The Top 5 Foreign Dividend Stocks For 2012

February 2nd, 2012

Which will be the best stocks to buy for dividends in 2012, foreign or US? Just like the dividend paying stocks in last week’s article,  The Top 5 US dividend stocks for 2012, the top 5 foreign dividend stocks for 2012 are ranked here by which ones will make the largest total cash payouts in 2012. This elite group contains firms from 5 countries, in these industries: oil majors, mobile phones, money center banks, and commodities producers. Two of these stocks are listed in our High Dividend Stocks By Sectors Tables :

CHL-BBL-HBC-PROFILE

Dividend Growth Rate: Excepting financial stock HBC, all of these stocks have an impressive 5-year dividend growth rate. All of them also increased their 2011 dividends per share, except for Shell, which, however, just announced plans to increase its dividend in 2012:

CHL-BBL-DIVGROWTH

Projected 2012 Dividends: For the table below, we took the conservative route, and projected the same dividend payouts/share as in 2011.  However, given these firms’ strong earnings, low debt loads, and past dividend growth rates, it’s very probable that they’ll continue to increase their dividends in 2012. (There are 2 classes of Shell shares, while Billiton actually operates as 2 different companies, with different ticker symbols, and divergent prices, but reports as one economic unit. The cheaper BBL shares have a higher dividend yield than the BHP shares, since the dividends are the same.)

CHL-BBL-DIVS-2012

Covered Calls: Interested in earning more income from these dividend paying stocks?  You might want to try selling covered call options, a strategy which gives you a second income stream that often pays you much more than dividends do, over the short term. The Sept. 2012 call options listed here for BBL and PTR both outpay their dividends by nearly 2 to 3 times during this 8-month term.

What’s the catch? Your shares of BBL and PTR may potentially be sold/assigned at their call strike prices, if the stocks rise above them near expiration in September.  In the BBL trade, you’re basically getting paid $5.90/share now, to make the bet that BBL won’t rise higher than its $70.00 call strike price.

In addition to the call option $, you’ll also collect the 2 semi-annual dividends, which have ex-dividend dates prior to the call option expiration date, provided that the shares don’t get called/sold away from you before the ex-dividend dates. However, if the shares do get assigned, you’ll also earn an additional $.97/share in this example- the difference between BBL’s 2/2/12 $69.03 share price, and the $70.00 call strike price.

(You can see additional details for these and 30 other trades in our Covered Calls Table.)

CHL-BBL-CALLS

Cash Secured Puts: Maybe you fell that PTR is too expensive at $148.90?  If so, you may want to sell cash secured put options below PTR’s current price, in order to achieve a much lower break-even price.

PTR closed at $148.90 on 2/2/12, but selling the Sept. 2012 $145.00 put option listed here will pay you $12.90/share now, and give you a break-even of $132.10, over 11% below PTR’s current $148.90 price.  As with selling covered call options, selling these put options will pay you over twice what the dividends pay during this 8-month term. However, unlike covered call sellers, put sellers never receive dividends.

The cash reserve equals the amount that your broker will hold in your account, so that you have enough funds to pay for the shares if they get sold/assigned to you. The cash reserve is equal to the put strike price times the amount of puts you sell, times 100. (One option contract corresponds to 100 shares of the underlying stock.) The main key to selling cash secured puts is to make sure you’d be comfortable owning the underlying stock at your break-even price, before you sell any puts.

(Note: You can find more info on these and over 30 other Cash Secured Puts trades in our Cash Secured Puts Table.)

CHL-BBL-PUTS

Earnings/Valuations: (* CCS EPS figure, which excludes the effects of oil price changes on inventory carrying amounts.)

CHL-BBL-EPS

Financials: Like many other financial firms, HBC’s mgt. efficiency ratios got decimated in the financial crisis. BBL/BHP has the best mgt. ratios and operating margin in the group:

CHL-BBL-ROE

Disclosure: Author is short BBL put options.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

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The Top 5 US Dividend Stocks For 2012

January 27th, 2012

Which dividend paying stocks paid out the most cash in dividends in 2011? Did they raise their dividends enough to stay among the top US dividend stocks in 2012 for cash payouts? 2011’s winners were all Dow dividend stocks, all raised their dividends in 2011, and have the size and cash necessary to make this short list.

This group paid investors approx. $6 billion to $10 billion-plus in 2011, and appear likely to increase those amounts in 2012, given their historic and recent dividend growth rates. (Although though GE lowered its dividends in 2009, it started increasing them again in 2010, and continued to do so in 2011, with a huge 21% hike):

T-XOM-DIVGROWTH

Pending Quarterly Dividends: These stocks pay quarterly dividends, and three of them are listed in our High Dividend Stocks By Sectors Tables. The projected dividends listed in the following table are all based upon the most recent quarterly dividends paid:

T-XOM-GE-DIV2012

Other than GE, investors rewarded these stocks for their dividend payouts in 2011- their share performance beat the S&P, which returned a big goose egg for 2011.  Chevron, Exxon, and J&J also beat the Dow’s 5.53% return in 2011.  So far in 2012, investors are favoring small caps, but that increased “risk on” approach will probably fade, in favor of large caps, when volatility returns to the market:

T-XOM-PERF

Selling Covered Calls: Even though these stocks don’t have the high options yields that we often write about, you can still substantially increase your dividend yields, via selling covered call options. We’ve listed only options for T, XOM, and GE here, as JNJ and CVX currently have much lower options yields.

In the July 2012 XOM covered call trade below, XOM’s call options sell for nearly 4 times the amount of its next 2 dividends.  The trade-off is that your shares will potentially be sold/assigned if they rise above the $87.50 July strike price for XOM. But you’d also receive a capital gain of $.73/share, the difference between the price/share of $86.77 and the $87.50 strike price, if the shares are sold/assigned.

The call options in the table below expire in Oct., July, and Sept. for T, XOM, and GE respectively.

(You can find more details for these and 30 other trades in our Covered Calls Table.)

T-XOM-CALLS

Selling Cash Secured Puts: As T, XOM, and GE are all relatively close to their 52-week highs, some investors may choose to sell cash secured puts below the current stock price, in order to achieve a lower break-even entry price.

Selling cash secured put options is an investing approach which pays you to wait: just like selling call options, you’ll get paid now for selling put options. But, if the stock goes below the put strike price at or near expiration, you’ll have it assigned/sold to you for a cost equal to the strike price.  However, your break-even will be lower than the strike price, due to the put premium you receive when you sell puts.

In general, most options aren’t exercised until sometime near or at their expiration date. As an option seller, this works in your favor, as the time value of the option that you’ve sold declines steadily.

The T Jan. 2013 $30.00 put strike price below pays you $3.25, making a break-even of $26.75, which is below T’s 52-week low.  (The puts in the table below expire in Jan. 2013, July 2012, and June 2012 for T, XOM, and GE respectively.)

(Note: You can see more info on these and over 30 other Cash Secured Puts trades in our Cash Secured Puts Table.)

T-XOM-PUTS

Valuations: Although these venerable large caps wouldn’t be considered growth stocks, GE’s PEG ratio is very near to the 1.00 undervalued threshold. XOM has a  negative PEG, due to analysts’ current negative growth forecasts for its next fiscal year. However, as we’ve seen before, oil could rise, or even spike much higher, in reaction to world events, particularly in the Middle East.  XOM has also turned in earnings surprises in 3 out of the last 4 quarters.

Ather issue for XOM is its increased exposure to natural gas via its 2010 purchase of natural gas giant XTO. With supplies coming on, natgas prices are forecasted to drop until US infrastructure can be built up enough to support increased demand.  However, with the current US administration just this week coming out with trucking tax incentives for natgas truck purchases, and other firms building a chain of US natgas fueling stations and liquid natural gas export treminals, demand for natgas may catch up with supply again sooner than later.

T-XOM-PEG

Financials: GE’s debt/equity ratio is much higher than the rest of the group, but it does have an interest coverage of 2.3.  XOM and CVX have metrics that are mostly in line with their Oil Majors peers. JNJ’s numbers are superior to its peers, and, with the exception of a slightly lower ROA, T’s numbers outshine its peers.

T-XOM-ROE

If you’re an income investor, this elite group holds some of the best stocks to buy in 2012 for dependable dividends.

Disclosure: Author is long GE, CVX, XOM, and T shares, and short GE call options.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

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Make Over 20 % By Hedging This Top Dow Dividend Stock

January 19th, 2012

Although it’s nearly flat for the past year, the Industrial sector has been rising strongly over the past few months:

SECTOR-PERF-1-19-12

Promising earnings forecasts are one of the main reasons for this sector’s momentum, as it’s projected to be one of the top sectors for EPS growth over the next 5 years:

SECTOR-PEG-1-19-12

So far, Caterpillar, (CAT), has been one of the best stocks to buy in 2012 for price gains. If you bought CAT in late 2011, you’d have a nice gain already:

CAT-PERF-1-19-12

Although the market has been climbing so far in 2012, many analysts are forecasting a volatile road ahead in the first half of 2012.  So how can you protect your gains in CAT?

Fortunately, CAT has some of the highest options yields of any Dow dividend stocks, which will help you to protect a large % of your gains, via selling covered calls.

Different strategies you can use to hedge your gains and earn high yields:

1. Sell covered call options further out in time, to capture a bigger premium, and hedge more of your gains. This table uses CAT’s 2011 year-end price as a cost basis, and illustrates how, the further out in time you sell these $105.00 call options, the more option premium $ you’ll receive.

In the table below, the May option pays $7.50, which hedges almost 50% of the $15.11 year-to-date gain for CAT, whereas the Jan. 2013 option pays $13.65, which hedges over 90% of the gain. The higher, longer-term call premiums will also lower your break-even price.

The trade-off is that your annualized yields decrease as you sell further out in time. However, all of these trades achieve double-digit annualized “static yields”, and much higher potential assigned yields.  Static yield equals the call bid premium dividend by the cost basis of the underlying stock, and refers to a scenario in which the stock doesn’t rise above the strike price near expiration, so you keep the underlying shares:

CAT-EXPS-2012-01-19

(You can see more details on over 30 high yield Covered Call trades which we’ve discussed in recent articles in our Covered Calls Table.)

2. If you’re more bullish on the market and/or CAT, you could sell covered call options at a higher strike price, leaving yourself more opportunity for future price gains.

The table below uses CAT’s 1/19/12 closing price as a cost basis, and shows the differences in potential price gains at different strike prices, all expiring in August 2012.

Potential assigned yield refers to the yield on the difference between the stock’s price and the strike price.

In this example, the $105.00 strike price is $.71 below CAT’s $105.71, so if the stock rises above $105.00 near expiration time in August, the underlying shares may get sold/assigned away from you at $105.00.  This is the big trade-off of selling covered calls at a strike price “in the money” – you sacrifice potential future price gains for a higher option payment now.

The other two higher strike prices leave you more room for potential price gains/higher potential assigned yields, but pay lower call option premiums:

CAT-STRIKES-2012-01-19

The above call options pay almost 6 to over 10 times the amount that CAT’s dividends pay during this 7-month trade period.

Selling Cash Secured Put Options:

Conversely, if you’re interested in buying CAT, but you’re leery of its current price, you can sell cash secured puts at a strike price below CAT’s current price, and achieve a lower break-even price.

Selling put options obligates you to potentially have to buy the underlying stock at whatever strike price you sell the puts at.  “Cash reserve” refers to the amount your broker will set aside in your account, to insure that you have the money to pay for the stock, if it gets sold/assigned to you at expiration. For example, the $105.00 strike price requires a cash reserve of $10,500.00, which equals $105.00 x 100 shares of CAT.  (Each option contract corresponds to 100 shares of the underlying stock)

In these August 2012 put options trades, each lower strike price gives you a lower break-even, but also has a lower option premium.  So, you have to decide how aggressive to be – should you “nibble at the edges”, and sell put options further out of the money for a lower break-even, such as the $97.50 strike price below, OR, be more aggressive, and sell at a strike price closer to a stock’s current price, such as the $105.00 strike?:

CAT-PUTS-1-19-12

(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

Financials: CAT’s mgt. efficiency ratios are higher than its peers’.  CAT’s Debt/Equity ratio is higher, but it has an Interest Coverage ratio of 5.9:

CAT-ROE-1-19-12

Valuations: Although CAT’s Price/Book is much higher than its peers, it appears undervalued on a PEG basis, and has enjoyed solid growth during its most recent quarter and fiscal year.  CAT is due to give its earnings report on Jan. 26, 2012.

CAT-PEG-1-19-12

Disclosure: Author is short CAT put options.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

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Hollywood Dividend Stocks With High Yields And Growth

January 13th, 2012

Whether its theme parks, movies, or TV – we all love to be entertained, and modern society rewards greatly those who entertain us. This week we’ve found 3 dividend stocks which profit handsomely from the endless demand for entertainment.  These may be some of the best stocks to buy in 2012 for undervalued growth and income within the Entertainment Industry:

DIS-TWC-VIAB-DIVS

Valuations: Compiling meaningful Industry Avgs. is complicated for these companies – although they all operate within the Cable TV industry, Disney and Viacom also are active in the film industry.

Viacom and Time Warner Cable both look very undervalued on a Next Fiscal Year PEG basis, (P/E dividend by EPS Growth), while Disney is close to the 1.00 undervalued PEG threshold. TWC also looks undervalued on a cash basis – its Price/Free Cash/Share is only 3.15 vs. the 10.05 industry avg.

DIS-TWC-PEG

High Options Yields: These firms have modest to avg. dividend yields, but by using options, you can achieve much higher yields, as seen below.

Covered Calls: Disney’s next annual ex-dividend date isn’t until December, but you can create a much higher “virtual” dividend by selling covered call options, plus, you won’t have to wait until December to get paid – option sales are credited to your account within 3 days of trading, often the same day.  However, unlike qualified dividends, which receive a 15% tax treatment, options are taxed as short term capital gains.

The TWC and VIAB call options now yield over 4 to 6 times the amount of their dividends over the 5-6 month period for these trades.  (The call and put options listed for Disney and Time Warner expire in July, and those listed for Viacom expire in June.)

You can see additional info on over 30 high yield Covered Calls trades that we’ve discussed in recent articles in our Covered Calls Table.

DIS-TWC-CALLS

Cash Secured Puts: What can you do if you’d like to own a stock, but you feel that the stock’s price is too high? You can sell cash secured puts at or below the stock’s current price, get paid your put premium $ now, and have a lower break-even – essentially, you’ll get paid to wait.

If you want to be more conservative, you could sell put options at strike prices even further below a stock’s current price and get an even lower break-even.  The catch is that the further “out of the money” you sell, the less put premium $ you’ll receive.  The key with selling cash secured puts is to only sell puts on a stock that you’d like to own, so that, even if the stock gets assigned/put to you, you end up owning it at a price you’re comfortable with.

Some options skeptics argue that, if you just wait for a market pullback, you can end up owning the stock cheaper anyway.  This may or may not happen, but meanwhile you wouldn’t receive any income by just waiting.

TWC’s puts have a break-even closest to its 52-week low. Similar to the call options, these put options pay 4 to 7 times the dividend payouts during this term:

DIS-TWC-PUTS

(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

Financials: TWC’s Debt/Equity ratio of 3.5 is higher than the industry avg. of 2.16, but its 1.44 Current ratio is better than its industry peers’ 1.06. Viacom has the best ratios of this group:

DIS-TWC-ROE

Performance: Although DIS and TWC are just about flat for the past 12 months, they’ve gathered momentum in the past month.  VIAB h,as been the most loved of the group, having made impressive gains during the past year, quarter, and month, and continues to have its fans thus far in 2012:

DIS-TWC-PERF

Disclosure: Author owns no shares at time of publication, but has always been a fan of Jiminy Cricket.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

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3 Large Cap Tech Dividend Stocks With Double Dividends

January 6th, 2012

Searching for undervalued dividend paying stocks with strong growth?  The Tech sector offers some of the best stocks to buy in 2012 for growth and dependable income. The cash-rich Tech sector gained just 1.03% in 2011, in spite of sector earnings growing by over 18%.  However, Standard & Poors is projecting the Tech sector to achieve the largest 2012 EPS increase, and Tech’s P/E is also currently below its 4-year average:

SP-SECTOR-EPS

(Data Source: Standard & Poors)

3 Large Cap Tech Dividend Paying Stocks - Although Tech isn’t normally known for high dividend stocks, there are now dependable dividend stocks in this sector, including these iconic firms, all of whom sport low dividend payout ratios. Better yet, their dividend growth rate is on the rise – all 3 companies had big dividend increases in 2011-  MSFT: up 25%; INTC: up 16%; IBM: up 15%.

ibm-INTC-MSFT-DIVS

Covered Calls: Want to double or triple your dividends? Selling covered call options is a strategy that allows you to vastly improve upon the dividend yields of a stock. These 3 trades have call options that pay from 3 to 11 times what the dividends pay during their approx. 3-month terms. (All options mentioned in this article expire in April 2012.)  Another bonus is that you receive your option premium $ within 3 days of selling a put or call option. In fact, many brokers, such as Schwab, credit your account the same day.  The covered call strategy also helps you to hedge gains in a stock that you own, as we’ve detailed in previous articles. This strategy is also used for locking in income and/or lowering risk when buying new stocks.

You can find additional details on over 30 high yield Covered Calls trades we’ve discussed in our recent articles in our Covered Calls Table.

IBM-INTC-CALLS

Cash Secured Puts: Selling cash secured puts below or close to a stock’s current price is an alternative strategy to use, if you want to buy shares below the current market price, and have a lower break-even cost.  Your break-even is the difference between the put premium and the put strike price. In the table below, the break-even for MSFT is $23.65, which equals the $27.00 Put Strike Price, minus the $1.10 Put Bid Premium.  As with the call options, these April put options pay many times over what the quarterly dividends pay.

(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

IBM-INTC-PUTS

Valuations: MSFT and INTC both currently have P/E’s close to their 5-year low P/E’s.

INTC, however, recently warned that their 4th quarter revenue and earnings will be negatively impacted by the floods in Thailand: “The company now expects fourth-quarter revenue to be $13.7 billion, plus or minus $300 million, lower than the previous expectation of $14.7 billion, plus or minus $500 million. Sales of personal computers are expected to be up sequentially in the fourth quarter. However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages. The company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012.” (Source: Intel website)

Will Intel regain these lost sales in the second half of 2012? Even with the supply issues, he current estimate of under 1% 2012 growth for Intel seems very low, especially since Intel has traditionally been very conservative in its earnings projections, and had 4 consecutive quarterly upside earnings surprises in 2011.

IBM’s new CEO, Ginni Romett, has already made a new acquisition, buying cloud software testing firm Green Hat.  IBM also had 4 2011 consecutive earnings surprises, (low single-digits), while Microsoft had 3 much larger ones, (approx. 9% to 19%).

IBM-INTC-PEG

Financials: Although IBM carries the highest debt load, but they earn enough $ to cover their interest payments by 53 times – quite a cash machine, to say the least.

IBM-INTC-ROE

Performance:  IBM and Intel both outperformed the Tech sector in 2011, but MSFT got no respect.  However, MSFT is up the most so far in the first few days of 2012:

IBM-INTC-PERF

Disclosure: Author is long INTC and IBM shares, and short INTC calls at the time of publication.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

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Profiting Now From A 2014 US Housing Rebound

January 4th, 2012

Do you think the US housing industry will bounce back in 2012 or 2013? The housing recovery theme has attracted more believers in recent months, as US economic data has mostly improved, and homebuilder stocks have risen.

Warren Buffett has been calling for a housing rebound for quite some time, and is predicting the start of a recovery in 2012, citing 1 million housing starts/year as a key target of industry growth. The NAHB reported that the pace through Nov. calls for 685,000 starts in 2011, which is 98,000, (16.7%), higher than 2010. The Northeast jumped 41%, the West rose 36%, the South rose 12%, and the Midwest fell 8%.

Fed Chairman Bernanke has also stated in a Fall 2011 speech that, “Over the medium term, housing activity will stabilize and begin to grow again, if for no other reason than that ongoing population growth and household formation will ultimately demand it”.  A Sept. 2011 Harvard University study forecasts the amount of new US household formations during the decade between 2010 and 2020 will be at least 11.8 million.

Toll Bros., (TOL), a mid- to upscale market builder, has survived the housing crash reasonably well, and was, unexpectedly, one of the best stocks to buy in 2011 for price gains, as it rose over 7%, vs. 0% for the S&P.  TOL continues to capitalize on cheap land prices, via a combination of land purchase options and outright purchases.  They’ve taken substantial impairments on their existing pre-crash land portfolio.

TOL is one of the few US homebuilder stocks who have positive earnings, however, this is still due to the use of accrued tax benefits which they’ve accumulated from prior years’ losses. They have tax benefits worth $104 million-plus that they can still write off, as of 10/31/11.  Toll Bros. also has one of the lowest debt loads in the housing industry, with a Debt/Equity Ratio of .65.

TOL-PEG

TOL’s recent quarter EPS growth decline was due to FY 2011’s fourth quarter only including a tax expense of $0.2 million, vs. a $59.9 million net tax benefit in FY 2010’s fourth quarter. On a pre-tax basis, TOL’s income rose by nearly $25M , as they reported FY 2011 fourth-quarter pre-tax income of $15.3 million, vs. FY 2010’s fourth-quarter pre-tax loss of $9.5 million.

TOL has also moved into lucrative urban markets, such as New York’s Manhattan and Brooklyn boroughs, and DC suburbs, where housing in trendy neighborhoods has traditionally been a tight, lucrative market. Their 2011 10K report states, “In order to serve a growing market of affluent move-up families, empty-nesters and young professionals seeking to live in or close to major cities, we have developed and are developing a number of high-density, high-, mid- and low-rise urban luxury communities and are in the process of converting several for-rent apartment buildings to condominiums”

“These communities, which we are currently developing on our own or through joint ventures, are located in Dublin and San Jose, California; Singer Island, Florida; Chicago, Illinois suburbs; North Bethesda, Maryland; Hoboken, New Jersey; the boroughs of Manhattan and Brooklyn, New York; Philadelphia, Pennsylvania and its suburbs; and Leesburg, Virginia.”
“We believe that the demographics of the move-up, empty-nester, active-adult, age-qualified and second-home upscale markets will provide us with the potential for growth in the coming decade.  According to the U.S. Census Bureau, the number of households earning $100,000 or more (in constant 2010 dollars) at September 2011 stood at 24.3 million, or approximately 20.5% of all U.S. households. This group has grown at four times the rate of increase of all U.S. households since 1980.” (Source: Toll Bros. 12/22/11 10Q Report)
TOL’s pre-tax income and revenue breakdown by geographic segment shows mostly improving trends, and also shows that the North and Mid-Atlantic regions are currently driving their profits, which is in line with the Northeast’s housing starts gains we mentioned earlier. Toll noted that its North segment’s 2011 revenue decrease was mainly due to many communities there being sold out:
TOLL-GEOG-INC
If you feel that the US employment picture will eventually improve in 2013, and improve Toll Bros’ sales and profitability along with it, TOL may be one of the best stocks to buy in 2012 for a long term speculative US housing trade, via selling cash secured puts, below TOL’s current share price. There are LEAPS available, (long-term equity appreciation security options), which don’t expire until Jan. 2014, which would give these trades the benefit of time to develop:
TOL-PUTS
The table illustrates how the put options’ yields and premiums decrease, the further below TOL’s current stock price the put strike price is. As always, there’s a trade-off between risk and reward. Although the annualized yields aren’t very high on these trades, unlike dividends, you’ll receive your put premium $ within 3 days of selling put options. Your broker will hold a cash reserve equal to the amount of puts that you sell, times the strike price, times 100. (Each options contract corresponds to 100 shares of the underlying stock.)  For example, selling one $13.00 put option requires a cash reserve of $1,300.00, and obligates you to potentially have to buy 100 shares of TOL at $13.00, if it falls below $13.00 before expiration in Jan. 2014.  Generally, most options aren’t exercised until close to or at expiration, because it’s usually more profitable for the option buyers to just trade the options themselves, instead of selling the underlying stock.
The other attraction that selling options offers is tax deferral: If you’re able to let these options expire in Jan. 2014, your tax bill won’t be due until April 2015. So, you’ll get paid up front, and have tax-deferred use of the option $ you receive for over 2 years.
(Note: You can see more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Although Toll doesn’t pay dividends, they do have a 20 million share buyback program, which they started in 2003, and greatly accelerated in 2011. The plan still has 8,786,000 shares that can be repurchased:
TOL-SHARE-REPURCH
One thing to beware of in this long term speculative trade, is that there’s a fair amount of short interest against TOL, and many other US homebuilders. In comparison, Lennar has a short float nearing 20%, and a higher beta of 1.71:
HOME-TECH'L
The homebuilders have had quite a runup in recent months, and TOL looks overbought on a stochastic chart, so you may be able to achieve even higher put premiums by waiting for the next pullback, when TOL’s share price should decline, and its put prices rise.
TOL-CHART

Disclosure: Author has no positions in TOL, LEN, or DHI at the time of publication.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved

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An Easy Strategy For Hedging 2011 Apple Gains

December 30th, 2011

If you were blessed with enough foresight to buy AAPL earlier in 2011 when it dipped, you probably have a profitable unrealized gain right now.  Once again, Apple was one of the best stocks to buy this year for price gains, rising over 24%, from $325.64, to approx. $405.12, as of 12/29/11.

Even though Apple doesn’t currently pay dividends, and isn’t normally part of our coverage of dividend stocks, in last week’s article we wrote about a lucrative, conservative strategy you can use to create your own AAPL dividend that has a higher yield than many high dividend stocks do.

This week’s article details one more way you can create decent income from Apple, and/or, if you now own AAPL shares, you could lock in a good % of 2011’s price gains. With so much uncertainty ahead in 2012 – a US presidential election, ongoing Eurozone debt problems, etc., many forecasters are predicting another volatile year in the market.

Selling Covered Calls is a strategy for hedging some of your downside risk on a stock, that offers you immediate income, and also has tax deferral advantages.  Since you only pay taxes on your options gains for the tax year in which the option expires or is closed out, you can often get tax-deferred use of your option income for 1-2 years.

For example, suppose on Jan. 3, 2012, you sell AAPL call options that expire in Jan. 2013. You get paid the call premium within 3 days of the sale, but you don’t have to report this income and pay taxes on it until April 2014, if you let it expire in Jan. 2013.

You can see more info on over 30 high yield Covered Calls trades discussed in our other recent articles in our Covered Calls Table.

Some of the key decisions to make when selling covered call options are:

1. How far out in time to sell covered calls – Generally, the further out in time you sell, the higher the premium, due to the time value of the options.  The trade-off, however, is the additional uncertainty of going further out into the future. Currently, there are AAPL options available in 2012-Jan, Feb, March, April, and Oct.; Jan 2013; and Jan 2014.  AAPL usually has high options yields and strong volume/liquidity, and there are many options to choose from.

This table below compares the current expiration months, using the same $410.00 strike price, with AAPL’s 12/29/11 price as a cost basis.

Call option premiums increase as you go further out in time, giving you a lower break-even, but a lower annualized yield also:

AAPL-TIME-405

“Static Break-Even” equals the difference between the stock’s cost of $405.12, and the call bid premium for each month’s strike price. If the stock remains static, (it doesn’t rise above the strike price at or near expiration), then the stock usually doesn’t get assigned/sold away from you. You keep your shares, and move on.  If the stock does rise above your strike price, your AAPL shares will get assigned/sold, and you’ll earn an additional profit. (In general, most assignments occur at or near the time of expiration.)

In the above examples, we used a $410.00 strike price, which is $4.88 above the $405.12 cost of AAPL.  This represents your potential assigned gain.  To calculate your total gain, just add the call bid premium to the potential assigned gain. Ex.) For the March 2012 $410.00 call, you’d receive a $21.05 call bid premium. If AAPL rises higher than the $410.00 strike price, most likely your shares will be sold/assigned, and you’ll also earn an additional $4.88 in price gains, for a total gain of $25.93.

How to hedge your 2011 price gains: The table below uses AAPL’s 1/3/11 $325.64 price as a cost basis, and shows what % of AAPL’s year-to-date 2011 profit you could hedge, via selling $410.00 covered calls in different expiration months.  As usual, the further into the future you sell, the higher premium you get, and the more of your profit you hedge, but your annualized yield decreases. (Note: The call bid premium is based upon what the current bid/offer is for each option, as opposed to the ask/sell price. There’s often quite a spread between the two, so you may be able to sell at a higher premium than the current call bid premium):

AAPL-TIME-325

2. Which call option strike price should I sell at – i.e., Should I choose an option strike price closer to, or much higher than the stock’s current price?

Option sellers usually base this decision upon their take on the market, and the stock’s future prospects for price gains.  The more bullish you are on a stock, the further “out of the money”, (above the stock’s current price), you may wish to sell calls at. The reason being that, when you sell a call option, you’re obligating yourself to potentially have to sell the stock in the future, at your sold call option’s strike price, no matter how much higher the stock rises. (Note: 1 option contract corresponds to 100 shares of the underlying stock.)

So, if you feel that AAPL might rise far beyond its current $405.00 price, (as do several analysts), you’d probably choose to sell at a higher strike price than a more bearish investor, who is more interested in locking in current price gains, and creating more immediate income, than in speculating on potential future price gains.  Indeed, that’s one of the other attractions of selling covered calls, you know exactly what your upside potential and your downside break-even are before you make the trade.

The trade-off is that call options further above the stock’s price, (out of the money), have a lower premium than those closer to the stock’s price, (at the money), or below a stock’s price, (in the money).

Here’s a comparison of various strike prices, using $405.12 as AAPL’s cost basis to further illustrate this point:

AAPL-STRIKE-405

Your potential assigned price gain per share increases with each higher strike price. However, your downside break-even price also increases.

The table below compares how much % of year-to-date AAPL profit you can hedge, using different strike prices:

AAPL-STRIKE-325

Again, your % of profit hedged declines, as you sell at a higher strike price, but your potential for additional price gains increases $5.00 with each higher strike price, in this example.

A bullish investor might choose a higher strike price for AAPL, leaving himself more potential for additional price gains on top of the current $79.48 year-to-date profit. (The additional price gains are calculated as the difference between $405.12 and the strike price.)  A less bullish. or conservative investor may wish to sell at a lower strike price, and hedge more of his year-to-date profit.  He’d also have a lower break-even.

Trading Range: If you sold a call at the $420.00 strike price from the table above, your trading range would be:

Max. Price Equivalent of $470.75, ($420.00 strike price plus $50.75 call bid premium), and Downside Break-Even of $274.89, ($325.64 stock cost basis less $50.75 call bid premium).

Valuations: Small wonder that AAPL is so popular with institutional and individual investors, when you consider its strong growth has happened during a period of recession and slow economic growth. 

AAPL-PEG

Financials: There’s not much to quibble about with AAPL’s financial metrics either, although many AAPL shareholders would like to see the company join other Tech firms, such as Cisco, and enter the ranks of dividend paying stocks. However, for dividend investors, selling covered calls and cash secured puts offer 2 lucrative alternatives for creating income from AAPL.

(Note: You can see details on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

APPL-ROE

Disclosure: Author is short puts of AAPL.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved

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How To Creat An Apple Dividend

December 23rd, 2011

Apple still isn’t part of the dividend stocks universe, in spite of its shareholders’ ramped up demands for the company to pay out some of its huge $51 billion cash pile as dividends. However, there’s an effective, lucrative strategy that we’ve often used, via which you can earn a higher yield on AAPL than on most high dividend stocks.

If you had been able to buy AAPL at $291.60 in 2011, would you have taken that risk?  How about $302.50?  As AAPL’s 52-week range is $310.50 to $426.70, both prices would have been quite profitable.  AAPL has been one of  best stocks to buy in 2011 for price gains, having risen 23.56% year-to-date.

But if you’re an income investor, not a trader, and AAPL still doesn’t pay dividends, what can you do?

Solution: Create your own “dividend” from Apple via selling cash secured put options below the current stock price, to give yourself the most desirable combo of a lower break-even and highest yield. Even Even though AAPL doesn’t currently pay dividends, we’ll show you below that it does have high options yields which can be very lucrative. The trade-off to manage is that the lower strike price you sell the put options at, the lower your break-even should be, but the lower your yield is.

(Note: You can see more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

Here are 2 examples of 2011 AAPL put-selling trades:

1. Jan. 2011 Cash Secured Put Selling Trade:

On Jan. 18, 2011, we sold Jan. 2012 $330.00 cash secured puts for $38.40, creating a break-even of $291.60.  These put options are worth only $.44 each at the time of this writing.

AAPL closed at $340.65 the day of this first trade, and had a 200-day moving avg. of $280.87, and a 50-day moving avg. of $322.64.

Our break-even of $291.60 was 3.82% above AAPL’s 200-day avg., and 9.62% below its 50-day avg.

AAPL-JAN TRADE

2. Oct. 2011 Cash Secured Put Selling Trade:

On Oct. 4, 2011, we sold July $345.00 cash secured puts for $42.50, creating a break-even of $302.50. These put options are worth only $19.15 each at the time of this writing.

AAPL traded for $372.50 the day of this trade. Its 200-day moving average was $350.55, and its 50-day moving average was $382.55.

Our $302.50 break-even was far below both the long and short-term avgs: 14.27% below the 200-day avg. and 20.9% below the 50-day avg.

AAPL-OCT TRADE

Our Oct. trade was certainly aided by the much higher market volatility present then, as the VIX “fear factor” hit a high of 46.88 the day we made our Oct. trade, vs. its 15.87 close when we made our Jan. trade.

This much higher volatility allowed us to sell put options at a strike price much further “out of the money” in Oct., ($27.50 below AAPL’s Oct. 4th price), vs. selling only $10 below AAPL’s Jan. 18th price.

Timing: In hindsight, the January 2011 trade was a riskier one, even though the break-even was lower, for a couple of reasons:

1. Our break-even was above AAPL’s 200-day average.

2. AAPL had not  entered the oversold region yet. You can see at the far left on the stochastic chart below, (bottom chart), that although we placed the Jan. trade just a few days before AAPL bottomed out at a $326 level, it wasn’t until late Feb. that AAPL entered the oversold low point on the chart:

AAPL-BlueChart

We made the Oct. trade when AAPL hit an oversold “valley” on the stochastic chart, and this better timing has played out thus far in accelerating the profit in this trade.

Here’s how the 2 trades compare in amount of total profit realized over roughly similar time periods. The Jan. trade only realized 20.80% of its potential profit in 72 days, while the Oct. trade has realized nearly 55% of its profit in 79 days:

AAPL-2 TRADE COMP

The lesson from these 2 trades is to try to wait for oversold conditions before selling cash secured puts. All other things being equal, this should help you to realize your potential profit sooner, and should also improve your cash flow. This is another example of the old Buffett saying, “Be greedy when others are fearful, and fearful when others are greedy”. In other words, some of your most profitable opportunities will emerge when the market looks bleak.  We made the Oct. trade on the heels of the -9.79% Sept. pullback, when US economic data was less rosy, and the European crisis was dominating the news – all in all, a rather dark atmosphere…

What action to take now: Keep this idea in your back pocket and wait.  AAPL is currently overbought on the stochastic chart, so wait for the next market downturn, and keep an eye on AAPL’s charts to see when it hits a “valley” low point at 20 or below on its stochastic chart. Volatility has subsided somewhat, but it’ll most likely return soon enough in 2012, given all of the current domestic and global economic and political issues in the news.

To walk through the details and mechanics of a cash secured put trade, please see this article: 2 High Yield Strategies For Hedging Dow Dividend Stocks, which also illustrates a covered call options trade.

The Covered Calls trades discussed in our other recent articles are listed in our Covered Calls Table.

Disclosure: Author is short puts of AAPL.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved

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2 Defensive Dividend Stocks Outperforming The S&P

December 16th, 2011

Looking to play defense in the market? As the market has vacillated between up and down months since July, income investors are seeking dividend paying stocks with less correlation-i.e., dividend stocks which are defensive during pullbacks, but still share in rallies. It has become more challenging to find such an animal, but they are out there. However, defensive stocks aren’t always the best stocks to buy for growth.  These two giant Healthcare dividend stocks, Lilly and Pfizer, have both outperformed the S&P in 2011, in both up and down markets:

LLY-pfe-perf

Performance-wise, LLY and PFE flip-flopped in the Sept. and Nov. pullbacks and the Oct. rally. Lilly just got a nice boost recently, after an analyst said that LLY’s anti-Alzheimer drug could double the share price, if proven to be effective, which he thought it had a 10-20% chance of.

Dividends:

LLY-PFE-DIVS

Financials: Lilly’ metrics outshine Pfizer’s, and also its Big Pharma peers.

LLY-PFE-ROE

Options: The put and call options trades listed in this article expire in April for LLY, and March for PFE.

Covered Calls: Although Lilly and Pfizer’s don’t have high option yields when compared to other stocks we’ve covered recently, such as CAT or CMI, both of the options trading strategies listed here give you a chance to significantly improve upon these stocks’ dividend yields over this 4-5 month period.

(You can find more details on these and more than 30 high yield covered calls in our Covered Calls Table.)

LLY-PFE-CALLS

Cash Secured Puts:  LLY’s put options offer more yield than PFE’s.  Since PFE and LLY have made 17% to 20%-plus gains year-to-date,  selling cash secured puts below the current stock prices might be the most conservative approach you could take in potentially accumulating shares. (Note: Put sellers don’t receive dividends.)

(There are more details on these and over 30 high yield options trades in our Cash Secured Puts Table.)

LLY-PFE-PUTS

EPS/Valuations: Due to issues with patent expirations, the future sales forecasts are sub-par for LLY and nearly flat for PFE. As we mentioned earlier though, there’s a trade-off between growth and defense in these stocks.

LLY-PFE-EPS

Disclosure: Author has no positions in LLY or PFE at the time of publication.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved

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3 Solid Industrial Dividend Stocks With High Options Yields

December 9th, 2011

In last week’s article, we showed that the Industrial sector has the 2nd best record for beating & meeting 3rd quarter earnings estimates. It also has the 2nd highest EPS growth estimate for the next fiscal year, trailing only Tech. This week we searched for additional attractive dividend paying stocks in the Industrials sector, focusing on finding the best stocks to buy for growth, valuation, financial metrics, and high options yields:

ETN-ITW-TYC-DIVS

Covered Calls: Although these aren’t high dividend stocks, you can easily earn a much higher overall yield from them, by combining their dividends with high call options yields.

These call options pay up to 11 times more than the dividends during these 4-5 month trades.

The Static Yield refers to the combination of the call option and dividend yields, which represents your total income if the underlying stock isn’t If the stock doesn’t rise above the call strike price at or near expiration.  The Total Potential Yield includes the potential price gain that you’ll realize if the stock’s price does rise above the call strike price.  For example, for ETN, you’d receive an additional $1.07/share, if the stock rises above $45.oo and gets assigned/sold away from you at expiration.

(You can see more details on these and more than 30 other high yield covered call trades in our Covered Calls Table.)

ETN-ITW-CALLS

Cash Secured Puts: This is a more conservative approach to take: Sell cash secured puts at a strike price below the stock’s current price, so you achieve an even lower break-even price.

As an example, selling ITW $45.00 March put options gives you a $42.20 break-even, which is approx. only 8% above ITW’s 52-week low, as opposed to being over 18% above its low, where it was at the time of publication.

Of course, there’s no guarantee that the stock won’t ge lower than your break-even price, but using this put strategy will decrease your risk more than if you’d just bought the stock outright.  As with the call options, there’s a big payoff disparity between the quarterly dividends and the options in these put trades, with put option premiums that are as high as 12 times the dividends.

(You can find more details on these and over 30 other high yield options trades in our Cash Secured Puts Table.)

ETN-ITW-PUTS

EPS: The EPS growth for the most recent fiscal year, quarter, and next fiscal year looks solid for all of these stocks:

ETN-ITW-EPS

Valuations: All of these firms have low Price/Sales and Next Year PEG’s that are right around the undervalued threshold of 1.00.:

ETN-ITW-PEG

Financials: These firms’ all have low debt loads, and their mgt. ratios are generally in line or better than their peers.

ETN-ITW-ROE

Technical Data: As their Relative Strength is in the low 50’s, all 3 stocks are in the neutral, “not oversold/not overbought” region.:

ETN-ITW-BETA

Company Profiles:

Eaton (ETN): Founded in 1911, Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuels, hydraulics and pneumatic systems for commercial and military use; plus truck and auto drive-train and power-train systems for performance, fuel economy and safety. Eaton has approx. 73,000 employees and sells products in over 150 countries.

Illinois Tool Works (ITW): Another multibillion dollar firm with nearly 100 years of history, ITW designs and manufactures fasteners and components, equipment and consumable systems and a large array of specialty products and equipment for its worldwide customer base. ITW owns more than 840 small businesses, which are decentralized, and operate in various markets, such as: industrial packaging, power systems/electronics, food equipment, and construction products, among many others.

Tyco Int’l (TYC): Tyco is a leading provider of security products and services, fire protection and detection products and services, and industrial valves and controls. Tyco had 2011 revenue of more than $17 billion and has more than 100,000 employees worldwide.  Tyco owns the dominant US residential security firm, ADT.

Disclosure: Author has no positions in ETN, ITW, or TYC at the time of publication.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved

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