In our March 22 issue of this column, I recommended three stocks for your purchase that yielded +10 percent dividends and, in my opinion, offered potentially reasonable prospects for stock price appreciation.
Today's issue will be an update of those three stocks and the recommendation of two more stocks, each offering over 10 percent dividends and what I, again, believe are reasonably good stock price increase potential.
Let's handle the update of the three stocks recommended in March first.
[Editor's Note:Big Gains as Stocks Go Up ... Or Down! -- Find Out How]
The three stocks were (1) MCG Capital Corp. (MCGC; NASDAQ), a Virginia company then selling at about $18 per share; (2) Aluminum Co. of China Ltd. (ACH; NYSE), a company basically owned by the Chinese government, but one that had an unusually low price to book value ratio; and, (3), Telecomunicacoes de San Paulo S.A (TSP; NYSE), the primary communications link for all of San Paulo, Brazil.
Before we begin, you can go to my archive and see the full text of the March 22 letter if that might be of interest to you. Look for the Expert's Corner on MoneyNews.com.
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The first of our three stocks, MCGC, we entered on March 26 at $18.88 per share. Today that stock is quoted at $16.02 a share, a decline of -$2.86 per share or 15 percent.
I would normally keep the stock, for my stop out rule is either twice the yearly dividend or violation to the downside of my Whitmore Super Chart Keyline. If either occurs, I generally exit the trade.
In the case of MCGC, which crossed down my Super Chart Keyline on July 6, I am recommending that you exit this trade today.
Had I a weekly update on the Keyline for you, I would have recommended you exit this trade last week when it broke the Keyline at $16.49 on July 6. You might use one of the three new recommendations made in this letter as a place to invest the proceeds from this sale.
The second of the three stocks recommended on March 22 was TSP, which we entered at $25.44 on March 26. The current quote is $35.74 per share, a gain of $10.34 per share or 41 percent.
I have another rule which says that any stock that gives a stock price gain of 50 percent during month 1 to month 6 should be sold and funds used elsewhere to help generate increased portfolio income.
We are short of the 50 percent mark by 9 percent as of today. If this stock were to hit, on a close, $38.16 or more (the 50 percent level) before September 22, sell it and consider reinvesting the funds in another high yield stock. The current stop out on the Super Chart Keyline is at $24.62, just a bit below our entry price.
Our third of the three recommended on March 22 was ACH, which we entered on March 26 at $26.40. The current quote is $45.88 per share, a gain of $19.44 or +73 percent gain.
Using our 50% rule, this stock should now be sold now since its 50 percent gain level was at $39.60. You might use the proceeds from this sale to invest in one of the three new recommendations made in this column.
[Editor's Note:Buffett, Soros, Templeton, Rogers: Learn Their Money-Making Secrets]
Now, just for the record, I did like this stock when I first saw it, but to see it gain over 70 percent in only 3 months was a real gift. We were fortunate. Few recommendations will do this well, but I will take it, as they say.
A Simple Rule Increases Portfolio Income
One final thought before I move on to the two new issues of this week's column. You notice that I took profits with the ACH stock using my "+50 percent six month" rule, a rule that I have had for quite sometime. While I did detail how my stop out price was determined, I don't think I gave you the details of this "exit" rule in the March 22 letter. So, I will give them to you now:
Rule 1 - If a stock recommendation's price increases more than 50 percent in the first six months, I take profits and reinvest the funds to increase income for the portfolio.
Rule 2 - If a stock increases 40 percent from month 6 to month 12, the same procedure is followed.
Rule 3 - If it increases 30 percent in the first 24 months, again, a sale of the stock and the reinvestment to make more income.
Rule 4 - After the 24th month, I, usually, only exit a trade if the Super Chart Keyline is broken to the downside.
These four rules are quite simple, but I have seen a substantial increase for portfolio income, over time, from this simple set of rules.
To give you an example, if we had invested $3,000 to get a 100 shares of a stock that paid 8 ½ percent dividends, or $255 per year, and the stock then rose within six months to $45 a share (a 50 percent gain) to a total value of $4,500 for the 100 shares, I would sell the stock and reinvest the $4,500 in another stock paying an equally or higher dividend.
Even if I only got an 8 ½ percent dividend again, I have increased my portfolio income to $383 from my original $3000 stock purchase, a 50 percent increase in income in dollars. Need I say more?
Our Two New Income Stock Recommendations
I have chosen two new stocks for today's column using the following criteria: (1) a market capitalization of at least $500 million is required; (2) book to price value ratio is less than 3 to 1; (3) dividend level is at least 10 percent; (4) P/E ratio is less than 18 (the current average of the S&P P/E); (5) Share price is less than $50 per share, so 100 shares can be purchased for less than a $5,000 outlay; (6) Growth over the last 5 years has averaged over 15 percent per year.
[Editor's Note:Buffett Says This Book Made Him Billions]
Both stocks are listed on the New York Stock Exchange. One, PVX, is in the natural gas and petroleum business, primarily in western Canada. The other, NAT, is what is called a "spot" ocean tanker service, that is, an ocean tanker hired on the open market for a single trip at a time, typically 2-3 weeks in duration
First, our tanker selection NAT. NAT is 12 years old and owns eight major size tankers. All are working in the "spot" market except one that is on a contract for 1 year.
The spot market tends to be very profitable, which is reflected by its profit margin level of over 39 percent. Its book to market value is 2 to 1 (quite good) and its return on equity is nearly 15 percent. Its share price has ranged between $31 and $43 over the last 12 months, so we are near its recent high after a run-up from $39 about 5 weeks ago. But, my Super Chart likes it for purchase below $41.50 per share.
Currently, it is selling for $42.92 per share. The current dividend is nearly 11.5 percent and its return on investment is also at the quite respectable 15 percent level. My current Super Chart Keyline is at $32.35 and the stop out level based on twice the yearly dividend stands at $36 per share. We will use the higher $36 stop out to begin this trade.
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Recommendation # 1: I like NAT for purchase below the $41.50 level, a bit lower than the current price, so you may have to wait a bit to get it. But, I believe the current pullback will give you a good entry. As I said, the current stop should be set at $36 per share.
Our second stock, PVX, is in the energy business, as I said above. It was formed in 2001 in Alberta, Canada to exploit a number of large gas and oil holdings of several other Canadian companies.
Its P/E ratio is a bit high for me at 17, but this is mitigated by the low book to market price ratio of only 1.9 to 1. The profit margin is over 28 percent, pretty good for its industry and the range over the last 12 months has been between $9 and $13 per share.
So, with its current price at $12.08 per share, dividends at over 11 percent, and just crossing up above my Super Chart Keyline — a very important plus here — I do like this one for income, nearly 220 percent above the current 5.1 percent yield for Treasury bonds.
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Recommendation #2: I am happy to buy PVX below 12.50 per share. To begin with, I would recommend that you set your initial stop out at $10.45 per share. This is below my Super Chart Keyline, but as I said, just crossing up the Keyline is a plus here, so a close stop seems dictated, even though it is below the Keyline.
Well, that's it for today. I hope you find these income investments help improve your portfolio's income. And I would like to announce that we will be inaugurating our monthly Income Investing newsletter this fall, dedicated to helping you increase portfolio cash flow and keeping abreast of developments that affect the planning-to-retire or retired investor.
Do hope your coming investment week is a good one. In the meantime, you keep in touch. I do! See you next week.
Editor's note:
Big Gains as Stocks Go Up ... Or Down! -- Find Out How
Buffett, Soros, Templeton, Rogers: Learn Their Money-Making Secrets
Buffett Says This Book Made Him Billions
