Compound Annual Growth Rate (CAGR) Calculator
Provide inputs below to calculate the compound annual growth rate. For example, to find the dividend CAGR for AmerisourceBergen (ABC) from 2002 to 2011, enter starting annual dividend in 2002 of $0.03 and ending annual dividend rate as of 2011 of $0.43 for a period of 9 years. If you enter the values correctly for ABC you should get a 34.43% growth rate. The calculator updates real time so be careful you have all of the correct values you want in each field and click somewhere on the page to update. You can also tab across the fields to make things easier.
Investing Idea #1: Using Covered Put Options to Enter Positions
An alternative to buying a stock flat out on the open market or with a limit order is using a cash covered put option. There are also non-cash covered put options (naked put options) that can be sold but require a substantial amount of equity in a brokerage account to be eligible to sell so I am sticking to the cash covered option because almost everyone can do it depending on the value of the stocks one wishes to buy.
A put option gives someone to right to sell 100 shares of an underlying equity at a particular strike price. The seller receives a cash amount called a premium from the buyer when the put option is sold. A cash covered put option requires that you have enough free cash in your account to cover 100 shares of the underlying equity. For example, if you sell a covered put on a stock at a strike price of $25 then you need to have $2,500 in cash in your account. Let's just jump right into an example.
Say you are interested in Coach (COH) stock and want to enter a position. Say it is currently trading at $68.31. You could just buy the stock at that price if you thought it was a fair price. Say you felt comfortable buying COH at a price of $65. You could enter a limit order buying shares of COH at $65 and the order would execute if/when the price fell to $65. Another way to enter the position would be to sell a June $65 put option at a premium of $158. You pocket $158 immediately after the option is sold that's yours to keep. This option now gives the buyer the right to sell you shares of COH stock at $65. The advantage over the limit order is that you get paid to wait for the price to drop to $65 and it if doesn't drop you still get a 2.43% return.
Options expire the 3rd Friday of every month. A couple of different outcomes can happen with our scenario. First, the price of COH stock is above $65 at expiration. This means the option expires worthless and you do not get "put" 100 shares of COH stock. Another outcome is that the price of COH falls below $65 before expiration. In this scenario the option will be exercised and you will be forced to buy 100 shares of COH at $65 a share. Oh well, we were comfortable with buying at $65 anyway right? A third option is that that you choose to close the option position before expiration by buying the put option back either at a gain or loss depending on the time to expiration, stock volatility, and underlying equity price at the time.
You will need the appropriate trading privileges in your brokerage account to trade options. A cash covered put strategy may not scale well when trying to start a well diversified portfolio if you do not have a sufficient amount of cash in your account. Remember, you will be required to maintain enough cash to cover 100 shares of the underlying equity for the option being sold. So if you want to sell a covered put option on Apple right now at the nearest out of the money strike price which is currently $565, you would need $56,500 in cash in your account to cover this single position!
A put option gives someone to right to sell 100 shares of an underlying equity at a particular strike price. The seller receives a cash amount called a premium from the buyer when the put option is sold. A cash covered put option requires that you have enough free cash in your account to cover 100 shares of the underlying equity. For example, if you sell a covered put on a stock at a strike price of $25 then you need to have $2,500 in cash in your account. Let's just jump right into an example.
Say you are interested in Coach (COH) stock and want to enter a position. Say it is currently trading at $68.31. You could just buy the stock at that price if you thought it was a fair price. Say you felt comfortable buying COH at a price of $65. You could enter a limit order buying shares of COH at $65 and the order would execute if/when the price fell to $65. Another way to enter the position would be to sell a June $65 put option at a premium of $158. You pocket $158 immediately after the option is sold that's yours to keep. This option now gives the buyer the right to sell you shares of COH stock at $65. The advantage over the limit order is that you get paid to wait for the price to drop to $65 and it if doesn't drop you still get a 2.43% return.
Options expire the 3rd Friday of every month. A couple of different outcomes can happen with our scenario. First, the price of COH stock is above $65 at expiration. This means the option expires worthless and you do not get "put" 100 shares of COH stock. Another outcome is that the price of COH falls below $65 before expiration. In this scenario the option will be exercised and you will be forced to buy 100 shares of COH at $65 a share. Oh well, we were comfortable with buying at $65 anyway right? A third option is that that you choose to close the option position before expiration by buying the put option back either at a gain or loss depending on the time to expiration, stock volatility, and underlying equity price at the time.
You will need the appropriate trading privileges in your brokerage account to trade options. A cash covered put strategy may not scale well when trying to start a well diversified portfolio if you do not have a sufficient amount of cash in your account. Remember, you will be required to maintain enough cash to cover 100 shares of the underlying equity for the option being sold. So if you want to sell a covered put option on Apple right now at the nearest out of the money strike price which is currently $565, you would need $56,500 in cash in your account to cover this single position!
Investing Idea #2: Using Covered Calls to Increase Your Yield
For those of you who have never dealt with options before, the idea of using a covered call on a stock position you own may seem like a foreign concept. Let's first explain what an option is. In the most basic sense an option either gives you the right to buy (call) or sell (put) an equity at a determined strike price within a certain period of time.
Options chains are displayed on just about every financial quoting website out there such as Yahoo and CNBC. An options chain displays the current ask/bid prices for options at different expiration dates and strike prices.
Let's take an example. Looking at the options chain for MCD, we can see that the Jun 12 $92.50 call option's ask price is at $89 at the time of writing. If you were to buy this option it would cost you $89 plus commissions. Owning this option gives you the right to buy shares of MCD at $92.50 at any time before or on the third Friday of June 2012. Say MCD goes up to $100 the first week of June. You can exercise your option and buy the shares at $92.50 even though they are trading at $100. You'll have an immediate gain of $7.50.
Many traders use options for leverage. You essentially control 100 shares of an underlying equity for a fraction of the cost. If someone were to believe a short term spike in the price of MCD stock they could buy shares outright on the market at say $92 a share. Or they could buy call options for MCD and control a much larger quantity of MCD stock for a fraction of the capital required for the position. There are numerous ways to trade options and if you are interested I suggest you get a good book because it can get complicated in a hurry. For now, though, we are only interested in selling call options on positions we own in our long term growth portfolio.
A covered call option is an option that is "covered" by owning 100 shares of the underlying equity. It is considered covered because we already own the shares and if the call option is exercised there shouldn't be any problem in delivering those shares to the owner of the call option.
Selling covered call options is a great way to increase returns and supply a little more capital through selling to buy more stock in great dividend growth companies. Let's take another example.
Say you own 200 shares of POT at an average price of $39. We could sell 2 x Jul 12 $43 call options at the bid price at the time of this writing of $81. We would immediately pocket $162 minus commissions that we get to keep. That's 2.08% return for about a two month period or an extra 12% annually if you could pull it off 6 times in a year. A couple of different outcomes can happen now. The price of POT goes above the $43 strike price and the call is exercised. If this happens you get a decent capital gain of $800 plus the $162 premium you got from selling the calls. Now, we as long term investors don't necessarily want to sell our shares. We could at any time buy back the options we sold, possibly at a loss, to prevent having to sell our shares. The other outcome is the price of POT stays below $43 before expiring on the third Friday of July. The option expires worthless, you keep your 100 shares of POT, and get $162 in covered call premium for your trouble.
Given the example, you can start to understand how covered calls can provide a steady stream of capital to help finance additional dividend growth stock positions. It's not without risks however. You have to be willing to sell your shares and you need to understand how writing covered calls can affect your qualified dividend status as well as your stock holding period that is used for long or short term capital gains tax. In short, as long as you sell out of the money calls with more than 30 days to expiration but less than a year to expiration, the covered call positions should not impact either your holding time for determining long versus short term capital gains or your qualified dividend status on the underlying shares. An out of the money call option is an option with a strike price higher than the current share price of the underlying shares.
Options chains are displayed on just about every financial quoting website out there such as Yahoo and CNBC. An options chain displays the current ask/bid prices for options at different expiration dates and strike prices.
Let's take an example. Looking at the options chain for MCD, we can see that the Jun 12 $92.50 call option's ask price is at $89 at the time of writing. If you were to buy this option it would cost you $89 plus commissions. Owning this option gives you the right to buy shares of MCD at $92.50 at any time before or on the third Friday of June 2012. Say MCD goes up to $100 the first week of June. You can exercise your option and buy the shares at $92.50 even though they are trading at $100. You'll have an immediate gain of $7.50.
Many traders use options for leverage. You essentially control 100 shares of an underlying equity for a fraction of the cost. If someone were to believe a short term spike in the price of MCD stock they could buy shares outright on the market at say $92 a share. Or they could buy call options for MCD and control a much larger quantity of MCD stock for a fraction of the capital required for the position. There are numerous ways to trade options and if you are interested I suggest you get a good book because it can get complicated in a hurry. For now, though, we are only interested in selling call options on positions we own in our long term growth portfolio.
A covered call option is an option that is "covered" by owning 100 shares of the underlying equity. It is considered covered because we already own the shares and if the call option is exercised there shouldn't be any problem in delivering those shares to the owner of the call option.
Selling covered call options is a great way to increase returns and supply a little more capital through selling to buy more stock in great dividend growth companies. Let's take another example.
Say you own 200 shares of POT at an average price of $39. We could sell 2 x Jul 12 $43 call options at the bid price at the time of this writing of $81. We would immediately pocket $162 minus commissions that we get to keep. That's 2.08% return for about a two month period or an extra 12% annually if you could pull it off 6 times in a year. A couple of different outcomes can happen now. The price of POT goes above the $43 strike price and the call is exercised. If this happens you get a decent capital gain of $800 plus the $162 premium you got from selling the calls. Now, we as long term investors don't necessarily want to sell our shares. We could at any time buy back the options we sold, possibly at a loss, to prevent having to sell our shares. The other outcome is the price of POT stays below $43 before expiring on the third Friday of July. The option expires worthless, you keep your 100 shares of POT, and get $162 in covered call premium for your trouble.
Given the example, you can start to understand how covered calls can provide a steady stream of capital to help finance additional dividend growth stock positions. It's not without risks however. You have to be willing to sell your shares and you need to understand how writing covered calls can affect your qualified dividend status as well as your stock holding period that is used for long or short term capital gains tax. In short, as long as you sell out of the money calls with more than 30 days to expiration but less than a year to expiration, the covered call positions should not impact either your holding time for determining long versus short term capital gains or your qualified dividend status on the underlying shares. An out of the money call option is an option with a strike price higher than the current share price of the underlying shares.