This week, I continued building my passive income (accumulating dividend stocks) and a semi-passive income (trading options). But, when reviewing my portfolios I realized one thing – I had my positions all over the place dispersed among many shares. There was nothing wrong with it, those are all stocks I want to hold. But, in order to monetize those positions, I need to be more concentrated than having a few shares here and there. I know, I can hear all diversification gurus yelling now. But, I take investing probably quite differently than many investors. If you pick good stocks, you do not have to be diversified. And that is something even Warren Buffett would agree with me… and William O’Neil too.
So, this week, I decided to focus on concentrating my holdings. Here is a brief view.
I have 92 shares of HP (Helmerich and Payne). Can I monetize this position (selling covered calls)? No, I cannot. I do not have enough shares. I can trade naked, but that would require margin I currently do not have. So, the only thing, instead of investing into other positions (which I was doing) is to put all my effort and raise this holding to 100 shares. But, there is a problem.
Helmerich and Payne is a company involved in oil. It manufactures rigs and oil drilling equipment, so not involved directly in drilling, though. Well, they do the drilling but they do it on contractual basis, they do not drill for the oil itself but for a company who buys their drilling service. But if all the drilling companies stop drilling and extracting oil because of the oil slump, they will also stop buying the equipment or companies hiring them for drilling would stop. And that would impact HP.
HP was a dividend aristocrat increasing dividends for 47 years. It is amazing how this company could sustain all oil crisis in the past, until this one. After 47 years of consecutive dividend increases, HP cut the dividend. And I have 92 shares.
I was accumulating this stock way before this self imposed, hysteria driven crisis. Maybe I could have foreseen this coming but I am not that smart to foresee everything. As a dividend investor, I should close this position and move on. But, I decided not to. I decided to increase the position to 100 shares and start selling covered calls to lower my cost basis and then eventually sell. Not exactly what a dividend growth investor would do, but I was accumulating this stock when it was trading at $40 – $45 a share. Today, it trades in a $15 – $19 a share range. The price drop from $45 a share happened way before they announced the dividend cut.
The market actually looked at the cut positively and I agree. The company decided to protect its cash flow until the economy stabilizes. Although, this was good for the company, it is not good for me as an investor. Not only I am under water now, but also, my passive income has been compromised.
I am not also much eager to close the position at a loss (at my current cost basis of $40.96 a share, I would be closing with 56.61% loss). This is a reason for me to hold the position, increase shares to 100, and start selling covered calls, lowering my cost basis. Although, this feature is more psychological, than real, but, at least, you have a good feeling that the position didn’t come in vain.
Of course, I would use this income to start increasing my positions in other stocks I own so I can also use them to sell covered calls. My next holdings will be:
PPL – currently holding 72 shares
O – currently holding 53 shares
ADM – currently holding 28 shares
KMI – currently holding 46 shares
VLO – currently holding 18 shares
All dividends and income from options will be used to purchase those shares so I can start selling covered calls.