Buy Protection with Puts

In my previous post, Protect Your Principal Investment, I talked about protecting your portfolio. I did not follow this advice in the past and had lost a fortune. I decided to heed the advice going forward and bought protect for my oil holding, Chevron Corporation(NYSE:CVX) in my DGI Portfolio. I bought a PUT at a strike price of 85 and expiration of Dec 2015 against my holding. This PUT allows me to sell my CVX holdings at $85 regardless of how low the stock drops. In exchange I pay a premium of $5 for the PUT. Essentially I have now defined my max losses for my CVX shares to be at $80.

The reason why I bought a PUT instead of selling the shares is because I’d still like to collect the dividends and hope to see a rebound in the share price in the near future.

The CVX PUT came in at a great time this week, because oil slid to record low prices. Also, on Friday August 21, 2015, the stock market had a huge drop, with the DOW down more than 530 points. That is the biggest single day drop since 2011.

The market is highly volatile now and these swings are likely going to happen again. I will have to consider more protection for my portfolio if I want to survive this storm.

Protect Your Principal Investment

Image Credit: David Elefant Wealth Management Group

In 2006, I worked for two ex-investment bankers in a startup up financial company and I asked one of them for a general good advice for investing in the stock market. His response was, “Protect Your Principal.”

I was baffled by his advice. I was young, in my  twenties, at that time and I always thought that when I’m young, I should take more risk and not worry about losing my principal. He continued, “You’d always want to protect your principal investment…” Basically his point was that if you don’t protect your principal you could end up losing everything and then you would end up with no capital left.

I was surprised that I hear this advice from an ex-investment banker, who I would expect to be more aggressive. I did not fully understand or accept his advice during that time, because I felt that I was young enough to take all the risk in the world and can take a heavy loss. I’d think that I would have all the time in the world to make those money back.

To say the least, I did not follow his advice. Subsequently, I placed large bets in the stock market, particularly in the financial sector during 2007 and continued to pile in new money after bad investments throughout the financial crisis. I lost almost all my principal, which was over $150,000. I had taken too much unnecessary risk and lost all my savings.

At that time, my mind was only thinking about the positive scenarios. I had not thought about how difficult it would be to make back the losses. If I were to invest $10,000, I would have to make a consistent 10% return for approximately 15 years just to break even, not to mention the loss of time cost of opportunity. I could have used this 15 years to make more money, if I had not lost the principal.

Thinking back to the advice from the ex-investment banker, I realized it makes a lot of sense to me now. If I had preserved my principal investment and protected it, I would still have at least $150,000 in my bank account. Furthermore, I could have deployed this cash and used it to pick up safe stocks during the market downturns.

Instead, I had founded myself short of cash and had to pass up great opportunities in the stock market because I had no cash available. I had made the mistake of not heeding to the advice twice — once during the financial market crisis and again during the oil price crisis. I hope not to make this mistake a third time. The advice given to me nearly 10 years ago resonates much stronger today than before. That’s why I have come to start picking stocks that are relatively safe and have learned to diversify my holdings across different sectors. My lessons learned have led me to the start of my DGI Portfolio.

What do you think of this advice, “Protect Your Principal?”

Dividend Growth Investing (DGI) Portfolio Update for July 2015

Dividends

This post is a monthly update to track the performance of my DGI portfolio. The goal of this portfolio is to build a steady and growing stream of passive income for achieving financial freedom. The strategy is to buy companies with a healthy balance sheet and a strong growing business. All the dividends are automatically re-invested in the stocks. Reinvested dividends help purchase more shares of the stocks and that helps produce more passive income.

Account Balance
Account Balance at start of month: $49,588.33
Account Balance at end of month: $49,372.44
Net Gain/Loss for month: $-207.94 (-0.01%)

Added $10,000 deposit, new balance is $59,372.44

Ticker Current Price Quantity Current Value Annual Dividends ($) Avg Monthly Dividends
CVX 85.21 100 $8,521.00 $428.00 $35.67
VZ 46.67 200 $9,334.00 $440.00 $36.67
T 34.57 200 $6,914.00 $376.00 $31.33
JNJ 99.81 100 $9,981.00 $300.00 $25.00
GSK 43.45 200 $8,690.00 $464.00 $38.67
OHI 36.7 300 $11,010.00 $660.00 $55.00
Total $54,450.00 $2,668.00 $222.33

Note: Cash balance not shown here.

Dividend Payouts This Month:
Total: $0

Funding Status: 60% Funded
I have added another $10,000 to the portfolio at the end of the month. And now the total deposited to this account is $60,000, which is 60% of the proposed $100,000. The new balance is now: $59,372.44

Summary
The DGI Portolfio was pretty balanced out for this month because it was more diversified. Unlike in my IRA Portfolio, I have only one holding in the oil sector, which is CVX and it weighs less than 15% of the entire portfolio. CVX performed poorly for this month, however, fortunately, my other holdings had gains to offset its losses. Ultimately, my balance was almost unchanged for the end of this month.

Additions to Portfolio
I also took advantage of the weak market this month to add one of my favorite REIT companies, Omega Healthcare Investors Inc (NYSE:OHI). The company has strong revenue, great earnings and a bright future ahead. The fear of interest hike has created a small sell-off in many REITs. I think it was a good opportunity to pick up 300 shares of OHI in my DGI Portfolio because it has the characteristics of a income growth stock.

With the addition of OHI to my holdings, my average monthly income is now $222.33. The average monthly income number will be my top focus for these posts, and I hope to increase this average monthly income over time.

IRA Portfolio Update for July 2015

Retirement

Image credit: 401kcalculator.org

 

This post is a monthly update to track the performance of my IRA portfolio. The goal of this portfolio is to build wealth and generate income for retirement. The strategy is to buy companies with strong growth prospects and a high dividend yield. All the dividends are automatically re-invested in the stocks. Dividends help grow income by buying more shares of the company and having more shares of the company help generate more income.

Account Balance
Account Balance at start of month: $19,638.80
Account Balance at end of month: $14,783.38
Net Gain/Loss for month: $-4,855.42 (-24.7%)

IRA Portfolio Holdings:
ARCP – 747.61 shares
LNCO – 874.08 shares
SDRL – 401.92 shares

Dividend Payouts This Month:
ARCP $0
LNCO $89.99 (Reinvested)
SDRL $0
Total: $89.99

 

Summary
Oil prices crashed again and my IRA Portfolio balance has crashed with it. There is no visible light in this dark tunnel yet, unfortunately. Oil prices are falling every week with no bottom in sight. At this point, it makes little sense to liquidate my oil holdings. It’s has become a lose-lose situation. If I would sell and should oil prices rebound, I would miss out on the bounce back up. If I would continue to hold and should oil prices continue to fall, I would continue to lose money. What do you think would be the best course of action for me to take on this portfolio now?

 

IRA Portfolio Update for June 2015

Retirement

Image credit: 401kcalculator.org

This post is a monthly update to track the performance of my IRA portfolio. The goal of this portfolio is to build wealth and generate income for retirement. The strategy is to buy companies with strong growth prospects and a high dividend yield. All the dividends are automatically re-invested in the stocks. Dividends help grow income by buying more shares of the company and having more shares of the company help generate more income.

Account Balance
Account Balance at start of month: $21,623.45
Account Balance at end of month: $19,638.80
Net Gain/Loss for month: $-1,976.28 (-9.1%)

IRA Portfolio Holdings:
ARCP – 747.61 shares
LNCO – 863.55 shares
SDRL – 401.92 shares

Dividend Payouts This Month:
ARCP $0
LNCO $89.10 (Reinvested)
SDRL $0
Total: $89.10

Summary
Oil prices continue to suffer from the downturn.

 

Dividend Growth Investing (DGI) Portfolio Update for June 2015

Dividends

This post is a monthly update to track the performance of my DGI portfolio. The goal of this portfolio is to build a steady and growing stream of passive income for achieving financial freedom. The strategy is to buy companies with a healthy balance sheet and a strong growing business. All the dividends are automatically re-invested in the stocks. Reinvested dividends help purchase more shares of the stocks and that helps produce more passive income.

Account Balance
Account Balance at start of month: $50,0000
Account Balance at end of month: $49,588.33
Net Gain/Loss for month: $-411.67 (-0.8%)

Portfolio Holdings:
VZ – 200 shares
T – 200 shares
JNJ – 100 shares
GSK – 200 shares
CVX – 100 shares

Dividend Payouts This Month:
Total: $0

Funding Status: 50% Funded
I plan to have a starting capital of $100,000 for the DGI Portfolio. I could only deposit $50,000 in the portfolio in the month of June. About $40,000 was borrowed from a credit card promotional loan and $10,000 was liquidated from other investment portfolios. The rest of the funding will be borrowed as well and will be added to this portfolio as well.

Summary
As I had mentioned in my previous post, Building My Dividend Growth Investing (DGI) Portfolio for Passive Income, I would like to build a portfolio that produces a stream of growing income. I would look for companies with a healthy balance sheet and that can grow their dividends over the long term. I have learned quite a few lessons in the past from buying high dividend yield traps, such as the once high yielding dividend stocks in my IRA Portfolio. One example of a big mistake is SDRL, which yielded around 20% at the time of my purchase and because of the oil prices collapse, SDRL had to cut their dividends entirely. The stock price also collapsed. I had too much of my IRA portfolio involved with oil and the portfolio suffered when the oil sector got hit. Therefore, it’s important to diversify my holdings, so I do not become get too affected by any one sector.

I learned that it’s better to buy a safer company with a lower yield than risky ones with a higher yield. And buy several companies in different sectors.

I started with a few stocks that are Dividend Aristocrats, which means that they have increased their dividend payouts for 25 consecutive years. They are Johnson & Johnson (NYSE: JNJ), AT&T Inc. (NYSE: T), and Chevron Corporation (NYSE: CVX). They are trading near their 52-week lows and looks undervalued.

I have also added two other classic dividend stocks, Verizon Communications Inc. (NYSE:VZ) and GlaxoSmithKline plc (ADR) (NYSE:GSK). They both have a great history of dividend payments, although Verizon’s dividend payment is more steady. I don’t mind having a wild card in the dividend payments as long as it has a good chance of growing over the long term.

Allocation
For each purchase, I made the initial purchases in increments of 100 and a purchase price of around $10,000. Therefore, I have 200 shares, of VZ, T and GSK and 100 shares of JNJ and CVX.

Diversification
From a diversification perspective, VZ and T are in the Telecommunications Services sector, JNJ and GSK are in the Healthcare sector, and CVX is in the Energy sector. I will keep an eye on avoiding these sectors when I make additional purchases in this portfolio.

Risk
One of the biggest factors that I focus on now is the beta, which measures the volatility of the stock in comparison to the S&P 500 index, because I want to sleep well at night. All of the beta for my picks are less than 1.0, except for CVX. CVX is deeply affected by the current oil price crisis, but I believe it will survive this period of downturn and come out strong.

Dividend Income
VZ – $2.2 annual dividends/share
T – $1.88 annual dividends/share
JNJ – $3 annual dividends/share
GSK – $2.32 annual dividends/share
CVX – $4.28 annual dividends/share

The total annual dividends from these five stocks is $2,008.00, which means the average monthly dividend income is $167.33. My short term goal is to increase this average monthly dividend income to $2,000 by the year 2020, without any additional funding from the initial capital. My long term goal is to build enough passive income for me to achieve financial freedom.