For the first time in years I am forced to take some time off from my systematic purchase of possibly undervalued dividend growth investments. I am not entirely sure how I feel about the predicament I am sitting in.
Background on Finding Undervalued Dividend Growth Companies
Every month for the past few years I have taken a look at the dividend champion list and then tried to find undervalued members (in recent months I expanded beyond the dividend champions). My undervalued dividend growth screen was to first only to look at those companies that have increased their dividend for the past 25 (and later 20 years). Once the company has done so for the requisite years do I look at:
- Price to earnings for the company vs industry
- Operating margin for the company vs industry
- Price to book for the company vs industry
- Dividend Yield
- Payout ratio (added later)
- Market cap (added later)
My thought process was/is that I can create a future stream of passive income that 45 or 50 year old Evan could use as a supplement for retirement or any other future bills that may incur (i.e. college for 2 children). With the end result in mind, I worked backwards. I wanted to buy stock in companies with a long record of increasing dividends – with a minimum of multiple decades of increasing dividends year in and year out.
With regard to value I always think back to something Warren Buffet said,
Price is what you pay, value is what you get
The thought process was/is that if I can pick something up that meets the first criteria (i.e. long standing company that has increased dividends year in and year out over the course of multiple decades) wouldn’t it be awesome if I could pick it up at a cheaper value than the price it is currently being offered compared to its peers! Yes, it would be awesome. Sometimes I hit it out of the ball out of the park and I got lucky that big money noticed around the same time I did and the stock shot up, and sometimes it took years for the stock to move.
Getting Assigned Shares from Naked Puts Has Put a Stop to Dividend Growth Investments…for now
While I have rolled options to profitibility that were going to be assigned to me, it is those naked puts that were actually put to me are the crux of this post/decision. Currently, I am holding 500 shares of two particular companies I wish I wasn’t. It isn’t that I am against the companies, it is that I was assigned these shares at a ridiculous price compared to current prices. The plan is to sell covered calls until I am profitable, but these purchases have tested my risk tolerance. Now I have a third company (TGT) that took a f’n dive with regard to price
How do I continue purchasing lots of dividend growth stocks when I am holding tens of thousands of dollars worth of shares that I don’t particularly want? At this point I can’t.
The Future of the Dividend Growth Investment Account
I am not giving up! This my favorite part of my personal finance world. I really believe buying blue chip type stocks that have a bit of room to grow and a long term view on dividends is the best way to building wealth in the market. Notwithstanding, I have put myself in a position where that has to be put on hold for a few months until I can roll out of my current positions.
I have talked about reducing the risk with naked puts in the past few months, and I think the easiest way to do that is to start with certain criteria for the stocks that I may sell naked puts on (e.g. they pay a dividend or are otherwise part of a dividend growth list). This way, even if I am in the middle of a shitty downturn on the stock I may not be as annoyed as I am today.
So as soon as I roll out of a few bad positions I am going to 1000% come back to my process of buying undervalued dividend growth stocks.