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McGraw Hill Financial Inc

5/18/2014

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McGraw Hill Financial is the leading provider of ratings, benchmarks and analytics in the global capital and commodity markets. In fact, most of the information that most investors rely on is compiled and presented each day by the companies of McGraw Hill Financial. This company is truly integral to investors at all levels.

But this company has been in the process of expanding, contracting and reinventing itself for decades. As a potential investor in this company it's difficult to base my investing decision strictly on the fundamentals. I'll need to rely on analyst's estimates going forward and the technicals as illustrated in the daily and weekly charts.
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  • As restructuring comes to a temporary end it appears that the fundamentals of the company are getting back on track.
  • The company has recently sold off its educational division and is now a pure financial reporting and analysis corporation.
  • A one year total return of 10.22% and a 3 year dividend growth rate of 5.95% is nice but not exceptional.

The Company
McGraw Hill Financial, Inc. (MHFI), a financial intelligence company, provides credit ratings, benchmarks, and analytics to capital and commodity markets worldwide. The company’s operations consist of four segments: Standard & Poor’s Ratings (S&P Ratings), S&P Capital IQ, S&P Dow Jones Indices (S&P DJ Indices), and Commodities & Commercial (C&C). The S&P Ratings segment offers credit ratings for investors, corporations, governments, municipalities, commercial and investment banks, insurance companies, asset managers, and other debt issuers. The S&P Capital IQ segment provides digital and traditional financial research and analytical tools, which integrate cross-asset analytics, desktop services, and investment recommendations. It serves asset managers, investment banks, investors, brokers, financial advisors, and investment sponsors, as well as companies’ back-office functions, including compliance, operations, risk, clearance, and settlement. The S&P DJ Indices segment maintains various valuation and index benchmarks for investment advisors, wealth managers, and institutional investors. The C&C segment offers information, data, analytic services, and pricing benchmarks for producers, traders, and intermediaries in energy, metals, and agriculture markets, as well as professionals and executives in automotive, construction, and marketing/research services markets. This segment consists of business to business companies that include brands, such as Platts, J.D. Power and Associates, and McGraw-Hill Construction. The company was formerly known as The McGraw-Hill Companies, Inc. and changed its name to McGraw Hill Financial, Inc. in May 2013 after the sale of McGraw-Hill Education to Apollo Global Management, LLC. McGraw Hill Financial, Inc. was founded in 1888 and is headquartered in New York, New York. (Daily Chart) (Weekly Chart)

18 May 2014
Price  $77.98
1yr Target  $84.75
Analysts  12
1yr Cap Gain  8.68%
Dividend  $1.20
Yield  1.54%
1yr Tot Return  10.22%
3yr DGR  5.95%
5yr DGR  4.94%
Payout Ratio  22.81%

Beta  .93
EPS (ttm)  $3.27
EPS next yr  $4.27
P/E  23.85
PEG  1.63

ROA  43.40%
ROE  211.10%

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McGraw Hill Financial, Inc (MHFI), is a relatively difficult corporation to assess (for me) due to its organizational evolution over the years. Although MHFI started out as a small and simple publishing company it has evolved into a completely different organization today. Today MHFI's primary areas of business are financial, publishing, and business services, and it is the parent company of Standard & Poor's, Platts, J.D. Power and Associates, McGraw Hill Construction, and the majority owner of the S&P Dow Jones Indices joint venture.
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The McGraw Hill Book Company started in 1909 when it was formed from a combination of the McGraw Publishing Company (established in 1888) and the Hill Publishing Company (established in 1902). It remained a simple publishing company for decades. In 1972, as part of a deal with Time Inc, it took control of four television stations and entered the broadcast market. With additional acquisitions and buyouts over the years, the McGraw Hill Publishing Company, in 1986, became the largest educational book publisher in the United States.

In 1995 the McGraw-Hill Publishing Company, Inc, became The McGraw-Hill Companies as part of a corporate identity rebranding and re-identification campaign. Then in 2011 the company sold its entire television station group to E.W. Scrips for $212 Million and redirected the company back into the publishing business.

In another tactical change of direction the McGraw Hill Companies sold off its entire educational division to Apollo Global Management in 2012 for $2.5 Billion and exited the education business completely. As a result of this new corporate direction, the McGraw Hill Companies, in 2013, changed its name once again to McGraw Hill Financial Inc. 


McGraw Hill Financial now organizes its businesses into four units, based upon the market they are involved in.
  1. Standard & Poor's provides independent investment research including ratings on various investment instruments.
  2. S&P Capital IQ is a leading provider of multi-asset class and real time data, research and analytics to institutional investors, investment and commercial banks, investment advisors and wealth managers, corporations and universities.
  3. S&P Dow Jones Indices is the world's largest global resource for index-based concepts, data, and research, it's home to the widely tracked S&P 500 and the Dow Jones Industrial Average, it calculates over 830,000 indices, publishes benchmarks that provide the basis for 575 ETFs, and serves as the DNA for $1.5 trillion of the world’s indexed assets.
  4. Commercial and Commodities Market which is made up of the following companies - J.D. Power and Associates, McGraw Hill Construction and Platts.

All of this has made it relatively difficult to sort through and understand the fundamentals of this evolving corporation from an investor's point of view.



The Fundamentals
Not being an accountant by training I find the fundamentals of this company difficult to sort through and to completely understand. In simplistic terms, revenues were increasing nicely before 2008 and have been increasing again more recently. The period when revenues were fluctuating was during the time that the television stations and its educational division were being sold off and that resulted in a decrease in revenues. It also caused an increase in profits as a direct result of those exact same sales. For a simple guy like me having difficulty sorting through the past, I'm forced to look closely at the estimates for 2014 and 2015 for possible insight as to whether or not to establish a position in this company's stock. This is not the most comfortable thing to do for a conservative investor like myself. I wish I was a smarter guy but I'm not. I'm the kind of guy that looks for companies with a consistent strategic plan and a management team that executes that plan. And then I judge their success by looking at the fundamentals.

Year
2015 Est
2014 Est
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Revenues
$5.48 Bil
$5.13 Bil
$4.78 Bil
$4.45 Bil
$3.95 Bil
$3.63 Bil
$5.87 Bil
$6.35 Bil
$6.77 Bil
$6.25 Bil
$6.00 Bil
$5.25 Bil
$4.99 Bil
Earnings
$4.27
$3.77
$4.91
$1.53
$2.27
$2.15
$2.33
$2.51
$2.94
$2.40
$2.21
$1.96
$1.79
Dividends
$1.36
$1.20
$1.12
$1.02 ($2.50)
$1.00
$0.94
$0.90
$0.88
$0.82
$0.72
$0.66
$0.60
$0.54
Payout Ratio
31.85%
31.83%
22.81%
66.67%
44.05%
43.72%
38.62%
35.05%
27.89%
30.00%
29.86%
30.61%
30.16%

Fortunately for investors, management has steadily maintained an increasing dividend annually throughout this entire process of reorganizing and rebranding the company. They've been able to do this by allowing the payout ratio to increase during periods of reduced earnings and then decreasing the payout ratio as earnings once again increased. This has maintained a dividend growth rate over the last few years in the 5%-7% range which is in excess of the inflation rate over this same period.

Revenue Growth Rates   
3yr = 9.50%     5yr = -5.53%     10yr = -0.43%
Earnings Growth Rates   
3yr = 31.32%    5yr = 14.36%     10yr = 10.61%
Dividend Growth Rates   
3yr = 5.95%     5yr = 4.94%       10yr = 7.56%


The Technicals
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Daily Chart
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Weekly Chart

The Competition
McGraw Hill Financial Inc is part of the Business Services Industry which is part of the Services Sector. The following companies are also in this industry and are considered to be the larger competitors of McGraw Hill Financial Inc.
  1. The Priceline Group Inc  (PCLN)
  2. Moody's Corp.  (MCO)
  3. Fiserv, Inc  (FISV)
  4. Alliance Data Systems Corporation  (ADS)
  5. Verisk Analytics, Inc  (VRSK)
  6. FleetCor Technologies, Inc  (FLT)
  7. Cintas Corporation  (CTAS)
  8. Vantiv, Inc  (VNTV)
  9. Global Payments Inc  (GPN)

Conclusion
Looking at the fundamentals of the company it's obvious that year over year comparisons are difficult because of the changes that have occurred over the last few years, but it's also obvious that over a period of years the company has been steadily growing its revenues and earnings. During this entire time dividends have been increasing each and every year. In addition, with McGraw Hill Financial on the list of Dividend Aristocrats I'm pretty confident that the management of the company will continue to be shareholder friendly in the years ahead.  

Like most other stocks this year, MHFI is bouncing between it's Bollinger Bands but has basically gone sideways since the beginning of the year, similar to the overall market. As such, the short term trade for swing traders is between the Bollinger Bands at $72 and $82. For buy and hold investors, waiting for a pull back to the lower Bollinger Band before buying and realizing the best return available is probably the best strategy to implement. Finally, if I already owned the stock (which I don't) I'd be looking for the price to approach the upper Band and then sell covered calls against my position.

With the stock currently listed at approximately $78, the best decision for me at this time is to simply wait for a lower price before committing funds. When I do commit funds, I'll be entering into the trade with the idea of Buy, Write, Collect.

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Buy, Write, Collect

5/17/2014

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I like to keep things simple when I'm thinking about investing because I'm a pretty simple guy. And when it comes to investing, I don't think there's a simpler or an easier way to invest than to Buy, Write, Collect. These three simple steps are easy to understand and implement but I have to admit that there's a lot of thinking that goes on behind the scenes before each of these is implemented. Here's the three steps in their entirety.  
  1. Buy the Stock
  2. Write the Option
  3. Collect the Dividend

This strategy will in no way make an investor instantly rich but it will, over time, produce some outstanding results. As to whether this is the only way, the answer is "certainly not." There may be better ways, and there may even be easier ways, but if there are I'm not aware of them. 
"I believe that through knowledge and discipline, financial peace is possible for all of us."
-- Dave Ramsey

I buy great quality securities that are optionable, sell out-of-the-money covered calls, and then sit back and collect the dividend payments. It's a strategy based upon the knowledge gained from years of trial and error and the discipline that comes from years of trading and investing. It's a strategy that works for me. So I hope this strategy continues to work for a very long time. I could use the money.

Good Luck and Good Trading.

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Dow Down Most In 5 Weeks

5/16/2014

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Get Excited - The Market Is Falling.

"I'm involved in the stock market which is fun and, sometimes, very painful." 
-- Regis Philbin
Dividend Growth Investors will always see a decreasing stock price as an increasing yield. The more stock prices fall, the higher their yields become. It's good to be a Dividend Growth Investor when stocks go on sale.
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Valspar Corporation

5/15/2014

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Valspar has been around in one form or another since 1806 (208 years ago), when it started out as a simple Boston paint store. Thirty years later it evolved into and became primarily a varnish producing company. Then around the turn of the 20th Century, Valspar was reborn when the company created the world's first clear varnish. In the 1980s the company bought Mobil's coatings business and evolved into the corporate structure that Valspar is today.

In 1995 Valspar began expanding its sales internationally to China, Hong Kong, Brazil, Mexico, and South Africa. And today the Valspar Corporation sells its products under a number of separate brand names, many of which have been acquired through a series of acquisitions.
  • Valspar
  • Plasti-Kote
  • House of Kolor
  • Cabot Stain
  • Barn and Fence
  • De Beer
  • Octoral
  • Valspar Industrial Mix
  • LIC
  • Devine Color
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  • In 2013 the company declared its 36th consecutive dividend increase (13%) as well as the repurchase of 5.9 million shares of company stock.
  • This past year the company acquired Inver, a leading European industrial coatings manufacturer.
  • They expanded sales at Lowe's stores, added Ace Hardware to their partner program, and started distribution through B&O, Europe's leading home improvement retailer.
  • Potential risks include a downturn in the overall economy or the unexpected unavailability or rise in the cost of raw materials. 

The Company
The Valspar Corporation (VAL) manufactures and distributes various coatings, paints, and related products worldwide. The company operates in two segments, Coatings and Paints. The Coatings segment offers decorative and protective coatings for metal, wood, and plastic primarily for original equipment manufacturing customers. Its products include primers, top coats, varnishes, sprays, stains, fillers, and other coatings used in manufacturing industries, such as agricultural and construction equipment, appliances, building products, furniture, metal fabrication, metal packaging, and transportation. This segment also provides color design and technical services. The Paints segment sells paints, primers, topcoats, aerosol spray paints, and automotive refinish paints, as well as crowns for glass bottles, and plastic packaging and bottle closures primarily through retailers, distribution networks, and company-owned stores. The company also manufactures and sells specialty polymers and colorants, as well as sells furniture protection plans, and furniture care and repair products under the Guardsman brand. The company was founded in 1806 and is headquartered in Minneapolis, Minnesota. (Daily Chart) (Weekly Chart)
14 May 2014
Price  $73.53
1yr Target  $80.50
Analysts  13
1yr Cap Gain  9.47%
Dividend  $1.04
Yield  1.41%
1yr Tot Return  10.88%
3yr DGR  13.92%
5yr DGR  11.14%
Payout Ratio  29.68%

Beta  .94

EPS (ttm)  $3.21
EPS next yr  $4.72
P/E  22.89
PEG  1.59
ROE  25.80%



The Fundamentals
Valspar has a strong history of increasing revenues and earnings over a relatively long period of time as can be seen in the numbers below. As can also be seen, revenues and earnings were impacted in 2008-2010 when the US experienced a recession in the housing and mortgage industry. As the economy returned so did the company's fundamentals. Looking forward to an improving economy in the years ahead, it's estimated that revenues and earnings will continue to increase.

The company's recent acquisition of Inver, a leading European industrial coatings manufacturer, should add additional sales and profits to the top and bottom lines going forward. In addition, recent partnerships with Ace Hardware and their deal with B&O, Europe's leading home improvement retailer, will expand both sales and distribution channels internationally.

Year
2015 Est
2014 Est
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Revenues
$4.69 Bil
$4.42 Bil
$4.10 Bil
$4.02 Bil
$3.95 Bil
$3.22 Bil
$2.87 Bil
$3.48 Bil
$3.24 Bil
$2.97 Bil
$2.71 Bil
$2.40 Bil
$2.24 Bil
Earnings
$4.72
$4.07
$3.20
$3.10
$2.28* (-$1.47)
$2.20
$1.49
$1.38
$1.50
$1.71
$1.42
$1.35
$1.08
Dividends
$1.41
$1.22
$0.95
$0.83
$0.74
$0.64
$0.60
$0.56
$0.52
$0.44
$0.40
$0.36
$0.30
Payout Ratio
29.87%
29.97%
29.68%
26.77%
32.45%
29.09%
40.26%
40.57%
34.66%
25.73%
28.16%
26.66%
27.77%

* Net Income (loss) per common share diluted in 2011 includes an impairment charge on goodwill and intangible assets of $3.75

Revenues are estimated to increase 7.8% in 2014 and 6.10% in 2015. Earnings are estimated to increase 27.18% in 2014 and 15.97% in 2015. And dividends are estimated to increase 28.42% in 2014 and 15.57% in 2015, which is similar to the increases expected in earnings. With dividend increases in the low teens, Valspar is one of those companies that Dividend Growth Investors love to own.
Revenue Growth Rates   
3yr = 8.29%    5yr = 3.33%     10yr = 6.23%
Earnings Growth Rates   
3yr = 13.16%    5yr = 18.31%   10yr = 11.47%
Dividend Growth Rates   
3yr = 13.92%    5yr = 11.14%    10yr = 12.21%


The Technicals
The daily chart shows a stock price that's been moving sideways for at least the last four months. Normally this would be a good thing if the overall market was moving downward and a bad thing if the overall market was moving upward. But in this case the overall market has moved sideways for the last four months also. So the daily chart is simply telling me that Valspar is moving in sync with the overall market. This is reinforced by looking at the momentum indicators. They seem to indicate that the market will continue to move sideways until some external stimulus is introduced. This indicates that there's no hurry to accumulate shares in this company at this time since it's expected to continue sideways.

On the weekly chart, however, it becomes more apparent that the price of the stock is in a slow but steady climb in step with its revenue and earnings growth rates. Looking at the momentum indicators, there's not a lot of upward pressure but there is pressure none the less. And a company growing at around 10% per year with a dividend increasing at 11-13% per year is a wonderful find for a dividend growth investor. 

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Daily Chart
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Weekly Chart

The Competitors
Valspar Corporation is part of the Specialty Chemicals Industry which is part of the Basic Materials Sector. The following companies are also in this industry and are considered to be the larger competitors of Valspar Corp.
  1. PPG Industries (PPG)
  2. The Sherwin-Williams Company (SHW)
  3. The Sigma-Aldrich Company (SIAL)
  4. Westlake Chemical Corporation (WLK)
  5. International Flavors and Fragrances, Inc. (IFF)
  6. W.R. Grace & Co (GRA)

Conclusion
Like many companies that I look at from time to time, this appears to be a great long term hold. With Bollinger Bands on the weekly chart set near $69 and $75, a price of $73 in not particularly a bargain. This is confirmed by noticing that the P/E ratio is approaching 23. I much prefer stock selling at a P/E ratio of 20 or less and with a dividend of 2.5% or more (these things are rare finds). With earnings estimated to increase dramatically in 2014, a P/E ratio based on next year's earnings is only 18, and even with an increase in stock price to an estimated $80.50, the P/E will only rise to just below 20. Going even further out, I could easily see this stock selling for approximately $94 per share by the end of 2015 (an almost 27.83% increase from today's selling price).

I intend to start a very small position in this company as soon as possible and then add to that position more prudently on dips in the price. 

Good Luck and Good Trading.
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Upstream E&P MLPs I'm buying

5/14/2014

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The oil and gas industry is made up of three distinct parts: upstream, midstream and downstream operations. Upstream operations refer to that part of the oil and gas industry that deals with exploration and production (E&P) operations. While profits in the oil and gas industry can be gained at all three levels of operations, I've found that the majority of profits occur in upstream operations.

Upstream operations consist of searching for potential underground or underwater crude oil and natural gas deposits, drilling of exploratory wells, and subsequently drilling and operating the wells and bringing the crude oil and/or raw natural gas to the surface.

Master Limited Partnerships (MLPs) are limited to enterprises that are primarily engaged in natural resources, such as petroleum and natural gas extraction and transportation. To qualify for MLP status, a partnership must generate at least 90 percent of its income from activities related to the production, processing or transportation of oil, natural gas and coal. MLPs are exempt from corporate income tax at both the state and federal levels and may record a pro-rated share of depreciation on their own tax forms to reduce liability.


Generally the stock of MLPs grow very slowly, if at all, because the payout ratios are usually around 90% leaving little if any retained earnings to grow the company and eventually increase the dividend. They do, however, tend to distribute dividends at a rate that is 5-6 times higher than normal securities (8-10%). As a result these are great securities for investors seeking current income or as great vehicles for generating income for investing in other securities that do grow dividends over time.


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BreitBurn Energy Partners L.P. (BBEP) engages in the acquisition, exploitation, and development of oil and gas properties in the United States. The company’s properties include natural gas, oil, and midstream assets. As of December 31, 2012, its total estimated proved reserves were 149.4 million barrels of oil equivalent. This company pays dividends on a monthly basis.

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Linn Energy, LLC (LINE) an independent oil and natural gas company, acquires and develops oil and natural gas properties. The company’s properties are located in Rockies, the Mid-Continent, the Hugoton Basin, California, the Permian Basin, Michigan, Illinois, and East Texas in the United States. As of December 31, 2013, it had proved reserves of 6,403 billion cubic feet equivalent; and operated 19,810 gross productive wells. This company pays dividends on a monthly basis.

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Memorial Production Partners LP, (MEMP) engages in the acquisition, development, exploitation, and production of oil and natural gas properties. Its properties consist of operated and non-operated interests in producing and undeveloped acreage, and interests in producing wells principally located in Texas, Louisiana, and California. As of December 31, 2012, its total estimated proved reserves were approximately 609 billion cubic feet of natural gas equivalent; and owned interests in 1,671 gross producing wells. This company pays dividends on a quarterly basis.

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Mid-Con Energy Partners, LP (MCEP) engages in the acquisition, exploitation, development, and production of oil and natural gas properties in North America. Its properties are located in Southern Oklahoma, Northeastern Oklahoma and parts of Oklahoma, and Colorado within the Hugoton Basin in the Mid-Continent region of the United States. The company owns a 75% average working interest in 272 net producing wells, 107 net injection wells, and 61 net wells shut-in or waiting on completion. As of December 31, 2012, its total estimated proved reserves were approximately 13.1 million barrels of oil equivalent. This company pays dividends on a quarterly basis.

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QR Energy, LP, (QRE) through its subsidiary, QRE Operating, LLC, engages in the acquisition, exploitation, development, and production of oil and natural gas properties in the United States. As of December 31, 2012, the company’s properties consisted of working interests in 4,527 gross producing wells located in Alabama, Arkansas, Florida, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, and Texas. It also had estimated net proved reserves of 56.8 million barrels of oil and condensate; 190.3 billion cubic feet of natural gas; and 10.6 million barrels of natural gas liquids. This company pays dividends on a monthly basis.

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Vanguard Natural Resources, LLC, (VNR) engages in the acquisition and development of oil and natural gas properties in the US. It owns properties and natural gas reserves located in the Arkoma Basin, the Permian Basin, the Big Horn Basin, the Piceance Basin, the Williston Basin, the Wind River Basin, and the Powder River Basin. As of December 31, 2012, the company had total proved reserves of 152.2 million barrels of oil equivalent and owned working interests in 2,266 net productive wells and approximately 785,085 gross undeveloped acres. This company pays dividends on a monthly basis.

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Stocks I Continue To Like

5/13/2014

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These are a few stocks that it seems I have always liked for one reason or another. They are some of the best companies in their industries and sectors. They're all large cap companies and they all pay dividends that seem to grow at a pace faster than inflation year after year. 

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Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. Its Established Pharmaceutical Products segment offers branded generic pharmaceuticals as well as provides anti-infective and influenza vaccines.

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Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. The company offers various voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan.

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Comcast Corporation (CMCSA) operates as a media and technology company worldwide. It operates through Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment, and Theme Parks segments.

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The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company primarily offers sparkling beverages and still beverages. Its sparkling beverages include nonalcoholic ready-to-drink beverages with carbonation. The company’s still beverages comprise nonalcoholic beverages without carbonation.

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Lowe’s Companies, Inc. (LOW) operates as a home improvement retailer. It offers products for maintenance, repair, remodeling, and home decorating. The company provides home improvement products under the categories of plumbing; appliances; tools and outdoor power equipment; lawn and garden; fashion electrical; lumber; seasonal living; paints; home fashions, storage, and cleaning; flooring; millwork; building materials; hardware; and cabinets and countertops. 

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T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. The firm primarily provides its services to individual and institutional investors, retirement plans, and financial intermediaries. Through its subsidiaries, it manages separate client-focused equity, fixed income, and balanced portfolios. The firm also launches equity, fixed income, and balanced mutual funds for its clients. It also invests in late-stage venture capital transactions with equity investments between $3 million and $5 million. 

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Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company operates in three segments: Walmart U.S., Walmart International, and Sam's Club. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, neighborhood markets, and other small formats, as well as walmart.com; and samsclub.com.

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VF Corporation

5/12/2014

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I like to invest in things I understand. And I understand that when I look in my closets, I see a lot of apparel manufactured and sold by VF Corp. If you're not sure of what I mean, look in your closet for the following brands. They're all produced by VF Corp.
The North Face
Timberland
Vans
Kipling
Napapijri
Reef
Eastpak
JanSport
SmartWool 
Lucy
Eagle Creek
Wrangler
Lee
Lee Casuals
Riders
Rustler
Timber Creek
Rock & Republic
Red Kap
Bulwark
Horace Small
Majestic
MLB
NFL
Harley-Davidson

Nautica
Kipling
7 For All Mankind Splendid
Ella Moss

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  • VF Corp is the largest by market cap in the apparel space but it has a lot of competitors and fashion is fickle.
  • This company sells a variety of apparel at multiple price points that can be found in most clothing stores and in virtually everyone's closet.
  • Revenues, earnings and dividends are estimated to grow at 13%-14% per year going forward.


The Company
V.F. Corporation (VFC) designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. The company offers outdoor adventure-oriented, skateboard-inspired, surf-inspired, and outdoor gear footwear and apparel products; and handbags, backpacks, accessories, merino wool socks, luggage, packs, travel accessories, and women’s active wear under The North Face, Timberland, Vans, Kipling, Napapijri, Reef, Eastpak, JanSport, SmartWool, lucy, and Eagle Creek brands. It also provides denim and casual bottoms, and tops under the Wrangler, Lee, Lee Casuals, Riders, Rustler, and Timber Creek by Wrangler brands, as well as fashion denim and sportswear under the Rock & Republic brand. In addition, the company offers occupational, protective occupational, athletic, licensed athletic, and licensed apparel products under the Red Kap, Bulwark, Horace Small, Majestic, MLB, NFL, and Harley-Davidson brands; and fashion sportswear, denim bottoms, sleepwear, and underwear, as well as handbags, luggage, backpacks, and accessories under the Nautica and Kipling brands. Further, it provides premium denim and casual bottoms, sportswear, and accessories, as well as premium women’s sportswear under the 7 For All Mankind, Splendid, and Ella Moss brands. The company sells its products to specialty stores, department stores, national chains, and mass merchants, as well as sells through company operated stores and e-commerce sites. V.F. Corporation was founded in 1899 and is headquartered in Greensboro, North Carolina. (Daily Chart) (Weekly Chart)
11 May 2014
Price  $61.76
1yr Target  $67.71
Analysts  22
1yr Cap Gain  9.63%
Dividend  $1.05
Yield  1.70%
1yr Tot Return  11.33%
3yr DGR  8.68%
5yr DGR  9.42%
Payout Ratio  33.57%

Beta  .60 
EPS (ttm)  $2.75
EPS next yr  $3.50
P/E  22.46
PEG  1.95
ROE  21.90%

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The Fundamentals
The fundamentals for VF Corp are similar to the fundamentals of other Consumer Goods companies. Revenues and earnings were progressing well until the recession in 2008-2010 when consumers decided to close their wallet to spending. While most of the damage occurred in the housing markets, the consumer goods sector was not immune to the effects of the economy. Management was smart enough to see what was happening so they readjusted sales and robust earnings returned in 2010. Fortunately the dividend payout ratio was low enough in the early part of the decade that management could allow the payout ratio to rise, maintain an increasing dividend, and then restrain the dividend later and allow the payout ratio to return to its earlier level. Now that revenues and earnings are once again in an upward direction and increasing at a rate of approximately 13-14% per year, I expect dividends will also increase at a similar rate. This would result in the revenues, earnings and dividends doubling in about 5 years (even without reinvestment).
Year
2015 Est
2014 Est
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003

Revenues
$13.37 Bil
$12.34 Bil
$11.41 Bil
$10.87 Bil
$9.45 Bil
$7.70 Bil
$7.22 Bil
$7.62 Bil
$7.21 Bil
$6.21 Bil
$6.50 Bil
$6.05 Bil
$5.20 Bil
Earnings
$3.50
$3.09
$2.71
$2.43
$2.00
$1.29
$1.03
$1.35
$1.30
$1.18
$1.11
$1.05
$0.90
Dividends
$1.16
$1.03
$0.91
$0.75
$0.65
$0.60
$0.59
$0.58
$0.55
$0.48
$0.27
$0.26
$0.25
Payout Ratio
33.14%
33.33%
33.57%
30.86%
32.50%
46.51%
57.28%
42.96%
42.30%
40.67%
24.32%
24.76%
27.77%
Revenue, earnings and dividend growth rates below reflect the slowing of sales during 2008-2010 and then a resurgence in growth rates for revenues and earnings while dividends were restrained to get the payout ratio back in line. Going forward I expect all three of these to increase at the rate of 13%-14% per year.
Revenue Growth Rates   
3yr = 13.85%    5yr = 8.40%     10yr = 8.17%
Earnings Growth Rates   
3yr = 27.75%    5yr = 14.95%     10yr = 11.65%
Dividend Growth Rates   
3yr = 8.68%    5yr = 9.42%    10yr = 13.79%


The Technicals
The Technicals are a hard read. The price of the stock has gone basically nowhere since the beginning of the year, but this is not a big surprise since the entire market has gone nowhere since the beginning of the year. Since the price is just under 62 and all of the moving averages are consolidating around 60, this stock is still a little on the high side for someone like me trying to start a position in this stock. The Bollinger Bands are sitting near 57 and 63 so once again, this stock is a little on the high end at the moment. The RSI, MACD and the ADX are settling down to their midpoints which is expected of a company moving sideways. All in all, this stock is going sideways and all the indicators are reinforcing that idea. As always, stocks stuck in a range give off their best information with a Stochastics Indicator. If an investor is interested in trading stocks that are stuck in a sideways pattern, then the Stochastics Indicator is one that he should be following closely. 

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Daily Chart
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Weekly Chart

The Competitors
VF Corp is part of the Textile/Apparel Clothing Industry which is part of the Consumer Goods Sector. The following companies are also in this industry and are considered to be the larger competitors of VF Corp.
  1. Ralph Lauren Corp (RL)
  2. PVH Corp (PVH)
  3. Under Armour Inc (UA)
  4. Hanesbrands Inc (HBI)
  5. Gildan Activewear Inc (GIL)
  6. Lululemon Athletica Inc (LULU)
  7. Kate Spade and Co (KATE)
  8. Carter's Inc (CRI)
  9. Columbia Sportswear Company (COLM)
  10. UniFirst Corp (UNF)

Conclusion
I like this company because I like and own their products. I think this is one of those companies that no one understands but everyone knows and buys their products. And it's the kind of company that makes a lot of money over a very long time. And its future look bright.

I also think that although the price of this company's stock is currently a little pricey, it'll probably remain pricey as long as the economy continues to improve. While I would like to buy this stock or any other stock at the best possible price, I'm not sure this stock will fall much below $57.00 per share any time soon. My strategy on this particular stock will be to begin buying it when it falls below $60.00 per share and then add to it over time. I normally like to buy stocks with a P/E ratio less than 20 and based upon estimated earnings $3.09 this year, a price of $60.00 or below is acceptable to me. I would not be surprised to see this stock double to approximately $120 per share within the next five years, simply based upon estimates of revenues and earnings and dividends going forward. 

Good Luck and Good Trading. 

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Ecolab

5/11/2014

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What you don't know about Ecolab will keep you from investing in this growth company that's been increasing its dividend every year since 1986. And that kind of dividend record puts this company solidly on the list of Dividend Aristocrats. 

Ecolab is a specialty chemical company disguised as a cleaning company. The company develops products and services for hospitals, hotels and water treatment facilities everywhere in the world. It's also recently introduced anti-microbial fruit and vegetable treatments for the food industry and waste water treatments for the oil and gas extraction industry. 
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  • Company delivers products and services for the energy, healthcare, industrial, hospitality, food service, and oil and gas sectors.
  • More than half of their employees work directly with their customers on training and support of the effective and efficient use of chemicals.
  • Company expects 18%-25% earnings growth in the first quarter 2014 and strong double digit growth for the entire year.
  • Bill Gates is the largest shareholder with a 10.9% stake.


The Company
Ecolab Inc. (ECL) develops and markets programs, products, and services for hospitality, foodservice, healthcare, industrial, and energy markets worldwide. It operates through four segments: Global Industrial, Global Institutional, Global Energy, and Other. The company offers cleaners and sanitizers for washing dishes, glassware, flatware, foodservice utensils, kitchen equipment, laundries, and general housekeeping functions; food safety products and equipment, water filters, dishwasher racks, and related kitchen sundries; pool and spa treatment programs; janitorial cleaning and floor care products; chemical dispensing device systems; and dishwashing machines, detergents, and rinse additives. It also provides lubricants, animal health products, cleaning systems, electronic dispensers, chemical injectors, and antimicrobial products; clean-in-place process control and facility cleaning systems; hard surface cleaners, degreasers, polishes, hand care products, and assorted cleaning tools and equipment; and infection prevention and other healthcare related products. In addition, the company offers textile care products and services; pest elimination services to detect, eliminate, and prevent pests; food service equipment repair and maintenance services; products and programs for water treatment and process applications, including cooling water and boiler water applications, raw water/potable water preparation, and wastewater applications. Further, it provides paper services for the papermaking process and across various grades of paper; and energy solutions, including well stimulation and completion, oilfield, enhanced oil recovery, downstream refining, downstream chemical processing, and water treatment solutions. The company sells its products through field sales personnel, distributors, and dealers. Ecolab Inc. was founded in 1923 and is headquartered in St. Paul, Minnesota. (Daily Chart) (Weekly Chart)
10 May 2014
Price  $104.75
1yr Target  $117.94

Analysts  16
1yr Cap Gain  12.59%
Dividend  $1.10
Yield  1.05%
1yr Tot Return  13.64%
3yr DGR  14.31%
5yr DGR  12.61%
Payout Ratio  30.37%

Beta  0.64
EPS (ttm)  $3.25
EPS next yr  $4.82
P/E  32.23
PEG  2.28
ROE  14.30%


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The strongest segment of Ecolab's businesses is the Global Energy segment where sales grew 78% last year. Acquisition-adjusted Global Energy sales, however, rose 12%. The Company's upstream energy business saw further double-digit growth in the fourth quarter, resulting from strong international performances in onshore, deepwater and oil sands.

Global Food & Beverage Sales are increasing at a rate of 9% and is led by the beverage and brewing, dairy, and agribusiness segments. Global Food & Beverage continues to benefit from its total plant assurance approach to customers in which they combine industry-leading Cleaning & Sanitizing, water treatment and pest elimination capabilities to deliver improved food safety, lower operating costs and better product quality assurance for their  customers. 

Global Water sales are increasing at a rate of 5%. Gains in this sector were led by good growth in the heavy, light and mining businesses.

Global Paper sales continue to increase at the rate of 5% per year and are expected to show modest sales growth going forward as the penetration of new business and technology more than offset the challenging paper market conditions.

Global Institutional sales are increasing at the rate of 4% but the end markets remain tough as modest growth in global lodging demand remains a challenge for the food service industry across both North America and Europe.

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Ecolab Scientists hard at work!

The Fundamentals
Ecolabs fundamentals have been recently driven primarily by a couple of major acquisitions. The Nalco Holding Co was acquired from a French utility in 2011 for $5.38 Billion. In 2013 Ecolab acquired Champion Technologies and its related company Corsicana Technologies for $2.3 Billion. Nalco is a maker of chemicals and provides products and services in water treatment, pollution control and energy conservation. Its primary aim is to reduce overall resource consumption and minimize the environmental releases of its customers. Champion Technologies is another leading specialty chemical company related to the energy sector. Its integrated offerings are an assimilation of sustainable chemistry, technology and service for the worldwide oil and gas industry. 

With a background of internal robust growth and growth through acquisitions, Ecolab is poised to gain even more momentum by aggressively pursuing additional acquisitions. Ecolab acquired Champions to become a giant in the oilfield chemical business with the additional benefit of reducing competition for its Nalco subsidiary. The acquisition will also beef up Ecolab's Global Energy Services and allow it to expand even further into the North American energy market. 

Revenue growth rates exploded in 2012 with the acquisition of Nalco and are expected to increase even further with the addition of revenues from the Champion acquisition in late 2013. Earnings are also increasing and have shown a boost in the more recent years. All of this is also resulting in a nice increase in the growth rate of dividend increases. As can be seen in the chart below, even with a falling payout ratio the dividend is increasing at a very healthy rate. With earnings estimates moving higher with the acquisition of Champion Technologies, dividend estimates are also increasing. This is exactly what both growth investors and dividend growth investors like to see. The singular blemish on the company's fundamentals is a current P/E of 32. Going forward this P/E drops to 25 in 2014 and to 21 in 2015. From a traditional view of fundamental analysis, this is certainly no bargain. Any investor considering buying this stock needs to balance this information against the increasing revenue, earnings and dividend growth rates.


Year
2015 Est
2014 Est
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Revenues
$15.41 Bil
$14.45 Bil
$13.25 Bil
$11.83 Bil
$6.79 Bil
$6.08 Bil
$5.90 Bil
$6.13 Bil
$5.46 Bil
$4.89 Bil
$4.53 Bil
$4.18 Bil
$3.76 Bil
$3.40 Bil
Earnings
$4.82
$4.18
$3.16
$2.35
$1.91
$2.23
$1.74
$1.80
$1.70
$1.43
$1.23
$1.19
$1.06
$0.80
Dividends
$1.32
$1.13
$0.96
$0.83
$0.72
$0.64
$0.57
$0.53
$0.47
$0.41
$0.36
$0.32
$0.29
$0.27
Payout Ratio
27.38%
27.03%
30.37%
35.31%
37.69%
28.69%
32.75%
29.44%
27.64%
28.67%
29.26%
26.89%
27.35%
33.75%

Revenue Growth Rates   
3yr = 29.31%    5yr = 16.66%     10yr = 13.42%
Earnings Growth Rates   
3yr = 12.19%    5yr = 11.91%     10yr = 11.54%
Dividend Growth Rates   
3yr = 14.31%    5yr = 12.61%    10yr = 12.71%


The Technicals
On the daily chart the stock price has fallen from a high of around 111 to a current price of around 104 where it appears to have found interim support. From the perspective of the RSI, the MACD and the ADX this stock seems to be moving sideways. While this stock is not on sale, it's not overbought either. I would consider this a great time to slowly accumulate a position in a great company. 

On the weekly chart the stock has been moving sideways since last fall as it digests the strong move that occurred earlier in the year. It's currently bouncing between it's Bollinger Bands at around 98 and 111. Based on this information a fall to a price below 100 appears to be a good entry point. The RSI, MACD and ADX are all retreating toward their equilibrium point as can be expected from a stock that's moving sideways. Generally the timing of buys and sells can be further enhanced by using Stochastics indicators during periods of sideways movements. Investors interested in trading or investing in Ecolab may wish to view the Full Stockastics indicator before committing funds. 

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Daily Chart
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Weekly Chart

The Competitors
Ecolab is part of the Cleaning Products Industry which is part of the Consumer Goods Sector. The following companies are also in this industry and are considered competitors of Ecolab.
  1. Church and Dwight Co (CHD)
  2. Stepan Company (SCL)
  3. Zep Inc (ZEP)

Conclusion
I like this company. I think this is one of those companies that no one seems to talk about and no one seems to notice, for the most part. But it's the kind of company that makes a lot of money over a very long time. And its future look bright. As the world becomes a dirtier place to live and work the need for Ecolab's products and services will increase dramatically. Ecolab's management has also shown its ability to identify new industries to target and enter to enhance and complement its existing knowledges and competencies. 

I also think that although the price of this company's stock is currently a little pricey, it'll probably remain pricey for some time to come. While I would like to buy any stock at the best possible price, this stock may not get cheap any time soon so if I want to accumulate a position in this stock I'll need to buy odd lots and build up a position over time at the best prices I can get at the time. My strategy will be to begin buying this stock in the next few days and then add to my position on dips as they occur. I believe that the P/E ratio will remain high (unfortunately) because their pursuit of sales to the energy sector will only increase as "fracking" becomes a world wide phenomenon. I would not be surprised to see this stock double to approximately $200 per share within the next four years, simply based upon estimates of revenues and earnings going forward. 

Good Luck and Good Trading. 

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First Steps

5/9/2014

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Every journey starts with a single step.

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Before you can take money out of the market, you have to put money into the market. Buying that first stock is the first step in that quest for financial freedom and security. But without that first step, nothing happens. 

Most people never take that first step for one of two reasons. They think they're not rich enough or they think they're not smart enough. Both facts couldn't be any farther from the truth. Some of the dumbest people I know started with next to nothing and today they have six figure portfolios. 

The key? Simple. They started. They took that first step and bought their first stock. From that point on they simply reinvested their dividends. Today they have no worries.


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0 Comments

A Simple Options Strategy

5/7/2014

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If you’ve ever considered an options strategy as part of your overall investing strategy, here’s a relatively simple trade that I often execute to supplement the monthly and quarterly income I receive from dividends on stock that I already own. It’s a simple strategy but it’s one that’s a two edge sword. It can reduce your initial investment but it does this by limiting your upside potential. That may not sound appealing to new investors because most of them emphasize only the potential gain that can be achieved. But a smart investor, an experienced investor, always looks to reduce the risk involved in any trade he enters into. 
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This simple options strategy is a strategy that’s less risky than simply buying and holding stocks for lengthly periods of time (often referred to as the pay and pray strategy). So if this simple options strategy type of investing interests you, you might want to consider selling covered calls like I do. As long as you’re aware of the potential risks (including transaction costs and tax and wash sale implications) this basic strategy is designed to help generate additional income from stocks you already own.


What is a Covered Call?
As you may already know, there are two types of options: call options and put options. In both cases an investor can be either long or short each of these option types. These options can also be either covered or naked. And while many advanced option strategies have exotic sounding names, every option strategy is based on the simple idea of the buying and selling of call and put options. 
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A detailed explanation of each of the advanced option types, along with the many strategies and tactics of using each of these options types, is way beyond the scope of this article. If interested in learning about these, information can be found at many websites around the internet. For those looking for an actual book to read, I learned most of what I know from the book "Options As A Strategic Investment" by Lawrence G. McMillan. This is an excellent and comprehensive book on every aspect of options trading.

For simplicity sake here is a working definition of who a call and put option buyer is. A Call Option Buyer is the buyer of a call who has the right to buy the underlying stock at a set price until the option contract expires. A Put Option Buyer is the buyer of a put who has the right to sell the underlying stock at a set price until the contract expires.

Selling a Covered Call, also referred to as writing a call, can only occur if you already own shares of the underlying stock and you sell another investor, a Call Option Buyer, the right, but not the obligation, to buy that stock at a set price until the option expires. The obvious question is, “Why would anyone want to sell their rights to their stock?” And the answer is "Any investor who wants to receive cash (the premium) that will reduce his initial investment in the security". If this activity is repeated several times and if, over time, a sufficient number of options are sold, the initial cost of the underlying security will eventually be reduced to zero.

For the uninitiated investor the idea of receiving extra income (in addition to dividends) on stocks they already own sounds too good to be true but like any options strategy there are risks as well as benefits. The intent of the options seller is to reduce those risks and enhance those benefits.


How this strategy works
Before making any trades, it’s critical to understand how this strategy works. For example, suppose an investor owns 100 shares of company "AAA" currently selling for $30 per share and he decides to sell (or write) one call (one call is equal to 100 shares of stock). The investor is contractually agreeing to sell those 100 shares for an agreed upon price known as the strike price. The premium that the investor receives is determined by a bid and ask price model but for a given stock, the higher the strike price is above the stock price, the smaller the premium is. In addition, premiums are larger for expiration dates that are farther out than for dates that are closer in. For example, an investor who chooses an expiration date three months out, the option will have a larger premium than one with an expiration date of only one month out. Luckily, for most securities there are multiple strike prices and multiple expiration dates so there's a myriad of choices for the option seller.

Let’s say in January an investor chooses to sell a covered call with a February expiration date. On the third Friday of the month trading on that option ends and on the following day it expires. At that point either the option is assigned and the stock is sold at the strike price or the seller keeps the stock. If, at the time of expiration, the price of the stock remains below the strike price the option will expire worthless and the covered call writer keeps all the money. He then has the option to sell another covered call.

This sounds simple and it is for more experienced investors. For new investors, however, it takes a little experience to find the right strike prices and expiration dates that work best for the security he's holding. New option sellers may want to initially experiment with one option contract and with different strike prices and expiration dates until they find that right combination that works for them.

I have found over the years that owning good quality stocks that allow me to sell covered calls against them can generate a series of premiums equal to, and sometimes greater than, the underlying stock’s dividend distribution. And in many cases I can double that dividend. And that's a dividend growth investor's dream.

This may just be one strategy that's worth taking the time to learn.

Good Luck and Good Trading.

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    Author

    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


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