Today 12/19/11, I bought 100 NLY shares for a net cost of $1,640.98 in an IRA account.  My basis for these NLY shares is now $16.41.

I already own 400 NLY shares in this account with Jan12 $19 Covered Calls on them.  Assuming that those Calls expire worthless next month I will combine them with these new shares, which will reduce my basis.  I will then see about selling new Covered Calls on the 500 shares.

I sort of think of NLY as part of my core holding because of its good return (14.13% on my basis when last received on 10/27/11) and for the extra income I can receive from selling Covered Calls.  I must admit though that I bought these new shares for the dividend that I will receive next month.

I should note here that the dividend payout varies from quarter to quarter.  Since I began to track and record my dividend income NLY quarterly dividends have varied from a low of .25 on 4/29/09 and a high of .68 on 7/29/10 and again on 10/28/10.  It has slipped a little each quarter since October 2010 to .57 for the January payout.

As a point of reference, the 20 Yahoo Analysts have a 12 month price target of $17.45 and a recommendation of 2.3 where 1.0 is a Strong Buy and 5.0 is a strong sell.

Many of the stocks that I own and write Covered Calls upon also pay dividends.  Dividends occur on a regular basis and add significantly to my annual investment income.  Year to date I have received a total of $8,154.06 in dividends in my various accounts for 2011.  My year to date average monthly dividends received is currently $741.28.  The year-to-date dividends currently represent about 31.00% of my average monthly investment cash flow and about 2.24% return on my current basis value.

My YTD dividends are up by $137.00 on a monthly average from last year.  That represents a 22.67% increase to date year over year.  I attribute the increased dividends to a few companies raising their dividends and to my purchasing additional dividend paying stocks.  During October, I received notice of the following dividends paid in various accounts for a total of $1,305.59.

Please notice that PGF is an ETF and pays dividends monthly.  The annualized dividend yield for PGF is based upon the simple and false assumption that it will pay the same dividend each month for the next 12 months.  The actual annualized dividend yield may be more or less than illustrated here.

ANH, MFA and NLY are mortgage REITs that make their money on interest rate spreads.  Their current high annualized dividend yields on my basis are probably at risk when the Fed begins to raise its discount rates.  As of this writing, my current basis, excluding dividends, for some of these stocks is now below their current market price, which increases my yield on those stocks.  I attempt to sell Covered Calls on these stocks to reduce my basis which, to some extent, will help mitigate any possible future reduction in their dividend payouts.  I find myself just holding some of these stocks sometimes while I wait for their price to rise to a point that I am comfortable selling new Covered Calls.  If I do not sell new Covered Calls I am content to capture the nice dividend for an indefinite period.  Notably, PGF, NLY, ANH and MFA fall into this category.

I use my basis per share to determine the simple and annualized percentage return because I feel that it gives me a better representation of the value of the dividends as they relate to my portfolio.  My basis may be above or below the market price which causes my return to be lower or higher than published yields for a stock.  I calculate my basis per share as my acquisition price less any option premiums received on those shares.  I do not use dividends to reduce my basis.

Today, 8/9/11, I BTC 2 NLY Oct11 16.00 Puts and STO 2 NLY Jan13 15.00 Puts for a net deposit of $294.96 in my taxable account.  My basis for these NLY shares, if Put to me, would be about 13.61 plus trading costs.  This transaction represents a simple return of about 9.77% and an annualized return of about 6.74%.

My Oct11 16 Puts were above the strike price but, as I have mentioned in some posts yesterday, I am trying to raise some cash in this taxable account to mitigate an anticipated margin call in this account.  In this case, I also reduced my potential liability by decreasing the strike price but at the cost of extending the expiration date out to January of 2013.  I may find that I will be able to roll these Calls in and up to generate some additional cash flow when the market appears to be a little more stable as I don’t generally like being exposed for so long in this account.

S&P continues its 12 month price target of $18 with a Hold recommendation.  MarketEdge Second Opinion has a price opinion of $16.78, down from $17.94 last month  with an Avoid recommendation, down from an earlier Long recommendation.  The Yahoo! Analysts have a 12 month price target of $18.87, up a little from $18.68 last month and a 1.9 recommendation, up from the 2.2 recommendation last week where 1.0 is a Strong Buy and 5.0 is a Strong Sell.