Dividends Drive Returns
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s now been a month since I began a paper trading portfolio called the “No Drip, No Mess” Portfolio which details my personal investing philosophy of writing options to buy dividend-paying stocks and then using the income to buy tomorrow’s next great growth story. It was a great month for stocks as the major indexes were all up around 4% with a bulk of those gains being solidified on the last trading day. Despite worrying for most of the quarter about Grexits and Spanics an agreement from Europe to bolster their troubled banks and economies sent stocks soaring as traders bid up the risk assets they had been dumping.
We take a much longer term view; it could be a year until we are even close to being fully invested because of the portfolio building strategies we’ll employ. A month into this venture and I’ve recommend eleven trades that have the potential to invest up to 36% of the portfolio’s $100,000 in virtual cash. Yet, we’ve actually invested just 11% of that cash as the balance allocated continues to be set aside for potential put obligations. Through our combination of options strategies, we’ve generated 1.45% of cash for the “No Mess” side of the portfolio, halfway to adding a second position. With a bulk of our trades now just awaiting assignment, I want to take a look at the four companies in which we do own shares and consider our other source of cash: the dividends they’ll soon be sending our way.
Of our four holdings, only two of them are unencumbered by options. Our largest unencumbered position is Medical Properties Trust (NYSE: MPW) at 3.6% of the portfolio. Shares are up a whopping 6% this month in part due to the Supreme Court Ruling upholding the health care reform law. As their tenant hospitals stand to benefit from the changes imposed by the law, current tenants will have an increased rent coverage ratio while prospective tenants will now be more eager to sell now that this unknown has been eliminated. CEO Ed Aldag went on record saying that, "Now that that outcome (is) made, I think people will get back into these stocks. From that standpoint, it will help our stock price, which obviously helps acquisitions." As a REIT whose growth strategy hinges on growth by acquisitions, a higher stock price gives them more flexibility in funding the equity portion of a deal. In the meantime we will be satisfied by our upcoming dividend. By purchasing our shares just before the date of record we’ll be receiving our $80 in quarterly dividends on July 12th.
Our only other unencumbered holding is Brookfield Infrastructure (NYSE: BIP) at just a 2% position in the portfolio. I’d love to add to our position someday, but I’m waiting on a pull back to below $30. There has been no reported news over the past month and shares are virtually unchanged since we bought them two weeks ago. While they just paid their dividend a few days ago, we didn’t qualify because we bought our shares after the record date. The company won’t have their next earnings report for another month so just sit back and enjoy your summer on this one.
Our two positions encumbered by options are doing exactly what we’d hope they’d do, nothing. Both Lowes (NYSE: LOW) and Activision (NASDAQ: ATVI) are up fractionally since we entered our positions. Activision is up just enough to touch the written call, but we don’t need to worry about dividends as the company pays them out annually and won’t pay another one until next spring. The best case scenario for us would be for shares to end right where they currently are. We’d pick up a second helping of shares and could write a double dose of calls to generate some more income. Lowes on the other hand does have a dividend coming up that was just raised by their board a week before we picked up our shares. The shares go on record to collect the dividend in late July and while shares are currently above our written call price, there is more than enough time value to prevent our shares being taken by dividend snatchers. All told we have $118.50 in dividends upcoming over the next quarter. While that might not seem like a lot, it will build over time.
Dividends will be a large driver of our future returns but they’ll be few and far between until we finish seeding the portfolio. In the meantime we’ll use options a lot and combine that with our dividend cash to buy companies of our watch list like robotic surgical company Mako Surgical (NASDAQ: MAKO). We’re closing in having enough cash to add another fast grower to the portfolio and Mako is right near the top of my list. While we are on the topic of dividends, do you have a favorite dividend company that you think deserves to be added to the portfolio? Sound off in the comment box below.
latimerburned owns shares of MAKO Surgical , atvi (synthetic long), and Medical Properties Trust. The Motley Fool owns shares of Activision Blizzard, Brookfield Infrastructure Partners, and MAKO Surgical. Motley Fool newsletter services recommend Activision Blizzard, Brookfield Infrastructure Partners, and MAKO Surgical . 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.