Why These Dividends Matter
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 three months since I launched a paper trading portfolio I dubbed the “No Drip, No Mess” portfolio. It was built upon three pillars which I believe will lead to some serious outperformance over the long term. These pillars were a core of high dividend paying stocks built around a theme of writing options on solid by fairly valued companies which also paid a decent dividend for even more income and instead of reinvesting this income like you would in a drip account, it would instead be invested in higher risk, higher reward companies.
At the time of this writing I’ve virtually invested about 18% of the portfolio’s starting cash. However, through the use of options, just over 62% of the portfolio’s cash is allocated to potential buys on a “look through” basis. Meaning that if all the written puts end up in the money and are assigned the portfolio would be 62% invested from the starting position.
Today though I want to take look at the dividend income collected. I think that all too often investors take dividends for granted but over time this income will really add up. The first quarter of income from the ‘no drip’ might appear to be insignificant but these dividends matter.
The first pure stock recommendation for the portfolio was Medical Properties Trust (NYSE: MPW). I like that MPT is a pure play owner of physical hospital buildings. In essence, MPT provides capital and liquidity to hospital operators to reinvest in their operations instead of the physical building. The company has been investing heavily in acquiring new hospitals over the past couple of years and all that new rental income is starting to hit the bottom line. As that bottom line grows, so will their dividend. In the meantime investors will have to content themselves with the current $0.20 quarterly dividend which contributed to the portfolio being paid its first dividend on July 12th adding $80 to the already healthy cash balance.
Next in line is McDonald’s Latin American franchisor Arcos Dorados (NYSE: ARCO). The company’s shares were purchased with income generated by the portfolio. Maybe as their way of saying thanks, they paid their first dividend back into the portfolio. While it might hardly seem worth mentioning, still the $4.36 in dividends collected on July 20th is money in the bank. Despite their problems with currency fluctuations and economic headwinds in their largest market of Brazil the company still turned in a golden quarter. Because shares were purchased with income generated by the portfolio and not with what would have been hard earned capital it’ll make it easier to deal with the inevitable bouts of indigestion. This is an exciting growth story that’s only just begun to shine.
Meanwhile, home improvement giant Lowes (NYSE: LOW) offered multiple streams of income through writing puts and calls as well as the recently paid dividend. Their first dividend was received on August 8th amounting to another $16 into the portfolio’s cash coffers. Writing a covered strangle on Lowes was a good way to take advantage of the volatility in housing related stocks. I liked Lowes over their chief rival Home Depot because while offering an identical dividend yield they were much cheaper on a forward looking basis than their much larger rival. Going forward, I’m hoping to generate a lot of income from Lowes as we await housing’s turn.
Then there are some stocks that seems like all you can do is watch hopelessly as they do nothing but continue their ascent without you. I figured that if I bought a small position in Apple (NASDAQ: AAPL) it would surely at be the top and I’d be able the fill out the rest of the position later. After a brief dip following their last earnings release I thought it was a good time to buy more, unfortunately I wasn’t quick enough to get a great price. At least I was in line in time to be paid their first dividend in decades on August 16th which added $13.25 to the portfolio. With a stunning cash hoard and amazingly well managed product cycle Apple could be the first company to reach that trillion dollar threshold to stay.
The final and most recent dividend payer is Ford (NYSE: F) which just paid a dividend on September 4th and added another $15 to the portfolio’s cash stash. I think that this iconic brand is exceptionally well positioned to take advantage of the coming automotive upgrade cycle. As we continue to wait for a large enough improvement in new car sales over those being scrapped I’m doubling up on my income opportunities with a covered straddle on Ford. Worst case is I fill out a full position in Ford and collect even more of their reestablished dividend.
By adding up all those dividends the portfolio generated a grand total of $128.61 worth of dividend income to date. While that might not sound like a lot, the income on just these five positions will add a half a percent to the total portfolio’s cash each year. That cash when added to options income and other dividends received as the portfolio is built out will be more than enough to fund some exciting growth companies to be added to the fold. These dividends really do matter and while they seem small now, all should grow over time and matter even more.
latimerburned owns shares of Apple, Medical Properties Trust, and Arcos Dorados and has the following options: Apple. The Motley Fool owns shares of Apple, Arcos Dorados, and Ford. Motley Fool newsletter services recommend Apple, Arcos Dorados, and Ford. 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.