Introducing the 'No Drip, No Mess' Portfolio
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For years now I have been pursuing a balanced strategy of investing in income producing stocks while also taking a flyer on the next big thing. I thought it would be an educational and hopefully profitable exercise to formalize my strategy for all to see and to track its progress.
If you read my mini investing bio you’ll see that, “I am a big believer in writing options to buy dividend-paying stocks and then using the income to buy tomorrow’s next great growth story.” To that end I am opening a paper trading account and will be writing a series of articles putting this strategy into practice. I thought I’d call this portfolio, “No Drip, No Mess” portfolio because instead of reinvesting those dividends in the same company as you normally would, we'll instead invest those dividends in growth stocks. You are welcome to follow along with me by opening your own paper trading account until you feel comfortable with the companies and the concepts.
While there is nothing wrong with investing in a company and reinvesting those dividends back into the stock, I think one of the biggest problems investors have is in over allocating in a volatile growth stock and then worrying at the first sign of trouble. So, what if you took the dividends from your stable stocks and invested those funds into those companies you never felt comfortable buying with your hard earned money? This way you won’t end up like the many investors who have been burned by over allocating in risky growth stocks that have burned holes in their portfolios and kept them out of the market. What I am proposing is seeking to own stable income producing companies and overlaying options to boost that income and then combining those two income streams to take smaller positions in those companies that are younger and more volatile so that you can still sleep at night.
I’ll be writing buy reports that will formalize both the thesis for the company to be included in the portfolio as well as detailing the chosen strategy if options are involved. For example, we’ll more than likely write put options in order to buy a stock cheaper while earning income whether we end up purchasing the stock or not.
Take Intel (NASDAQ: INTC), for example. They are one of the better dividend paying large cap technology stocks with a current yield at about 3.25%. Given the market of late, I think with patience we could get shares cheaper than its current $25.74 a share. We could write August put options for around a dollar a share and pick up another 4% worth of income while gaining a better starting position on the stock. If Intel stays above our strike price we can keep the income and write another put or move on to another company. This gives us potentially 7% of income from Intel over the course of a year that we can then use to invest in the next Intel.
With that being said, in addition to these buy reports I’ll continually be adding growth stocks to the watch list, which we’ll be buying once we’ve collected enough income to reinvest. So, let’s say we want to indeed invest in the next Intel but this time in the mobile industry and think that both Near Field Communication specialist NXP Semiconductors (NASDAQ: NXPI) or motion sensor designer InvenSense (NYSE: INVN) have the potential to earn huge returns, but their size makes them fairly risky and volatile. InvenSense for example is down over 50% from its 52-week high while NXP Semiconductors has been bouncing around wildly. What we’ll do is build out very small positions in these and other companies over time using the income the portfolio kicks off and allow these companies to grow without being concerned by the volatility they are sure to generate.
For the most part we’ll keep it simple and just write puts to acquire stock cheaper and earn income while we wait, but over time we’ll also look to write calls to mainly earn additional income but also to sell shares higher. We might even combine the two for either covered Strangles or Straddles.
If you’ve never used options before I hope that you’ll see how valuable those can be in your investor’s tool box. I’ll plan on keeping a close eye on each stock in the portfolio after earnings as well as alerting you if any big news hits. We’ll also be going through a comprehensive review or the portfolio every quarter. I hope you’ll join me on this virtual journey as we take what looks good on paper and apply it to real-life investing with a goal of generating absolute returns that will grow for decades to come.
latimerburned owns shares of InvenSense. The Motley Fool owns shares of Intel and InvenSense. Motley Fool newsletter services recommend Intel and NXP Semiconductors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.