Consumer Goods Dow 30 component Procter & Gamble, (PG), languishes at the bottom of our High Dividend Stocks by Sector consumer goods table, with a lower dividend yield, (2.82%), than the other dividend paying stocks in this sector table.
Looking at other solid Dow 30 giants, their dividend yields were equally unimpressive. For example, Coke, (KO), has a 2.87% dividend yield, and Exxon only pays 2.24%. Is there a way to invest in these great companies, but get paid a higher yield? Absolutely. By selling long-term puts, with a January 2011 expiration, you can earn nearly 3 times the current dividend yields on these stocks. In addition, you’ll get paid this money now, and not have to wait to collect it over the next year. (Brokers have to deposit the option premium money in your account by 3 days after the trade).
Here’s a table illustrating this strategy for these 3 stocks:
| STOCK |
SYMBOL |
PRICE |
ANNUAL YIELD |
JAN 2001 PUT STRIKE PRICE |
JAN. 2011 PUT YIELD ANNUALIZED |
| Coke |
KO |
$57.18 |
2.87% |
$55.00 |
7.74% |
| Procter & Gamble |
PG |
$62.48 |
2.82% |
$60.00 |
8.40% |
| EXXON |
XOM |
$74.87 |
2.24% |
$70.00 |
7.76% |
Here are some other considerations about selling puts vs. just buying stocks and collecting dividends:
1. Taxes: Your put gains will be taxed at your personal tax rate, not the 15% qualified dividend tax rate. Compare your personal rate to see if it’s worth it to you. For example, if you had a Federal tax rate of 35% and a State tax rate of 10%, you’d net 3.48% for the Coke put, vs. 2.44% for the Coke dividend, after taxes. The lower your personal tax rates are, the more advantageous the put selling strategy is, in terms of yield.
2. Capital Gain Timing: Your put gains are taxable when the put expires, is assigned, or you close out your postion. So, in the above examples, if you simply let the puts expire in 2011, you’d be liable for taxes on these gains on your 2011 taxes.
3. Price Appreciation: The put premium you receive now is the only income and gain you’ll earn on this trade, vs. possible future price appreciation in the stock.
4. Long-term exposure: Although your break-even will be lower on the stock after you’ve sold puts, you’re still obligated to buy the stock, if it gets assigned to you at any time before expiration. So, if you’re wary of another market meltdown , you may not want to sell puts this far out in time. There are other premiums available, with 2010 expiration dates that would accomplish this. Just keep in mind that your capital gain would then be in 2010, not 2011.
Disclosure: Author long XOM, PG
Disclaimer: This article is for informational purposes only.
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