The market is in a downtrend as you can see here since October of this year:
You’ve seen me write or heard me say that there are good times when you can get paid to wait for your stock to hit a good buying price … but what does that mean?
Hopefully by the end of this article you will have some idea. I can’t stress enough that if you are working with a financial advisor that you trust you should consult with him/her to make sure this is a strategy you should be using before jumping on it. The purpose of this article is merely to provide some education about how to get paid to wait for a stock or ETF to hit a good price before buying into it.
Now may not be the perfect time to invest in the stock market … but now would be a great time to …
PUT YOUR SHOPPING LIST TOGETHER …
If you are conservative “value” investor you may want to look at a list such as the “Dividend Aristocrats” to start shopping. You can find that list right here. A dividend aristocrat is an S&P 500 Index company that has had 25 years or more of consecutive dividend increases. They are classified as the “best of the best” dividend growth stocks and have a long history of outperforming the market. This does not mean they will outperform the market every year … but on average (as shown in the table) should outperform long-term.
We see here that based on price alone, these stocks have outperformed the S&P 500 Index by an average of 2.1% per year. When you add dividends in … the performance is much greater. The average dividend yield as of this writing for the Dividend Aristocrats is 2.23% per year whereas the average dividend yield for the S&P 500 is only 1.46%.
Some of the stocks that have the highest dividend payouts that also happen to be household names can be seen as follows:
These are all great companies that likely will be around for many years to come. However, if we look at their graphs this is what we see on price action:
Of these four stocks we see that T and XOM are in a downtrend while ABBV and CVX have been moving more sideways over the past three months. These four will work for the concept I will be discussing later.
Here we see that these four have been actually somewhat in an up trend for the past month or two. Why is this since the market has been trending down. Three of them, PEP and KO fall into the Consumer Staples Sector of Food and Beverage and Personal Care. Consumers staples (things people need) tend to trend up in down markets. Another one ED (Consolidated Edison) is a Utility that also seems to trend up with the market is trending down. Why does this happen? Simply because people will move money out of other sectors (“want” sectors) and invest into “need” sectors during turbulent times.
Here we see MCD (McDonalds) making a nice move up over the past few months with TGT and ADM definitely in a down trend. As for Clorox (CLX) since mid-October it has started to edge up. Again, MCD and CLX would fall into that Consumer Staples Sector of the market.
Now in this last set of graphs … of the three dividend aristocrats, PG and JNJ are in nice uptrends. Again “needs” stocks while Colgate-Palmolive has just stated a nice uptrend in November. However, look at the one Non-Dividend Aristocrat I have put in here … Apple Computer (AAPL).
Now let me spend a little time discussing AAPL in the following scenario …
Getting Paid to Wait …
We know that AAPL is a large company. As of today, based on market capitalization (measured by multiplying outstanding shares (4,745,400,000) by the price per share (currently 169.75) giving Apple Corp. a market value of over $805,000,000,000 ($805 Billion Dollars). Based on stock rankings of the over 8,000 stocks I follow this makes AAPL the 3rd Largest Company next to Amazon #2 and Microsoft currently #1 (though these three tend to change from day to day.
So AAPL is trading for around $169 to $170 today. We know that as recent as October 3, 2018 this stock closed at a high of 232.07. We also know that if you take a look at the stock dating back to 05/13/1996 the split adjusted price of the stock was at $0.966 per share. Oh, to have had a few thousand shares of it back then.
We also know that this stock has had three splits in this historical period.
On June 21, 2000 that stock had a 2:1 Split. This means that if you owned 100 shares at $X.00 per you would, after the split own 200 shares at half the amount per share.
On February 28, 2005 the stock had another 2:1 split. So now what ever your 200 shares were worth on 02/27/2005 per share when you went to bed you woke up the next morning with 400 shares valued at one-half what the shares were worth on a per share basis the day before the split.
Then, on June 19, 2004 the stock had a 7:1 split. I remember this one well. The price before the split was about $650 per share. I don’t remember how many clients called me and told me that their Apple stock had lost $556.20 over night and they demanded to know why I let that happen to them. You see, unless you are really following a company’s stock and watching the daily news on it … it is likely that you will not know about a split until after it has occurred … even though it is announced usually many days or weeks in advance. Now the person that held 400 shares of Apple Prior to the split valued at $260,000 held 2,800 shares valued at the same $260,000.
Next, we will look at a long-term chart of AAPL followed by Five Year Charts so that you can see that it has not always gone straight up in price:
This chart goes back in time for 26 years, 6 months and 24 days … all the way back to May 13, 1996. You can definitely see some hills and valleys in this chart as Apple edged its way into the stratosphere. Let’s look closer at some of these by reviewing five-year periods at a time.
05/13/1996 – 05/11/2001
Here we see a drop from $5.15 per share (split adjusted) on 03/22/2000 to $1.00 per share by 12/19/2000 – a drop of $4.15 or 80.58%. Remember that till we get to the end of these charts.
05/14/2001 – 05/12/2006
Here we see the stock dropped from $12.23 per share on January 13, 2006 to $8.39 per share by 03/28/2006. That is a drop of $3.84 per share or 31.40%.
05/15/2006 – 05/12/2011
Here we see the stock drop during two major downturns. From December 28, 2007 through February 21, 2008 the stock dropped from $28.55 to $17.36 – a drop of $11.19 or 39.20%. Again, it dropped from $27.10 on May 15, 2008 to $11.17 by January 20, 2009 – another drop of $15.93 or 58.79%.
05/13/2011 – 05/12/2016
Here we see that between September 18, 2012 and April 17, 2013 the stock dropped from $100.27 to $57.54 – $42.73 per share or 42.6%. Then, again between February 23, 2015 and May 12, 2016 the stock trended down from $133.00 to $90.34 – another drop of $42.66 or 32.1%.
05/12/2016 – 12/07/2018
Finally, in this last period of 2 years and almost 7 months we see a major downturn from $232.07 on October 3, 2018 to $168.43 as of now (December 7, 2018 at 3:27:02 PM). This is a drop of $63.64 per share or 27.42%.
So, if you hold the stock now … and are concerned about the drop in price … remember that it is not as bad as some of the previous drops were. Such as 80.58% in 2000, 31.40% in 2006, 39.20% and 58.79% in 2008 and 2009, 42.6% and 32.1% in 2013 and 2015.
How low can it go? I have no idea. Let me ask you this. Would you be willing to pay $150 to $160 per share knowing that since May 13, 1996 with all the ups and downs and not including dividends the stock has actually gone up by 17,410% which is about 771.43% per year (as of 3:40:45 PM ET today)? That annual return by the way is simply an annual average return and not a compounded return.
You could do this one or two ways; you could set aside about $17,000 and sit and wait to see if the stock drops further … or you could sell a PUT option that would obligate you to buy the stock when and if it does drop … but get paid for selling that PUT option.
Take a look at this option chain for a Jan 18, 2020 Put Option on Apple:
Here I have highlighted two strike prices. The $150 and the $160. What this is telling you is that you could sell a put option at a $150 strike and get $2.10 per share ($210) or a strike price of $160 and get $4.25 per share ($425) put into your brokerage account. At the $150 strike that is like collecting 1.235% on your $17,000 sitting in cash and at the $160 strike that is like collecting 2.5% on your $17,000.
Remember too, this is only a maturity that is 43 days into the future. I recommend when selling put options you look at 21-45 days out for expiration. The premiums are smaller … but if you’re not executed against … you can do it over and over again. Also remember that $17,000 in your cash account in brokerage will do good to earn you 0.50% per year … which means over 43 days you might earn a whopping 0.059% or 10.30 from the broker or banker. The option buyer is willing to pay you more and if you want to buy the stock anyhow … this would be one way to GET PAID WHILE WAITING FOR THE STOCK TO HIT THE PRICE YOU ARE WILLING TO PAY FOR IT.
If it does not hit your price (the strike price) you get to keep your $17,000 and the premium and do it again. If you did this every 43 days on the $150 strike and generated $210 every time you did it … you would be able to do it 8 times in a year generating a total return of $1,680 which is equivalent to having your $17,000 pay you 9.88% per year in interest while you wait for the stock to hit your price.
If the stock does hit your price … smile knowing that you got the stock for the price you were willing to pay for it and feel good that it is likely going to head back up in price. If you miss the income … we can fix that too by having you sell covered call options against the stock once you own it. That is an article for another time: COVERED CALL OPTIONS.
You can do this on any stocks that allow options …
For example: Let’s assume it is AMD that you want to buy.
You’ve seen the price go from $32.72 per share as recently as 09/14/2018 and know it is trading for $19.46 per share today. You could use your $17,000 to purchase 1,000 shares if the price would just keep dropping to $17. So, you look at the option chain and see that you could sell 10 contracts (100 shares per contract) for $0.48 per share.
This is a December 28 expiration so you need only wait 22 days while getting paid a total of $480 to wait. If the stock hits the $17 price by December 28th or before … Merry Christmas you got your stock at the price you wanted and got paid to wait. If it does not hit your strike the options expires worthless, the buyer (holder) of the option loses and you, the seller (like the casino) wins because you can turn around and sell another put option.
Can you do this in tax-qualified plans (like IRAs)?
This depends on your broker. Some will allow “cash secured” put selling and some won’t. You need to check with them.
What if you get assigned or exercised against and don’t have the money in your brokerage account to purchase the stock that you obligated yourself to purchase?
Here you have some options: First you could sell other stocks to come up with the money since the money, or second, you could buy the stock and turn around and sell it right away … but there could be a problem with this.
If you buy a stock and sell it on the same day with no money invested this is known as “free riding” and it will get your account locked down so that you cannot trade it without the assistance of your broker for up to 90 days (on the first offense). I had this happen once and believe me … it is not fun and very expensive to call in your trades. The best thing is to make sure you have “margin” in your account then you will not run into this problem. Margin can be a life saver and a way to make money if it is not abused. Again, margin is a subject for another article in the future. However, until then, discuss it with your financial advisor – he/she is trained to assist you with this.
What am I hoping you can get out of this article?
- There is always a way to make money in the stock market regardless of the way it is going (up, down or sideways).
- There is value in really understanding the companies you are buying into.
- There is tremendous value in looking at the charts and analyzing past performance first without making any investments.
- That buying at the market price of an investment is not always the best way to invest. Sometimes you need to state the price you are willing to pay and be patient … but be paid for being patient.
- That the “big money people” are always making money in the market. They are never on the “sidelines” waiting for the market to “act right” before they invest.
In closing …
The Dow Jones Industrial Average closed down 558.72 points today and is at 24,388.95. The S&P 500 closed down 62.87 points today and is at 2,633.08. The NASDAQ Composite closed down 219.01 points today and is at 6,969.25.
Since October 1 the Dow is down 8.884% (Green), the S&P 500 is down 9.9676% (Red) and the NASDAQ Composite (Yellow) is down 13.2887%.
Have a great day!
This information is not recommendations for you to purchase or sell any investments outlined in this article. The information is being shared for educational purposes only. I recommend that you seek the advice of a licensed and competent financial advisor before taking actions on your portfolio if you see a need to after reading this article.
The author of this article is long or short on the following investments outlined herein: AAPL OPTIONS AND STOCK, KO OPTIONS, PG OPTIONS, MCD OPTIONS AND CLX STOCK AND OPTIONS.