5% Rule/Jeddah – That would be fun. Make sure you attribute it though. Look at all the mileage Laffer gets off his father's work.
So it turns out NLY sold their CRE to Slate for $2.3Bn as they think it's a good time to double down on RMF. My whole premise on NLY over the years is like HOV – trust the management to know what they are doing and take advantage of the ups and downs. $8.50/share for NLY is $12Bn and they should make $1.45Bn this year and distribute 90% of it (because they are a REIT) so 0.88 dividend makes perfect sense.
So, for the Dividend Portfolio, let's:
- Buy 2,000 shares of NLY $8.63 ($17,260)
- Sell 10 NLY 2023 $10 puts for $2.75 ($2,750)
That's net $14,510 and we're not selling calls yet because the 2023 $7 calls are only $1.75 so we'd get called away for sure and I think we'll be able to get $1 for the $10 calls if we are patient. If NLY drops to $7, we sell the $7 calls for $1 ($2,000) and our net drops to $12,510 ($6.255/share) and then we wait to see how things go until we are able to roll the short puts to 2024.
CIM has way better premiums and the same management team as NLY. They were stupidly cheap in the fall and now fairly priced at $12.70, which is $3Bn for a company that made $88M last year but usually more like $400M and projecting $300M going forward:
| Year End 31st Dec | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021E | 2022E | CAGR / Avg |
|---|---|---|---|---|---|---|---|---|---|
|
$m
|
950 | 952 | 1,148 | 1,271 | 1,381 | 1,197 | 498 | 513 | 4.74% |
|
$m
|
250 | 552 | 525 | 412 | 414 | 89.0 | -18.7% | ||
|
$m
|
250 | 552 | 525 | 412 | 414 | 88.9 | 317 | 327 | -18.7% |
|
$
|
1.25 | 2.92 | 2.61 | 1.96 | 1.81 | 0.067 | -44.4% | ||
|
$
|
1.62 | 3.23 | 3.12 | 1.94 | 1.79 | 0.307 | 1.26 | 1.30 | -28.3% |
|
%
|
-45.1 | +99.3 | -3.37 | -38.0 | -7.87 | -82.8 | +311 | +3.25 | |
|
x
|
41.4 | 10.1 | 9.75 | ||||||
|
|
0.133 | 3.10 | |||||||
We're not going to play them for growth and we're more likely to have to DD on a dip than NLY so this will be for the LTP, where we have tons of cash:
- Buy 3,000 shares of CIM for $12.65 ($37,950)
- Sell 20 CIM 2023 $12 puts for $12.75 ($2,550)
- Sell 30 CIM 2023 $10 calls for $3 ($9,000)
That's net $26,400 or $8.80 per share so if we're called away at $10 we don't care as $1.20 is a year's dividend. We're in a small allocation block so we aggressively sold the $12 puts as we don't mind being assigned 2,000 more shares at net $9.25, do we? This is another one of those times when we'd rather see the stock go lower and get to 5,000 at an average of $10.04 per share – that's our worst downside case – a 20% discount! Meanwhile the dividends are $1.20 while we wait, $3,600 against $26,400 is 13.6% annually and another 13.6% if we're called away at $10.
You have to think of the dividend plays in the very long-term:
- 2021, we spend net $26,400 to buy 3,000 shares of CIM
- 2022, we have collected $3,600 back.
- 2023, another $3,600 back and we roll our short puts and calls and pick up another $5,000 (being conservative)
Now our net cash outlay is down to $14,200
- 2024, we collect $3,600
- 2025, we collect $3,600
- Jan 2026 we roll for another $5,000
Now our net cash outlay is down to $2,000 on 3,000 shares of NLY
- Jan 2027 – it's all profit from here on out.
So, in Jan 2027, we begin another 6-year cycle with another stock using all the cash we got back. We are still getting $3,600 x 6 from NLY ($21,600) without even selling more puts and calls and we'll get the same from our new stock AND the cash comes back so by 2034 we will have 2 sets of $25,000 stocks AND $50,000 cash to buy 2 more sets – all of which will pay us dividends so about 40% back annually on $50,000 starting in 2034. That is how you build a dividend portfolio to retire on.
