sell a new call contract against your stock when the old one expires, you will have lower trading commissions with LEAPS.  Finally, with the longer time horizon associated with LEAPs, an individual investor has a longer time period to plan out with a known risk/reward factor.

As you can see, covered LEAPS are as easy to use as regular options, and can provide you with several advantages when using them in a covered call strategy.  You should consider using them in your covered call writing strategy.

Technorati Tags: Anticipation, Collateral, Covered Call, Covered Calls, Expiration Date, Individual Investor, Leap, Leaps, Length Of Time, Long Term Equity Anticipation Securities, Long Time, Money, Option Contract, Option Expiration, Risk Reward, Stock Market Investors, Stock Portfolios, Term Equity, Time Horizon, Time Period, Trading Commissions

LEAPS Covered Calls

LEAPS covered calls are much like other stock covered call options that investors can use to generate cash income in their stock brokerage accounts, but with one important difference.  The difference is that LEAPS, or Long Term Equity AnticiPation Securities, have expiration dates longer than one year.  An example might help to explain how to use LEAPS covered calls to your advantage.

First, if you are not familiar with options trading, a call option gives the buyer the right, but not the obligation, to buy a pre-determined quantity of an asset, usually a stock or commodity, at the specified price (strike price), on or before the expiration date of the option contract.  A covered call  option is just a standard call option where the seller is covering the contract with securities that are already owned in their brokerage account.  LEAPS covered calls are standardized call option contracts with expiration dates over one year away, that are secured by the shares of stock that are already owned in the sellers trading account.  Since each LEAP option contract represents 100 shares of stock, these covered options can only be sold (also known as writing a call option) based on full 100 share increments of the underlying stock that the option is being written against.  For example, if an investor holds 200 shares of General Electric (GE) in their brokerage account, they would be able to write (or sell) 2 LEAPS covered calls.

The longer expiration dates that LEAPs possess give long term investors the ability to get exposure to long term price changes, with no need for a combination of shorter-term option contracts. Also, the premiums (price) for LEAPs are higher than for standard options in the same stock because the increased expiration date gives the underlying stock more time to make a large price move and for the investors to make a good profits.  Conversely, for the investor writing LEAPS covered calls, they get a higher cash payment up front for taking on the risk that they may be called out of their stock over the longer time frame contained in the covered LEAP contract.

One other characteristic that an investor considering writing LEAPS covered calls should consider is that the price decay of a LEAP call option is much slower than an option with a much nearer term expiration date.  For instance, if a call option with a strike price  equal to the underlying stocks current price only has a month to expiration, and the underlying stock price stays flat, the price of the call option will decline to nothing over the final month of the contract.  However, a leap contract will register a very minimal reduction in price over the same month, due to it’s longer time to expiration.

Technorati Tags: Anticipation, Brokerage Account, Call Option, Call Options, Covered Calls, Covered Option, Covered Options, Diversification, Exercise Price, Expiration Date, Expiration Dates, General Electric, Increments, Investor, Leaps, Long Term Equity Anticipation Securities, Option Contract, Option Contracts, Options Contracts, Premiums, Price Changes, Price Move, Purchase Shares, Stock, Stock Brokerage Accounts, Stock Market, Stock Ownership, Stock Price, Substantial Move, Term Equity, Term Investors, Term Option, Term Options, Traded Options

Stock covered calls are a technique use by stock market investors to generate additional income from stocks that they already own in their investment portfolios.  While options trading may sound scary, this technique for generating income is actually so conservative that most brokers will even let you utilize this technique in your online Individual Retirement Account (IRA).

A call option gives the buyer the right to buy a pre-determined quantity of an asset, usually a stock or commodity, at a specified price (strike price), on or before the expiration date of the option contract.  A covered call option is a standard call option that the seller is covering with securities that are already owned in his trading account.  Stock covered calls are merely standardized call options that are secured by the shares of stock that are already owned in the sellers trading account.  Since each option contract represents 100 shares of stock, these covered option calls can only be sold (also known as writing a call option) based on full 100 share increments of the underlying stock that the option is being written against.  For example, if an investor holds 670 shares of Cisco Systems (CSCO) in their account, they would be able to write (or sell) 6 stock covered calls.

Now that we’ve gone over what stock covered calls are, lets look at how to use them.  Lets continue with the example of the investor with 670 shares of CSCO in their stock market investing account.  Since CSCO does not pay a dividend, and the investor wants income without having to sell his stock, he decides to sell call options that will expire in two months, for a price that is above todays stock price for CSCO.  In return for this option, the investor gets $1 per share, or $100 per covered option calls contract, times 6 contracts equals $600.  This cash is deposited directly into the investors trading account, and can be used for whatever purpose the investor chooses.  The investor is now obligated to sell the contract holder 600 shares of stock at the price specified in the contract, on or before the expiration date of the contract. 

Now if the stock price does not go above the contract strike price, the investor who sold the option contracts keeps his stock, and the cash he got from selling the stock covered calls, and can do it all over again on the trading day after the contract expires.  This is a very powerful concept, since it means that the investor can generate income multiple times per year by selling these call options. 

If the stock closes above the price specified in the contract, usually around the date the contract expires, the contract will be exercised by the option holder, and the investor will have to sell him the 600 shares of CSCO at the price specified in the option contract.  Since the contract price is above the price that the stock was trading at when the options were sold, the investor gets that capital gain profit, plus the cash that he was paid for selling the options.

While stock covered calls may seem a little complicated at first, in the end they provide you with a relatively easy way to generate cash flow on stocks that would otherwise just be sitting in your investment account.

Technorati Tags: Additional Income, Call Option, Call Options, Cisco, Cisco Systems, Commodity, Covered Call, Covered Option, Csco, Dividend, Expiration Date, Increments, Individual Retirement Account, Investment Portfolios, Ira, Option Contract, Options Trading, Stock Investing, Stock Market Investors, Stock Price

Covered option calls are a popular way to generate recurring investment income in an investment portfolio, even in retirement portfolios like Individual Retirement Accounts (IRA‘s).  This income can be generated on any stock in your portfolio that has actively traded options associated with it, the caveat being that you need to own at least 100 shares of the stock you are going to sell covered option calls against in order to take advantage of this money making strategy.

Let’s start by looking at what a call option is.  A call option contract gives the buyer the right, but not the obligation, to buy 100 shares of stock at the price defined in the contract (strike price), on or before the date the contract expires (expiration date).  One of the key concepts here is that the buyer of the covered option call contract would lose money if they exercised their right to buy the stock, if the stock is trading below the strike price of the contract.  This is simply because they could buy the stock for a lower price on the open market, so there would be no point in exercising the call option contract under these circumstances.

In order to implement this income producing strategy, an investor will have to do a couple of simple tasks.  First, the investor would have to ask their broker to set up their trading account to allow options trading.  This usually involves reading a short pamphlet on the risks associated with standardized options trading, and signing a form indicating that you understand the risks.  The investor will probably also have to tell the broker what options trades they want to be approved for, and their risk tolerance for these types of trades.  As I indicated earlier, this strategy is so conservative, most stock brokers will even let you do it in your IRA account.

Next, the investor must identify which stocks they would like to sell options against.  These stocks can have options sold against them in 100 share multiples, since each contract represents 100 shares.  For example, if you own 230 shares of Apple (AAPL) in your account, you could write 2 covered option calls contracts against 200 shares of the Apple computer stock in your account.  Finally, the investor needs to determine what price they would be like to write the contract for, and how long they would like the contract to be in place.

Once the investor has completed these steps, they merely need to call their broker (or login to their online trading account), and place the order to sell the covered option calls from their account.  Once the sale is complete, the investor will receive cash in their account for the call options that they sold – this cash is theirs to keep.

If, at the end of the contract period, the price of the stock is below the call option strike price, then the investor keeps their stock, and can write new covered option calls against their shares of stock.  However, if the stock price has risen above the strike price of the option contract, then the investor will have to sell his shares to the contract holder at the strike price specified in the agreement.

Technorati Tags: Call Option, Caveat, Circumstances, Covered Calls, Covered Option, Covered option calls, Expiration Date, Investment Income, Investment Portfolio, Investor, Ira, Ira Account, Key Concepts, Money, Obligation, Option Contract, Pamphlet, Retirement Portfolios, Risk Tolerance, Stock, Stock Brokers, Stocks, Trades

A call option is a useful tool for stock market investors to master.  First I will go over what a call option is, then descrcibe why it is a valuable tool for stock investors.  Just a note – I am going to describe standard options contracts that are traded in the United States.

Call option definition – an option contract that gives the current holder the right, but not the obligation, to buy 100 shares of stock in a specific company, at certain price (the options strike price), by a specific date (the expiration date).  Conversely, the seller of the option contract is obligated to sell 100 shares of the specified company to the holder of the contract, for the strike price of the contract, if the contract holder exercises his right to buy the stock on or before the expiration date.  This explanation probably needs an explanation to make the principal clear.

Lets say an investor holds 100 shares of General Electric (GE) in his trading account.  The dividend was cut, so the investor decides to sell a covered call option to generate some income, using his 100 shares of GE as collateral to “cover” the transaction.  The investor notes that the price of GE is currently $15, and the investor thinks it will probably stay under $20 over the next two months, so he sells a $20 call option, with an expiration date that is two months out, and he receives $1 per share ($100 total) in cash for the option contract.  At this point, the investor with the GE shares in his account is obligated to sell whoever is holding the call contract his 100 shares of GE stock for a price of $20 per share, until the contract expires.

So we’ve looked at why someone would sell covered option calls contracts – because they want the income, and do not believe the stock price will go above the strike price of the contract, but why would someone buy the GE call option contract?  Because they believe the stock may experience an upward move in price, and by utilizing only $1oo, they actually control 100 shares of GE stock, and can profit on any move over the strike price.  For instance, if GE went up to $25, the contract holder could call away the stock from the contract seller for $20 per share, and immediately turn around and sell the stock for $25, locking in a nice 400% profit in a period of two months.

As you can see, a call option can generate income for the person who sells the contract, as well as occasionally being a lucrative investment for the person who buys the contract.

Technorati Tags: Call Option, Collateral, Contract Holder, Covered Calls, Dividend, Expiration Date, Ge Stock, General Electric, Investor, Obligation, Option Contract, Options Contracts, Specific Company, Stock Investors, Stock Market Investors, Stock Price, United States, Upward Move, Valuable Tool

Covered Call

A popular strategy amongst investors looking to generate extra income from their portfolios is to sell a covered call option on stock that they already own in their investment portfolio.  Selling covered calls can be a good way to generate regular income on stocks that do not even pay dividends (but you can use this income producing strategy on dividend stocks too).

First, lets look at how this strategy works.  In this example, you own 100 shares of XYZ company in your investment account, it pays no dividend, and while you expect it to increase in price over time, it isn’t gaining in price very quickly, so you’d like to generate income with the stock until it hits your target sell price.  To do this, you sell a covered call option contract against your 100 XYZ shares (your 100 shares “cover” the contract as collateral).  In this scenario, somebody pays you cash that goes into your investment account, and no matter what happens next, the cash is yours to keep.  The terms of the contract are very simple – you promise to sell your 100 shares of XYZ to the person who holds the contract at the price specified in the contract, by the date the contract expires – this last term is very important. 

To continue our example, lets say XYZ company is currently selling for $20 per share, and you sell a call option using your 100 shares of XYZ stock as collateral with a strike price of $25, and a contract expiration date two months from now.  You receive $1 per share for your covered call contract, or $100 total, which is deposited into your investment account.  As long as the stock is less than $25 over the next two months, you will keep your stock, and the $100 you got for selling the contract.  In this case, you will be able to to do the same thing again after two months, up to six times per year.  In this example, you would be able to generate up to $600 in option income over the course of a year, from a stock that was just sitting in your online trading account.

What if the stock had risen above $25?  In this case, you would most likely have to sell your stock to the covered option calls contract holder (this is done automatically by your online broker), for $25.  So in this case, you would get the $25 per share for your stock, plus the original $1 per share that you kept from the sale of your option contract, for a total of $26 per share (or $6 per share gain from your $20 starting price) – not a bad profit for two months of risk in the stock market.

In order to execute this strategy, you will need to sign up with your stock broker to trade options in your account.  This strategy is so so conservative, that many brokers actually allow you to sell covered call contracts in your retirement IRA account.

Technorati Tags: Call Option, Collateral, Contract Expiration, Contracts, Covered Call, Dividend Stocks, Dividends, Expiration Date, Extra Income, Investment Account, Investment Portfolio, Investors, Ira Account, Option Contract, Portfolios, Retirement, Selling Covered Calls, Six Times, Stock, Stock Broker, Target

Stock Options Basics

Put options give an option buyer the right to sell 100 shares of an underlying stock at the strike price that the option contract was written for. While the put option buyer is not obligated to exercise the contract, if the buyer does exercise the contract, the option seller is obligated to pay the contract price for 100 shares of the underlying stock from the contract buyer, on or before the expiration date of the contract. Put option buyers are betting that the price of the underlying stock will move down. A put option becomes more valuable when the price of the underlying stock goes down.

are one of the most versatile trading vehicles available. Options on stocks are highly leveraged derivative investments, with a very well defined risk/reward profile.

Technorati Tags: Bet, Call Option, Call Options, Contract Buyer, Contract Price, Derivative Investments, Expiration Date, Investors, Liquidity, Money Market, Obligation, Option Contract, option trading, Perspective, put option, put options, Risk Reward, Share Price, Stock Market, Stock Options, Stock Share, Trading Stocks, Ways To Make Money

 Best Dividend Stocks

When it comes to finding the best dividend stocks, you’ll probably want to use an automated stock dividend screener as a tool to find good candidates to buy.  Screening is a way to scan the stock market for stocks that meet your particular criteria.  Dividend investing can be very profitable, and while there are many stock screening programs out there (some you pay for, some are free – I’ll list a couple of free ones at the end of this article), it is important to understand the characteristics of good dividend stocks, so your screening tool can help you filter out unacceptable choices.

For an easy dividend stock screener to find the best dividend stocks, I would suggest focusing on the following qualities to help find strong dividend stock candidates:

Dividend Yield – The dividend yield can be calculated primarily in one of two ways – either by using the trailing 12 months dividends, or by using the expected dividends for the upcoming 12 months, and then dividing that number by the current price of the stock.  Ideally you want to buy dividend stocks that have a yield that is higher than the overall market.  Stock market yields as well as individual stocks yields will fluctuate over time, as stock prices move up and down, and the amount companies pay out in dividends changes, so it is good to check these factors right before you buy a stock, and not just rely on data you put together at some earlier point in time. At this time, I would suggest looking for stocks with dividend yields of at least 4% to 5%.

Profit – Also known as earnings, profit drives company growth, and more importantly for us, profit is what pays dividends in healthy stocks that pay dividends (some company’s pay for dividends by taking on more debt, and distributing that cash to share holders – see the next paragraph for more on debt).  While there are many ways to measure profitability, one widely used indicator that can be found on most stock screens is return on equity (ROE).  For ROE, the higher the better.  The minimum ROE we want is in the 10% to 12% range.  Another great indicator for profitability that is available on many stock screeners is earnings per share (EPS) – again, the higher the better for this indicator too.

Debt – Many of the best dividend stocks are from companies that are large, mature, and have accumulated long term debt during the process of growing into their current state.  The problem with debt is that too much of it can represent a risk to future dividend payments if the company goes into a rough patch, and earnings drop to the point where they may need the money they normally pay out as dividends to service their debt payments.  One easy way to measure debt is to look at the debt to equity ratio.  For our purposes, we would like to see the company financed with more equity than debt, which means that our dividend stock screener would need to limit the debt to equity ratio to less than .5, and ideally, you should look for stocks with a ratio even lower than that.

Market Cap – Also known as the market capitalization of a company, is a good way to filter the size of the company you are looking for.  Market cap is just the total number of shares outstanding, multiplied by the current price of the stock.  Most analysts use this as the measure of a company’s size.  For our dividend investing purposes, we want strong stable companies, and bigger companies are generally safer than smaller ones, so for market cap, select stocks that are at least $2 Billion. 

Valuation – This is how much the market is paying for a company’s earnings stream.  For this, we actually want a low valuation, because that usually means that a company’s stock price has been beaten down relative to it’s earnings.  The price to earnings ratio (P/E) is a widely available indicator that can help you assess valuation on a free dividend stock screener.

A couple of free dividend stock screeners that you can try to help you find the best dividend stocks are at MSN.COM and FINVIZ.COM.

Technorati Tags: 12 Months, Best Dividend Stocks, Debt Equity Ratio, Dividend Stock, Dividend Yield, Dividend Yields, Dividends, Free Ones, Larger Companies, Market Capitalization, Market Caps, Market Yields, Mature Companies, Point In Time, Price Earnings Ratio, Profitability, Profitable Profitability, Return On Equity, Roe, Screening Programs, Screening Tool, Share Holders, Shareholders Equity, Stock Dividend, Stock Dividend Screener, Stock Market, Stock Prices, Stock Screen, Stock Screener, Stock Screening, Stock Screens, Stocks That Pay Dividends

Stocks That Pay Dividends

Stocks that pay dividends can be a good alternative for investors either seeking regular income from their investment portfolio, or more consistent returns from their stock investments.  An investment in stocks that produce consistent dividends can be an ongoing source of profits for your portfolio.  These are some of the characteristics that these income producing investments provide:

1. Stocks that pay dividends can represent a single company, or they can be many companies under the organizational structure of a holding company, trust, closed end mutual fund, ETF, etc.  It is important to note that a majority of companies do not qualify for dividend investing for the simple reason that they do not pay dividends.
2. Companies that pay dividends do so because their management teams and boards of directors make a conscious, regular, and most importantly – discretionary – decision to pay their shareholders a dividend.  While most companies do this quarterly, there are many stocks that pay monthly dividends.
3. Dividend stocks typically have policies in place that promote the ongoing payment of dividends.  So while the decision to pay a dividend is at the discretion of the management team and board of directors, they typically have a goal of managing the company in a way that preserves, protects, and in many cases, grows the dividend income streams for their shareholders over time.
4. In many cases, stocks that pay dividends represent companies that are large, and more established (i.e. they have been around for a while).  These companies have created consistent, stable cash flows with very predictable earnings.  For example, utilities are a great type of stock that pays a dividend, they have a steady, predictable, source of income, expenses that are understood (and that can usually be passed along to their customers if expenses go up unexpectedly), which leads to a stable source of profits to pay dividends with.
5. Stocks in general are volatile, but stocks that pay dividends are usually lower in volatility than the overall stock market.  This is because investors are confident enough in the earnings of these companies, and the income they produce on a regular basis for their shareholders, that they reward this stability with lower price volatility, due to the justified view that these stocks are safer than average.
6. There are also tax advantages to owning dividend paying stocks.  Capital gains only trigger a taxable event when these stocks are sold, just like regular stocks.  The key tax advantage is that right now, the maximum federal income tax rate for dividends is only 15%.  This tax rate is lower than the tax rate you pay on bond interest, which is usually taxed at the same rate as your salary.  15% is typically much lower than your marginal tax rate for other sources of income.

As you can see, stocks that pay dividends have characteristics that set them apart from the overall stock market.  These income producing stocks may have a place in your investment portfolio.

Technorati Tags: Boards Of Directors, Companies That Pay Dividends, Consistent Returns, Discretionary Decision, Dividend Income, Dividend Increase, Dividend Paying Stocks, Dividend Stock, Dividend Stocks, do you pay dividends on issue stock or outstanding stock, Holding Company, Income Producing Investments, Income Streams, investing in strong profitable dividends, Investment Portfolio, Investment Stocks, Investors, Management Teams, monthly dividend stocks screener, Organizational Structure, Predictable Source, Single Company, Stable Source, Stock Dividend, Stock Investments, Stocks That Pay Dividends, Stocks That Pay Monthly Dividends, Utility Stocks, Volatility

ROIC Growth Formula

The ROIC growth formula relies on evaluating return on invested capital (also known as ROIC) as a way of looking at stocks that helps smart value investors find good stocks to buy.  First let’s look at what is return on invested capital, then we’ll examine why companies with comparatively large values of this key performance indicator tend to outperform their competition over time (and make good value investment candidates).

The first step in the ROIC growth formula is understanding how to calculate ROIC for the companies that you are thinking about investing in, so here is the formula:

(Net Operating Profit After Taxes) / (Invested Capital)

Now there are a couple of things that must be noted about this formula.  First, net operating profit after tax (NOPAT)is not the same thing as net income.  Net income counts money that a company receives from all sources, whereas NOPAT is derived from the sales that a business makes from the ongoing operations of its main business.  Some of the revenue that is not included in NOPAT are things like interest income from cash and cash equivalents (short term securities like T-Bills), and rent from real estate that the company may own, but sub-leases to other businesses because it is not currently needed by the company.  These types of revenue, that are not from sales of the companies main products and services, add noise to what we are seeking – a clear view of the company’s operating efficiency – so we take them out of the equation.  The second thing that we have to consider is that invested capital is not just equity (like what is used in return on equity (ROE) calculations), but also includes long term debt that is used to grow and sustain the business.

The ROIC growth formula is fairly simple – calculate the return on invested capital for the companies in the industry group you are considering investing in, identify the company with the highest value of this indicator, then buy it when it gets to a good price.  By comparing the return on invested capital values of companies in the same industry, the one with the highest return is likely to either continue dominating the industry, or, if it is not already dominating its industry, should outperform the industry over time.  If you think about it, the company with the highest return on invested capital is yielding a higher percentage of profit for every dollar invested in the company - either by equity share holders or debt bond holders.  The competitive advantage that allows a company to earn these higher than industry average returns are usually due to a dominating position in the market place, which makes it possible for them to charge more for their product or service relative to their cost, which leaves other companies in the sector competing based on price discounting (and lower margins).  Over time, this sustained competitive advantage allows the company with higher returns on invested capital to grow faster than its competition, which drives its stock price higher.

Technorati Tags: Cash And Cash Equivalents, Efficiency, Industry Group, Interest Income, Key Performance Indicator, Leases, Net Income, Nopat, Ongoing Operations, Operating Profit, Return On Equity, Return On Invested Capital, Roe, Roic, Smart Value, Stocks, T Bills, Term Debt, Value Investment, Value Investors

ROIC – What is Return On Invested Capital?

What is return on invested capital?   

Most casual investors have probably never heard of the acronym ROIC.  Investors that do their homework before they buy a stock have probably run across ROIC, but don’t really understand what it is, or why it is important.  So, what is return on invested capital?  At a high level, ROIC is a way to measure how efficiently it uses the cash it invests in it’s operations – whether that cash comes from loans or cash it generates from its ongoing operations.  Another way looking at ROIC is the amount of profit that a business generates for every dollar invested in it’s ongoing operations.

Before we get into too much detail, here is how to calculate ROIC (return on invested capital):

Net Operating Profit After Tax
——————————————————
Invested Capital (Long Term Debt + Equity)

When trying to answer the question “what is return on invested capital?”, or “why is ROIC better than ROE?”, there are a couple of details that an investor must master.  First, unlike return on equity, return on invested capital looks at all funding sources that a company’s management team uses to fund the growth of the business.  This includes both equity investments from shareholders, as well as debt investments from bondholders and banks.  ROE only uses shareholder equity as the denominator in the equation, which leaves out long term interest bearing debt used to finance the growth of the company.

The other detail that an investor needs to get used to is not just looking at net profit, which is used in the ROE calculation that they are probably accustomed to seeing, but instead looking at net operating profit after taxes (NOPAT) instead.  The difference in these two numbers is that net profit includes income from all sources, whereas NOPAT looks at income from sales revenue.  Some of the income items that are not included with NOPAT are interest on investments (typically interest that accrues on cash and cash equivalents), revenue from sub-leased office space, etc.  In other words, NOPAT focuses on revenue generated only from the main focus of the business activities of the company you are looking at.

By focusing on after tax net operating profit, and ALL of the capital that a business is using to sustain and grow that cash flow, the time it takes to learn what is return on invested capital can give an investor a much better and deeper view on the health of a company that is being considered as an investment candidate.

Technorati Tags: Acronym, Bondholders, Capital Investors, Debt Equity, Debt Investments, Denominator, Equity Investments, Equity Return, example roic formula for multiple periods, Funding Sources, greenblatt roic, Interest Bearing Debt, Net Profit, Nopat, Ongoing Operations, Operating Profit, Profit Return, Return On Equity, Return On Invested Capital, Return On Invested Capital Roic, Roe, Shareholder Equity, Stock, Term Debt, Term Interest

Stocks That Pay Monthly Dividends

While you have probably heard about stocks that pay dividends every quarter, did you know that there are many stocks that pay monthly dividends?  When many income investors think about investing for dividends, they naturally look at safe, stable companies like McDonald’s(MCD), Proctor & Gamble(PG), and IBM (IBM), which have a long history of paying quarterly dividends.  These types of dividend stocks are usually financially stable, have a lot of liquidity so they are easy to buy and sell, and have enough income and cash reserves to cover their dividend payouts to investors every three months.

There are a couple of issues that investors in these type of quarterly dividend stocks should consider.  First, the investors income stream is exposed to a single company for each stock that they own, and second, depending on the mix of stocks in the investors portfolio, the dividend income can be very lumpy (i.e. most of the dividend money arrives in one month of the quarter, leaving the remaining two months with very little cash coming in.

Stocks that pay monthly dividends are an alternative that can provide regular, consistent, income to investors, and overcome the two main issues highlighted above.

First, monthly dividend stocks are typically traded on regular stock exchanges, and have enough liquidity for investors to easily buy and sell them.  Stocks that pay monthly dividends are usually trusts, closed end mutual funds, and other investment vehicles that actually own a portfolio of income producing assets.  This benefits investors because they get the diversification of the underlying portfolio owned by these companies, so investors are not as exposed to single company risk as they would be if they owned a single company that paid a quarterly dividend.

Second, since the income stream from stocks that pay monthly dividends comes three times as often as the cash flow from their quarterly brethren, the income is not going to be as lumpy.  This is a significant benefit for investors that need regular income, like retirees that need a passive source of retirement income to meet their monthly needs. 

One of the obvious items that investors considering purchasing stocks that pay monthly dividends over a company that pays a quarterly dividend is understanding the assets that are held by the monthly dividend company.  While this adds an extra research item, it is very easy to find this information in the standard government filings that publicly traded companies have to file with the SEC.

Stocks that pay monthly dividends are a great tool for people looking for consistent regular income.  Since these stocks may be new to you, just click on this link for a list of monthly dividend stocks.

Technorati Tags: Brethren, Cash Flow, Cash Reserves, Consistent Income, Diversification, Dividend Income, Dividend Payouts, Dividend Stocks, how are dividends paid out on a monthly basis, Income Stream, Investing, Investment Vehicles, Investors, Liquidity, Mcd, Monthly Dividend Stocks, Proctor, Quarterly Dividend, Quarterly Dividends, Single Company, Stable Companies, Stock Exchanges, Stocks That Pay Dividends, Stocks That Pay Monthly Dividends, what months does pg pay their dividend

Stock Market Breadth

The definition of stock market breadth is the number of stocks participating in an overall stock market index price move, whether the stock price is moving up or down.  Market breadth is useful in determining the strength of a stock market trend.  The theory is that the more stocks participating in stock market trends, the stronger the price trend.  Many analysts have noted that a divergence between the price of stock market indices like the S&P 500, and the breadth of stocks participating in the trend can lead to a price trend reversal.  Using market breadth indicators may give you an edge in stock market timing, giving you an advanced view of when to tighten your trailing stop loss orders.

Market Breadth Indicators

Market breadth indicators come in a variety of forms, and they all have the intent of measuring the underlying stock participation in a rally or sell-off.  Most popular breadth indicators can be roughly divided into three categories:

1) Indicators based on stocks making new highs or new lows

2) Indicators based on stocks above or below a moving average

3) Indicators based on stocks that are advancing or declining in price

There are other market breadth stock market indicators, some, like the McClellan Oscillator, are a combination of those just mentioned, while others are based on an aggregate view of stocks exhibiting a particular technical indicator trait (for example the number of stocks in an index with an RSI value >= 90).

Stock market breadth indicators have been classified as technical analysis of stock market trends, as they do rely on the price action of individual stocks.  They are also sometimes referred to as stock market internal indicators.

Understanding the stock market is all about knowing which side of the trade you should be on (long or short), and this easier when you start with a top down analysis, which should include a study, and ongoing review, of stock market trends and their underlying strength using market breadth as a guide.

Technorati Tags: Divergence, Index Price, Lows, Market Breadth Indicators, Market Stock, Market Trend, Mcclellan Oscillator, Moving Average, New Highs, Price Move, Price Trend, Rally, Stock Analysis, Stock Index, Stock Indices, Stock Market Index, Stock Market Indicators, Stock Market Indices, Stock Market Timing, Stock Market Trends, Stock Price, Stock Trend, Stock Trends, Stocks, Technical Analysis Stock, Technical Indicator, Timing Stock, Trailing Stop Loss, Trend Analysis, Trend Reversal, Trend Stock, Understanding The Stock Market

Highest Dividend Stocks

Income investors looking for a good return on their investment often look for the highest dividend stocks, or more precisely, the highest yielding dividend stocks.  This can also be a good place for value investors to look for potential buy candidates because high dividend yields can be caused by a stock price being temporarily low (i.e. undervalued stocks), which simultaneously raises the yield.  However, the highest dividend stocks can also be a dangerous place to find buy candidates.

Normally when income investors are looking for dividends stocks, they are looking at monthly dividend stocks or stocks that pay dividends quarterly with the highest yield (adjusted for risk).  The issue with the highest dividend stocks on the top dividend stock list is that they are usually amongst the most risky stocks a conservative income investor will look at.  Many of these stocks have high dividend yields because the underlying stock price has fallen, while the dividend payment is presumably staying the same, giving the appearance of a high yield.  Stocks with high dividends should raise a flag with any income investor to be extra diligent doing their homework.  The biggest question you’ll need to ask yourself is whether or not the dividend is safe?

The first thing an income investor should screen for in stocks paying dividends is whether or not the stock is consistently profitable.  As they say on Wall Street, profits drive dividends, and many times, stocks with high dividends are also losing money – their dividends place them on the highest dividend stocks list because of the additional risk.

Another attribute that you should look for in profitable top dividend stocks is how well their earnings cover their dividends – also known as the dividend payout ratio.  Ideally, you want to see a stock paying out less than 50% of it’s earnings as dividends.  If the high dividend stocks you are looking at have a dividend payout ratio of 50% or less, the dividend has a higher probability of being safe – in other words it is less likely to be reduced or cancelled.

Technorati Tags: Array, Attribute, Dangerous Place, Dividend Payment, Dividend Payout Ratio, Dividend Stock, High Dividend Stocks, High Dividend Yields, High Yield Stocks, Highest Dividend Stocks, Highest Yielding Dividend, Highest Yielding Dividend Stocks, Investor, Monthly Dividend Stocks, Profitable Stocks, Risk, Risky Stocks, Stock List, Stock Price, Stocks That Pay Dividends, Stocks With High Dividends, Top Dividend Stocks, Top Stocks, Undervalued Stocks, Value Investors, Wall Street

List of Monthly Dividend Stocks

A list of monthly dividend stocks is sometimes hard to find, so I’ve compiled a list of stocks with monthly dividends here.  Monthly dividend stocks can be useful for people who are trying to smooth out the dividend income from there investments over all of the months in a quarter.  This helps counter the affect of having a lot of dividend paying stocks that pay quarterly dividends in one particular month of a quarter, leaving the rest of the months in the quarter without much dividend income.  Here is the list of monthly dividend stocks that I’ve found so far, if you know of others, please email me, so I can add them to the list for everybody to see.

Technorati Tags: Advent Claymore, Alliance California, Alpine, Apex, Ayn, Bfy, Bfz, Bhv, Dividend Income, Dividend Paying Stocks, Dividends, Dollar Income, Dynamic Dividend, Ex Dividend, Income Trust, Inv, Investment Quality, Investments, list of monthly dividend stocks, List Of Stocks, monthly dividend investments, Monthly Dividend Stocks, monthly dividend stocks 2010, Muni, Municipal Bond, Municipal Trust, Opportunity Trust, Quarterly Dividends, Smooth, stocks that pay monthly dividends 2010

Monthly Dividend Stocks

Monthly dividend stocks can be a good idea for income investors to create a steady income stream.  If you are looking for regular income, you may want to consider monthly dividend stocks.  Thats right, there are stocks that pay monthly dividends.  These monthly dividend stocks are just like their quarterly dividend stock brethren, but they pay out their dividends – you guessed it – on a monthly basis.

Many people interested in income investing have stocks that pay quarterly dividends in their portfolio, as these are the most common type of dividend paying stocks.  Depending on the dividend payment dates, this can lead to inconsistent monthly income – for example you get a lot of dividend income in the first month of the quarter, and very little dividend income in the last month of the quarter.  One way to smooth this out is to buy stocks that issue dividends in different months of the quarter.  Another way to set up a more steady income stream is to put monthly dividend stocks in your portfolio.

Most stocks that pay monthly dividends are investment trusts, closed end funds,  or holding companies that own many income producing securities, that issue the income from these investments in the form of  a monthly dividend.  The list of monthly dividend stocks is nearly 300 long.

Adding stocks with a monthly dividend payment can help smooth out the monthly income in your portfolio.  Click on the link above for a list of monthly dividend stocks.

Technorati Tags: Array, Bretheren, Brethren, Buy Stocks, Dividend Income, Dividend Paying Stocks, Dividend Payment, Dividend Payment Dates, Dividend Stock, Investment Trusts, Investments, Investors, Lot, Many People, Monthly Dividend Stocks, Portfolio, Quarterly Dividend, Quarterly Dividends, Steady Income Stream, Stocks That Pay Monthly Dividends, Trusts

How to Calculate Return on Invested Capital (ROIC) – Why use NOPAT?

Return on invested capital (ROIC) is usually calculated with Net Operating Profit After Taxes (NOPAT) instead of just corporate profits more commonly measured as Net Income (NI).  What about NOPAT makes it a superior indicator of corporate profitability vs. net income?

NOPAT Definition

NOPAT (Net Operating Profit After Taxes) is the profit that a company realizes from ongoing profit generating operations of the company.  For example, a stereo store will count earnings from selling stereos using NOPAT, but will not count income from leasing out extra space in it’s stereo store building as an office to another business, as that is not a part of it’s primary business activity.  This is different than net income, which counts all income a company generates, even if it is not generated from it’s primary business activity.

How to calculate NOPAT

Here is how to calculate NOPAT:

Net Sales – Operating Expenses = Operating Profit (Also known as EBIT or Profit from Operations)
EBIT – Taxes = NOPAT

A good thing about NOPAT is that it starts with net sales instead of net income, which eliminates income and expenses that are not associated with the main profit making operations of a company.  This eliminates items like interest expense and interest income. 

By focusing on profits (earnings) that are generated from the ongoing operations of a company, instead of the overall net income of a company, which contains GAAP related items that create financial noise, a clearer picture will emerge to help you find companies that are growing and may make good investments.

Technorati Tags: Array, Business Activity, Corporate Profitability, Corporate Profits, Earnings, Ebit, Financial Noise, how to calculate %vs, Interest Expense, Interest Income, Investments, Leasing, Net Income, Net Sales, Nopat, nopat and net income, Ongoing Operations, Operating Expenses, Operating Profit, Return On Invested Capital, Return On Invested Capital Roic, Selling Books, Stereo Store, Stereos, Taxes

Dividend Investing

Dividend investing is for people seeking income from their investments, who are also willing to take on a little more market risk than bonds offer in order to try to achieve growth in both their principal and the dividend income provided by their dividend stocks, not just by chasing the highest dividend stocks.  A successful dividend investor knows that this strategy can help them stay ahead of inflation.

One of the first steps in dividend investing is identifying companies that are in a position to not only maintain the dividend that they are paying out to their dividend investor base, but can also as a dividend growth stock opportunity.  A good way to determine if a stock fits this criteria is to look at it’s dividend payout ratio.

Dividend Payout Ratio

The dividend payout ratio can be calculated in a number of ways, so we’ll look at two of them and let you decide which one to use for your dividend investing screens (my favorite dividend payout ratio calculation is the second one).

The most popular way is calculated by dividing the annual dividend a company pays out per share by it’s annual earnings per share.

Dividend Payout Ratio = Annual Dividend Per Share / Annual Earnings Per Share

These numbers are readily available at most popular financial web sites, and can be included in dividend investing screens at sites like MSN Money.  Using this version of dividend payout ratio calculation, a level of 50% or lower is considered good.  So, this calculation is pretty easy, and the data is readily available, but for good dividend investing principals, it has a flaw…

The problem with the above calculation is that EPS has some noise embedded in it that can mis-lead a dividend investor into buying a company that is not a dividend growth stock candidate.  In my view, good dividend investing stocks’ dividends need to be paid out of the ongoing cash operating profits a company generates, and due to  GAAP accounting rules, EPS contains more than this.  For dividend investing, it is better to use annual free cash flow (FCF) instead of EPS in the dividend payout ratio calculation.

Since free cash flow takes into account both expenses and capital outlays, it shows how much cash is left over from company operations to apply to dividend payouts.  With the inherent noise in EPS taken out of the dividend payout ratio calculation, a level of 60% – 65% or lower can be considered good for dividend investing (obviously lower is better in either method of calculating dividend payout ratio).

Dividend investing can be a profitable endeavor when you use the right tools.  If you’re a dividend investor, please leave a comment on how you screen for good dividend stocks.

Technorati Tags: Array, Bonds, Dividend, Dividend Growth, Dividend Income, Dividend Increase, Dividend Payout Ratio, Dividend Stocks, Dividends, Earnings Per Share, Eps, First Steps, Free Cash Flow, Growth Stock, Highest Dividend Stocks, Inflation, Investing, Investing Stocks, Investments, Investor, Investor Base, Investors, Market Risk, People, Principal, Principals, Profits, Ratio Calculation, Screens, Share Dividend, Stocks Dividends

Earnings Yield is a very popular, and useful, tool for investors who try to beat the market with value stocks investing. 

Earnings Yield

Earnings yield can help value stocks investors in their quest to find good solid companies that are currently relatively cheap.  Using indicators like return on invested capital (learn how to calculate ROIC), can be helpful in finding a list solid companies, and once you’ve identified this list, earnings yield can help you determine if the company is cheap enough to buy right now, after all, that is what value stock investing is all about.  Earnings yield does this by dividing a company’s annual earnings per share (you can use a trailing 4 quarters view of EPS for this if you’d like) by the company’s current market price per share.  This number is expressed as a percentage, which makes it easy to compare with bond yields.

How to Calculate Earnings Yield

There are a couple of ways to calculate earnings yield.  Since you don’t find this number in a lot of free online stock screeners, I’ll cover both methods, and you can decide which one you want to use. 

The first way to calculate earnings yield is to take the inverse (1/x) of the P/E ratio.  Since P/E ratios can be found in most financial publications, web sites, and stock screening tools, it is very easy to find this number, and invert it on a calculator or in a spreadsheet, to give you the earnings yield.  This method is very simple to use, and gives you a quick view of how cheap (or expensive) a stock is.

The other way to calculate earnings yield is a little more involved, but gives you a better understanding of how a company is valued relative to it’s earnings.  This form of earnings yield was written about by Joel Greenblatt in his book, “The Little Book That Beats the Market”.  The earnings yield he created is useful in comparing companies with different tax rates and levels of debt.  Greenblatt’s earnings yield formula is:

Earnings yield = pre-tax operating profit (EBIT) / Enterprise Value

So, in this case, the numerator (EBIT) comes from the income statement, and the denominator (Enterprise Value) is calculated by adding the market value of all equity – both common and preferred – to the value of all interest bearing debt that the company owes.  The value of equity is just the shares outstanding multiplied by the price of the stock, and interest bearing debt can be found on the company’s balance sheet.

I like Greenblatt’s method of calculating earnings yield better than the more popular E/P method, since it gives a more accurate view of what is happening inside of a company, and also gives a more balanced view when comparing multiple companies to each other.

Technorati Tags: Array, Bond Rates, Bond Yields, Calculator, Citation, Current Market, Earnings Per Share, Earnings Yield, Earnings Yields, Eps, Equity Investments, Expansion Capital, Financial Publications, Investors, Joel Greenblatt, Operating Profit, Quarters, Ratios, Return On Invested Capital, Spreadsheet, Stock Investing, Stock Screeners, Stock Screening Tools, Stock Sector, Tax Rates, Treasury Bonds, Value Investing, Value Stock, Value Stocks

Free Cash Flow

Free cash flow (FCF) is the left over cash a company has after paying for it’s growth and ongoing operations.  Free cash flow growth is another one of our primary indicators used for value stock picking, as it helps us gauge the relative health of a company.  The good thing about free cash flow is that it accounts for outlays of both expenses as well as capital asset purchases. 

How to calculate free cash flow

Learning how to calculate free cash flow is simple, and you can make it even more powerful when you use it together with other powerful value stock picking metrics, once you learn how to calculate ROIC and equity growth.  Free cash flow is calculated by subtracting capital expenditures from operating cash flow:

Free Cash Flow = Operating Cash Flow – Capital Expenditures

Operating cash flow is Net Income + Amortization/Depreciation – Changes in Working Capital

So the full Free Cash Flow formula looks like this:

Net Income + Depreciation/Amortization – Changes in Working Capital – Capital Expenditures
= Free Cash Flow

You can find the numbers for calculating free cash flow on annual or quarterly earnings statements for any public company you are examining.  Net Income and Depraciation/Amortization are on the income statement, working capital and capital expenditures are on the Cash Flow Statement (or Statement of Cash Flows).

Technorati Tags: Asset Purchases, Calculating Free Cash Flow, Capital Asset, Capital Expenditures, Cash Flow Growth, Cash Flow Statement, Depreciation, Earnings Statements, Equity Growth, Fcf, Free Cash Flow, Free Cash Flow Formula, Ongoing Operations, Operating Cash Flow, Outlays, Quarterly Earnings, Relative Health, Roic, Statement Of Cash Flows Example, Value Stock, Working Capital