Best Stocks to Buy Right Now In 2011 and 2012

3 High Dividend Stocks Bucking The Spring Pullback

May 11th, 2012

The S&P 500 has pulled back approx. 4% since its early April highs, which begs the question, are there any dividend paying stocks that have beaten the market since then? We took 3 dividend stocks from our High Dividend Stocks By Sector tables, and researched how they’ve done in all of the various rallies and pullbacks since last summer.

These 3 stocks have all held up better than the market in pullbacks, and have also participated in rallies. Not surprisingly, these defensive dividend stocks hail from the Healthcare and Utilities sectors: NextEra Energy, (NEE), Xcel Energy, (XEL), and Eli Lilly Co., (LLY):

LLY-NEE-PERF-LONG

(We used 5/11/12 intraday prices in our tables.)

In addition to their defensive characteristics, these stocks have been some of the best stocks to buy for price gains since Dec. 2010, and all 3 have beaten the market since the beginning of last summer’s market meltdown, which began right after July 7th, 2011. Even with its strong showing since last fall, the S&P is still flat since its highs last July:

LLY-NEE-PERF-YTD

Dividends: NEE raised its quarterly dividends to $.60/share, from $.55 in 2012, and XEL raised its dividend to $.26, from $.25 in 2011. LLY hasn’t raised its dividend since 2008, when they raised to $.49, from $.47, right in the midst of the market turmoil.

LLY-NEE-DIVS

Covered Calls: If you want to improve upon its dividend yield, LLY’s near-the-money covered call options currently pay over 4 times its quarterly dividend in the October trade listed below.

(LLY is listed along with over 30 high yield options trades in our Covered Calls Table.)

LLY-CALLS

Cash Secured Puts: Another lucrative options trading strategy is to sell cash secured put options below a stock’s price, so that you can achieve a lower potential entry cost. The other benefit of this strategy is that, as with selling call options, you’ll get paid your put premium $ within 3 days of making the trade, often even the same day.

The differences between the 2 strategies are: Put sellers don’t collect dividends, and they also don’t buy the underlying stock in order to place the trade. Instead, they may have the stock sold/assigned to them at expiration, if the stock’s price is below their strike price around that time. Similar to the covered call trade, this put option pays over 5 times what the dividends pay for this 5-month term.

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

LLY-PUTS

Earnings Growth & Valuations: Although Utilities aren’t known for growth, NextEra did put up good numbers in its most recent quarter, and is projected to grow over 9% in its next fiscal year. NEE is trading much closer to the low range of its 5 year P/E range. Lilly, along with many of is peers, had a mediocre quarter, thanks to ongoing drug patent expirations, but it’s projected to bounce back next year, and actually has an undervalued PEG of .85:

LLY-NEE-PEG

Financials: All 3 of these defensive dividend stocks have financial metrics that are superior to their peers:

LLY-NEE-ROE

Disclosure: Author had no positions in any of the above stocks at the time of this writing.

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

Tags: best stocks to buy, call options, cash secured puts, covered call, covered calls, defensive dividend stocks, dividend, dividend paying stocks, dividend stocks, dividend yield, dividends, high dividend stocks, high yield options, Lilly, LLY, NEE, options trading strategy, put option, XEL
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The Top Dow Dividend Stocks For First Quarter 2012 Earnings

May 4th, 2012

25 of the 30 Dow Jones Industrials have reported 1st quarter 2012 earnings so far. 18 firms have reported positive growth, and 7 have reported negative growth, with the range running from Boeing, (BA), with 54% year-over-year 1st quarter growth, down to beleaguered Bank of America, (BAC), with -82%. These 2 Dow dividend stocks reported the best 1st quarter 2012 earnings growth year-over-year: Boeing and Caterpillar:

BA-CAT-Q1-2012GRWTH

CAT’s share price has fallen 0ver 7% since its 4/25/12 report, as of 5/3/12, even though it beat earnings estimates by over 11%, by posting a record $1.586 billion in earnings, and also raised its 2012 guidance from a $9.25 EPS midpoint range, up to a $9.50 EPS midpoint. CAT says that this $9.50 EPS will give them their 2nd record earnings year in a row.

CEO Oberlmann stated, ““These outstanding results demonstrate our continued focus on execution and controlling costs as we increase production and expand capacity to meet increasing demand from our customers. We’re seeing strong global demand for most mining products and significant growth in replacement demand for products in the United States, which more than offset slowing in China and Brazil”. (Source: CAT website)

The acquisition of mining equipment giant Bucyrus added over $1 billion to quarterly sales, and the Motoren-Werke acquisition added $143 million in sales. These acquisitions added approx. $53 million in quarterly profits, mostly attributed to Bucyrus.

CAT’s global reach has given them a diverse geographic sales base:

CAT-GEOG-SALESQ1

CAT’s 3 major segments all had significant revenue increases:

CAT-REV-SEGMENTS-Q1

Earnings Valuations: With their strong earnings, CAT and BA both look undervalued on a P/E and PEG basis vs. their industries. BA is near the low end of its 5-year P/E range of 11.70 to 28.93. CAT’s current 13.87 P/E is also much closer to the low end of its 5-year P/E range of 7.89 to 39.86

BA-CAT-PEG

Cash Secured Puts: , If the market hasn’t rewarded CAT’s share price, even with all of this positive news, how should you play it?

One conservative strategy is to sell cash secured put options below a stock’s current price, thereby achieving a lower break-even cost. You won’t receive any dividends, but you’ll be paid the put option $ within 3 days of selling the puts. Your broker will hold/secure enough funds in your account to pay for 100 shares at whatever strike price you sell the put options at. (In this example, the broker would hold $10,000.00: 100 shares x the $100.00 strike price.)

In general, you’ll receive higher option premiums the further out in time that you sell. At expiration time, if CAT is below $100.00, you’ll be assigned/sold 100 shares at $100.00 for each put contract you sold. However, your net cost will only be $91.10, (the $100.00 strike price minus the $8.90 put bid premium.)

Due to its higher volatility, CAT has high options yields, which outpay its quarterly dividends significantly. There are put option strike prices at every $2.50 increment near the money – $97.50, $95.00, $92.50, etc., so the more conservative you want to be, the further below the stock price you’d sell puts at, for an even lower break-even:

CAT-BA-PUTS

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

Covered Calls: Alternatively, if you’re moderately bullish, you may want to consider selling covered call options, which also allows you to collect dividends, and to hedge your risk, via receiving call option premiums. Although CAT or BA aren’t high dividend stocks, you can greatly increase your dividend income from them by selling covered calls.

In the trades listed below, the call options outpay the dividends by over 3 to 8 times.

In the BA trade, BA’s $77.50 strike price is much closer to its $76.83 share price, so your potential assigned price gain is only $.67/share, (the $77.50 strike price minus $76.83 share price). CAT’s $105.00 strike price is further above from its share price, which gives you the potential for a $4.33/share assigned price gain, which you’d realize if CAT is above $105.00 at or near expiration in August.

If CAT doesn’t rise above $105.00 then, your “Static Yield” profit would consist of the $.46/share in dividends and $4.05/share in call option premiums that you received when you sold these options. Selling covered calls requires you to buy the shares first, in 100-share lots, as each option contract corresponds to 100 shares of stock.

BA-CAT-CALLS-5-3-12

(You’ll find more details for over 30 other high options yields trades in our Covered Calls Table.)

Dividends: BA raised its quarterly dividend to $.44, from $.42 in Feb. 2012. CAT raised its quarterly dividend to $.46, from $.44 in 2011. BA is going ex-dividend next week, with an ex-dividend date of May 9, 2012.

BA-CAT-DIVS

Financials: Both CAT and BA have impressive mgt. efficiency ratios. Given that they’re in such capital-intensive businesses, their interest coverage more than offsets their debt levels:

BA-CAT-Q1-12-ROE

Performance & Technical Data: BA’s year-to-date price gain was mostly achieved after its earnings report, whereas CAT’s was logged before its report. CAT’s Relative Strength Index (RSI) figure of 35.17 is in the moderately oversold region, just below the 40 threshold.

BA-CAT-PERF-TECH

If you’re looking for dividend paying stocks with undervalued growth, BA and CAT appear to be among the best stocks to buy.

Disclosure: Author is short BA and CAT put options.

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

Tags: ba, bac, best stocks to buy, boeing, call option, call options, cash secured puts, cat, caterpillar, covered call, covered calls, dividend, dividend paying stocks, dividend stocks, dividends, Dow dividend stocks, ex-dividend date, high options yields, put option, put options
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Two Auto Parts Dividend Stocks With Undervalued Growth

April 27th, 2012

Since the US auto industry had its best sales quarter in 4 years in Jan-March, and overall world sales are also expected to increase in 2012, you’d think that auto parts companies would be fairly valued already. But, that’s not the case, even with standout growth apparent in some firms. We found 2 solid dividend paying stocks within this sub-industry that are undervalued on many metrics: Magna International, (MGA), a Canadian firm, and Standard Motor Products, (SMP), a US firm. Magna sells its parts to Original Equipment Manufacturers, and Standard sells its parts in both the aftermarket segment and also to Original Equipment Manufacturers. (More detailed profiles are at the end of this article.)

Both of these dividend stocks had strong growth in their most recent quarter, and have good growth forecasts for their next fiscal year. However, their P/E’s are way below industry avgs., making them look undervalued on a PEG ratio basis. MGA’s current 10.72 P/E is approx. in the middle of its historic P/E range of 7.93 – 14.03, while SMP’s 5.44 P/E is actually below its historic range of 7.24 – 27.97. Both stocks are also cheap on a Price/Book and Price/Sales basis:

MGA-SMP-PEG

Even though it’s up over 35% in 2012, MGA still looks undervalued. SMP is down over -24% this year:

MGA-SMP-PERF

Dividends: MGA and SMP both increased their quarterly dividends in 2011 and 2012 – MGA went from $.18 in 2009, to $.25 in 2011, and raised it again, to $.275, in 2012. SMP raised its dividend from $.05 to $.07 in 2011, and again to $.09 in 2012:

MGA-SMP-DIVS

Covered Calls: Want to rev up the dividend yield on these stocks? You can do it via selling covered call options: Both stocks have relatively high options yields which you can use to turn them into short term high dividend stocks. MGA’s call options yields outpay its next 2 quarterly dividends by over 5 to 1. Click here for a blow-by-blow outline of selling covered calls.

MGA-SMP-CALLS

(You can find more details for over 30 other high options yields trades in our Covered Calls Table.)

Cash Secured Puts: This is a strategy to use if you want to earn some option income now, with the potential of having a stock put, (sold), to you in the future.

SMP has higher put options yields in the 2 trades listed below. SMP’s August $15.00 put currently pays just over 10%, on a 4-month term, for a very high annualized yield of over 33%.

You’re basically getting paid to wait, with the possiblity of having SMP put/sold to you at the $15.00 strike price, if SMP goes below $15.00 at or near expiration. However, your break-even cost would be $13.45, due to the $1.55 put premium you received when you made the put sale. As with the calls, these put options pay a lot more than the dividends do over the next 4-5 months. (Note: Put sellers don’t receive any dividends.)

Unlike selling covered calls, when selling cash secured put options, you don’t buy the underlying stock first. Instead, your broker will “secure”, i.e. hold, an amount equal to 100 times the strike price of the put option you sell. In the SMP example below, you’d sell 1 $15.00 put option.

Since each option corresponds to 100 shares of the underlying stock, your broker would hold $1500.00 for every $15.00 put option that you sell. At expiration time in August, you’ll either end up with 100 shares of SMP being sold to you, or the $15.00 put will expire worthless.

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

MGA-SMP-PUTS

Financials: Both firms have better Mgt., debt, and margin metrics than industry avgs., but SMP is the winner in all categories, except for debt. SMP has a very impressive Interest Coverage ratio of 17.9:

MGA-SMP-ROE

Profiles:

Magna International: With 286 manufacturing operations and 88 product development, engineering and sales centers in 26 countries on five continents as of Q4 2011, Magna is the most diversified automotive supplier in the world. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers (OEMs) of cars and light trucks in our three geographic segments – North America, Europe, and Rest of World (primarily Asia, South America and Africa).

Magna’s capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; metal body & chassis systems; mirror systems; exterior systems; roof systems; electronic systems; powertrain systems as well as complete vehicle engineering and assembly. (Source: MGA website)

Standard Motor Products: SMP is a leading independent manufacturer, distributor and marketer of replacement parts for motor vehicles in the automotive aftermarket industry, with an increasing focus on the original equipment and original equipment service markets. The company is organized into two major operating segments, each of which focuses on a specific line of replacement parts. The Engine Management Segment manufactures ignition and emission parts, ignition wires, battery cables and fuel system parts. The Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories, and windshield washer system parts. We also sell our products in Europe through our European Segment.

SMP sells primarily to warehouse distributors, large retail chains, original equipment manufacturers and original equipment service part operations in the United States, Canada and Latin America. Our customers consist of many of the leading auto parts retail chains, such as Advance Auto Parts, AutoZone, O’Reilly Automotive/CSK Auto and Pep Boys. (Source: SMP website)

Disclosure: Author had no positions at time of writing this article.

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

Tags: cash secured puts, covered call, covered calls, dividend, dividend paying stocks, dividend stocks, dividend yield, dividends, magna, mga, put option, put options, smp, standard motor parts
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How To Buy Apple Below The Market And Earn High Options Yields

April 21st, 2012

Apple, (AAPL), has been much more volatile ever since the US Dept. of Justice announced an investigation into possible e-book price fixing, dropping from its high of $644.00 down to a $572.98 close this week. Adding to the volatility is the anticipation for AAPL’s next quarterly earnings report, scheduled for Tuesday, April 25th.

AAPL has reported spectacular earnings growth over the past 4 quarters, and has surprised to the upside in the “Earnings Surprise” game in 3 of the past 4 quarters. The table below shows the Post-Earnings Share Price changes on the day following each earnings report.

AAPL’s “stumble” in mid – Oct. 2011, when it reported a mere 52% EPS growth and missed inflated analyst expectations, happened during last fall’s high volatility period. The share price only fell -5.59% the day after earnings, but fell from $422.24 to a low of $363.57, (a 13.90% drawdown). during the Nov. market pullback, finally recovering on Jan. 6, 2012, and is currently approx. 36% above its Oct. 18, 2011 price, as of 4/20/12:

AAPL-EARN SURPRISE

After AAPL’s stellar Q1 Fiscal Year report, analysts have kept raising earnings estimates for next Tuesday’s report, with growth forecasts that leave AAPL’s mega-cap peers in the dust. Looking at AAPL’s past quarterly EPS growth numbers, though, one can hardly blame them for getting so excited.

With estimates and expectations so high, one wonders if AAPL can possibly avoid “disappointing” analysts next Tuesday, while still turning in strong growth figures? Moreover, how will the market react?:

AAPL-Q2-2012 CONSENSUS

So, how can you profit from AAPL’s current volatility and 12.6% pullback? The prudent approach is probably to wait for next Tuesday’s results and market reaction, but what if AAPL blows out its earnings once again, and soars out of reach?

Fortunately, AAPL has rather high options yields, so, a conservative way to profit in this situation, even if AAPL soars, is to sell cash secured puts below AAPL’s share price, which, of course, is a rapidly moving target. Conversely, if the market is disappointed with AAPL’s report, and its price declines, its put option premiums will rise, including those on the many other strike prices below these put options, resulting in even lower break-even points.

You could sell puts at an even lower strike price in that scenario. As usual, you’ll get paid the put premium price within 3 days of making the trade.

There are 2 variables to this approach – Expiration Month and Strike Price. Here are some examples of the current put options payouts for 2 different put option strike prices that expire in August. Lower strike prices offer lower put premium payouts, but also have lower break-even prices. The key here is to find a strike price far enough below AAPL’s stock price that achieves the balance between your risk tolerance and your target option income:

AAPL-PUTSTRIKES

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

The next table has examples of the current put options payouts for various expiration months, using the same put option strike price of $580.00. Put premiums are higher for longer expiration dates, which gives you a lower break-even, but a lower annualized yield, due to the longer time period. Again, the more conservative approach is to sell at strike prices further below AAPL’s strike price.

AAPL-PUTMONTHS

AAPL is due to join the ranks of dividend paying stocks sometime in the July-Sept. 2012 quarter, but hasn’t announced its ex-dividend date yet. (Note: Put sellers don’t receive dividends, we list dividends here for comparison only.):

Disclosure: Author is short Apple put options.

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

Tags: AAPL, Apple, cash secured puts, dividend paying stocks, dividends, ex-dividend date, put option, put options
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These Dow Dividend Stocks Are Bucking The April Pullback

April 20th, 2012

It’s been a rainy April for the market thus far, with the S&P down almost -3.00% through 4/19/12. Being optimistic, we went searching for dividend paying stocks that are bucking the new market pullback. We found 2 contenders, Caterpillar, (CAT), and Home Depot, (HD), that have held their own in this month’s market decline, and have also done well in recent rallies:

CAT-HD-PERF

HD beat CAT in the Nov. 2011 pullback, and has also had stronger share performance year to date and during this month’s decline.

Valuations & Earnings Growth: CAT derives a lot of its profits from overseas, vs. Home Depot’s mostly domestic focus on the US home market. Subsequently, CAT has had stronger earnings growth in its most recent quarter and fiscal year, as the hobbled US consumer slowly picks up spending, and the home market remains weak. Although it’s up over 18% this year, CAT still looks more undervalued on a PEG basis than HD.

CAT-HD-PEG

We’ll find out if CAT’s current EPS projections hold, when it reports earnings, on its upcoming April 25th morning conference call next week. (Judging by how far off analysts have been in their CAT estimates in recent quarters, it should be an interesting report.)

CAT-ANLYSTMISSES

Dividends: Although CAT and HD aren’t high dividend stocks, both firms have a 5-year dividend growth rate that’s above their industry avgs.: CAT’s is 9.62%, and HD’s is 9.03%. CAT’s dividend payout ratio is more conservative than its industry avgs., while HD’s is much higher than its industry’s low avg. of 26.4%:

CAT-HD-DIVS

Covered Calls: Combining covered call options with dividend stocks is a powerful way to create much more immediate income than many stocks’ dividends offer over 1 – 3 quarters. The increase in income is particularly high in a stock like CAT, which has high options yields that dwarf its dividend yield. The tradeoff is that you may forgo potential future price gains, in return for being paid a call option premium now. CAT has a higher beta and more volatility than HD, which gives it higher options yields.

In this trade, CAT’s August $110.00 call options pay well over 12 times its $.46 quarterly dividend.

CAT-HD-CALLS

If CAT is above $110.00 at or near expiration in August, your shares will be sold/assigned for $110.00, no matter how much higher CAT rises. You’ll receive an additional $2.64/share in price gain, for an additional assigned yield of 7.54% annualized, and the total potential assigned yield is 25.86%. ($110.00 strike price – $107.36 stock cost = $2.64/share.)

How does this compare to just buying CAT outright at $107.36? Since you received a call premium of $5.95, at a strike price of $110.00, your maximum price point potential is $115.95. If CAT doesn’t go as high as $115.95 during this 4-month term, you’d be ahead by selling this covered call.

(Each option contract corresponds to 100 shares of the underlying stock.)

The 3 income streams in this covered call trade are, (for 1oo shares of stock bought and 1 call option sold):

1. Call premium of $5.95/share, (paid within 3 days of the trade): $595.00

2. Quarterly dividend of $.46/share, (paid in August, ex-dividend date in July): $46.00

3. Potential assigned price gain of $2.64/share, if CAT is above $110.00 at or near expiration: $264.00

(You can see more details for over 30 other high options yields trades in our Covered Calls Table.)

Technical Data: CAT and HD have been two of the best stocks to buy for price gains over the past year:

CAT-HD-TECH

As the table above shows, both of these stocks are quite close to their 52-week highs, which leads us to another, more conservative options strategy – selling puts.

Cash Secured Puts: By selling cash secured puts below a stock’s current price, you’ll achieve a lower break-even price, and also get paid within 3 days of making the put sale. However, you won’t qualify for any dividends, but, as you can see, the put options listed below pay out over 6 to 14 times what these quarterly dividends pay.

For every put option that you sell, your broker will secure enough cash in your account to purchase 100 shares of the underlyng stock, at whatever the put option’s strike price is, hence the name “cash secured puts”. In the CAT put option trade below, the broker would hold $10,500.00, (100 times the $105.00 strike price).

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

CAT-HD-PUTS

Financials: Both firms’ metrics are far above their industry avgs, except for CAT’s higher debt load. However, CAT has an interest coverage ratio of 6.4.

CAT-HD-ROE

Disclosure: Author is short Caterpillar put options.

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

Tags: best stocks to buy, call option, call options, cash secured puts, cat, caterpillar, covered call, covered calls, dividend, dividend growth rate, dividend paying stocks, dividend payout ratio, dividend stocks, dividend yield, hd, high dividend stocks, high options yields, home depot, put option, put options
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2 Ways To Hedge Your 2012 Apple Gains

April 13th, 2012

Could this be true? Apple fell on a big “up” market day Thursday, and is negative for the week so far, (-.05%). Is the game changing, or is AAPL just taking a breather, as investors get a little skittish from a government E-book price fixing probe?

As you most likely know, AAPL has been one of the best stocks to buy for price gains year-to-date, and over the past year. However, it slowed down its torrid pace in March, gaining 10.53%, vs. it 18.83% gain in February, and is up just 3.74% so far in April.

The mere fact that we’re calling a 10%-plus monthly gain a “slowdown” seems absurd, and illustrates just how well AAPL has performed, and how much the market has come to expect it to perform. But maybe it’s time to hedge your 2012 gains, with AAPL up almost 54% year-to-date, and up 100% from its 52-week low:

AAPL-PERF

AAPL-BETA

If you’d had the prescience to buy AAPL on its way up, you may be wondering which is the best way to hedge your gains. There are numerous ways to hedge, but selling covered calls is an options trading strategy that will create some immediate income for you, and also hedge some of your gains.

Below are two approaches to selling covered calls:

1. Longer Expirations: By selling call options further out in time, you’ll earn more call premium $, and achieve a lower break-even price. In the examples below, we’ve used AAPL’s opening price for 2012 as our cost, in order to show how much of 2012’s gains you can hedge by selling covered calls with various expiration dates:

AAPL-CALLS-TIME

As you sell calls at expiration months further out in time, your call premiums increase – the Jan. 2013 $625.00 call pays $76.10, and hedges over 35% of the year-to-date gain, vs. a $52.45 call premium for the nearer August call, which hedges approx. 25% of the gain.

Tradeoff: Your break-even cost of $328.00 is also lower with the higher Jan. 2013 call option premium, vs. $354.30 for the August expiration. However, your annualized yield is lower, since it’s a 9-month trade, vs. only 4 months for the Aug. 2012 trade. (As we don’t yet know what AAPL’s ex-dividend date will be for the 3rd and 4th quarter, we’ve speculated that it might fall before the August expiration. However, it would certainly fall before the Oct. 2012 expiration, and you’d receive 2 quarterly dividends with the Jan. 2013 trade.)

(You can see additional details for over 30 other high options yields trades in our Covered Calls Table.)

2. Higher Strike Prices: A more bullish approach would be to sell covered call options at a higher strike price, in order to leave more room for future potential price gains. If you think that AAPL has more room to run, you could sell covered calls at strike prices higher than AAPL’s current strike price. We used AAPL’s 4/12/22 price of $622.50 for this example, which shows the range of call option payouts you’d receive for 3 different Jan. 2013 strike prices.

Tradeoff: All 3 strike prices are above AAPL’s current price, but as you sell at higher call strike prices, you’ll receive less premium. However, the Jan. 2012 $640.00 call strike price leaves you $17.50/share in potential assigned price gains, vs. only $7.50/share for the Jan. $630.00 strike price. As usual, the more call premium $ you receive, the lower your break-even is:

AAPL-STRIKES

Dividends: Apple announced in March that it will be entering the world of dividend stocks sometime in the July-Sept. 2012 quarter, paying $2.65/share quarterly. Market commentators have increasingly compared AAPL, with its huge cash hoard, to other Tech dividend paying stocks, clamoring for a dividend payout. CEO Tim Cook took their advice, and also instituted a 3-year $10 billion stock buyback plan that starts in October, which will mitigate the effect of employee stock option dilution of shares.

AAPL-DIVS

Valuations: AAPL’s PEG ratio might turn out to be much lower than 1.25, since they’ve exceeded earnings estimates handily for the past 3 out of 4 quarters. Consider this: AAPL earned $27.68/share in its last fiscal year, which ended 9/30/12, and has already earned $13.87 in its first fiscal quarter, which ended 12/31/12. Since it’s already earned 50% of its past fiscal year’s profit in one quarter, it seems a reasonable bet that AAPL can grow its next fiscal year earnings by a lot more than 14.31%.

By the way, AAPL is also one of only 4 large cap stocks with 40%-plus sales growth over the past 5 years. Just imagine – they grew their sales over 41% through the Great Recession – what an accomplishment! So, the biggest market cap stock in the world is also a growth stock:

AAPL-PEG

Financials: AAPL’s Mgt. ratios and operating margin far outshines industry avgs., and it has no debt:

AAPL-ROE

If you haven’t gotten on board the AAPL bandwagon, any upcoming pullbacks may offer you a chance to do so. In our next article, we’ll detail a lucrative way to sneak up on this stellar stock.

Disclosure: Author is short Apple put options.

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

Tags: AAPL, Apple, best stocks to buy, call options, covered calls, dividend, dividend paying stocks, dividend stocks, dividend yield, dividends, options trading strategy
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Two Oversold And Undervalued Blue Chip Energy Dividend Stocks

April 6th, 2012

The market’s big multi-month rally may have you wondering if there are any oversold and undervalued dividend stocks left. The Basic Materials sector has lagged the other sectors over the past year, and is also next to last in appreciation year-to-date, but has shown more signs of life this past week.

The Oil & Gas Equipment & Services industry within this sector has two dividend paying stocks that look oversold and mostly undervalued: Halliburton, (HAL), and Schlumberger, (SLB). Halliburton’s P/E of 10.31 is near the low end of its 5-year P/E range of 6.24 – 23.52, while SLB’s P/E of 19.87 is closer to the upper part of its 5-year range of 9.58 – 24.97.

As the 2 premier stocks within this industry, both of these stocks usually command a premium Price/Book, but they’re both undervalued on a PEG ratio basis. HAL had strong EPS growth in its most recent fiscal year and quarter, and is projected to have strong growth in its next fiscal year. SLB has a much higher P/E, but also had strong sales and EPS growth in its most recent quarter, and is forecast to have over 22% EPS growth in its next fiscal year:

HAL-SLB-PEG

Share Performance: Like many other Basic Materials stocks, both of these stocks are down considerably over the past 12 months. They’re also way down from their 52-week highs, and have low Relative Strengths of below 40, indicating that they’re starting to enter the upper regions of oversold territory:

HAL-SLB-PERF

Dividends: Both firms managed to maintain their dividends during the 2008 crisis, and Schlumberger increased its quarterly dividend in 2012, to $.275/share, from $.25.

HAL-SLB-DIVS

Covered Calls: Although these certainly aren’t high dividend stocks, they both have high options yields that dwarf their dividend yield. We’ve listed 2 different covered call options trades for HAL, to illustrate how you can tailor option trading strategies to meet your market bias, be it conservative or aggressive. When you sell covered call options at higher strike prices, you receive lower premiums, but you leave more room for potential price gains.

The first HAL call is more defensive: It has a strike price of $33.00, and its call bid premium of $3.35 is over 18 times HAL’s 2 dividend payouts during this 7-month term. However, since the call strike price and the stock price are equal, the $33.00 call options leave no room for potential assigned yield, (price appreciation).

The second HAL trade is more bullish: It has a $34.00 strike price, which leaves you the potential for a $1.00/share price gain, but its call bid premium is only $2.88, $.47/share less than the $33.00 call option.

(You can find additional details for this and over 30 other high options yields trades in our Covered Calls Table.)

HAL-SLB-CALLS

Cash Secured Puts: Experienced traders also sell cash secured put options as a way to earn a profit now from stocks that they want to accumulate. By selling a put, you’re obligating yourself to potentially have to buy a stock at a given put strike price by expiration, if the stock goes below that strike price. Like call options, you get paid a put premium within 3 days of making the trade, (often the same day), as opposed to waiting for quarterly dividends and possible price gains.

Generally, most stocks aren’t assigned or “put” to you until sometime near their expiration date. The reason for this is twofold:

1. Put option buyers will mostly end up selling their open puts, instead of exercising them. They may not want to allocate the cash needed to actually buy the shares and then sell/put them to a put seller.

2. Option buyers want to capitalize as much as possible on the potential price appreciation of the options.

The SLB trade listed below is more conservative than the HAL trade, in that its strike price is below SLB’s $68.69 price/share. This gives you a break-even that’s fairly close to SLB’s 52-week low of $54.79. SLB’s November $67.50 put options pay over 7 times what its dividends pay for the next 8 months.

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

HAL-SLB-PUTS

Financials: Both firms’ financial figures are superior to industry averages, except for operating margins, where the industry averages appear to be skewed higher, mostly by much smaller companies:

HAL-SLB-ROE

As the market starts to realize that these oil & gas service firms are able to quickly reallocate their resources to high demand areas, HAL and SLB may be two of the best stocks to buy for price gains.

Disclosure: Author is short Haliburton put options.

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

Tags: best stocks to buy, call options, cash secured puts, covered call, covered calls, dividend, dividend paying stocks, dividend stocks, dividend yield, dividends, HAL, Halliburton, high dividend stocks, high options yields, put options, Schlumberger, SLB
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A Major Oil High Dividend Stock With Undervalued Growth

March 30th, 2012

Are there any “bargain basement” high dividend stocks with strong financials, undervalued earnings growth, and future dividend growth? Surprisingly, British Petroleum, (BP), an energy stock that many investors dumped, after its Gulf oil spill debacle, looks like one of the best stocks to buy once again for these attributes.

Investors have been shunning Big Oil stocks for the past year, so this sub-industry group as a whole is down a bit over -1%. However, unlike two of its larger peers, Chevron, (CVX), and Exxon, (XOM), BP has actually been getting support from institutional buyers in the past few months. Technically speaking, BP is also in the upper region of oversold territory, with its RSI of 35.14:

BP-CVX-XOM-PERF

A lot of this new support has to do with BP’s improving earnings and low valuations. BP has logged strong EPS growth in its most recent fiscal year, and recent quarter. Surprisingly, BP’s sales growth over the past 5 years topped both Exxon and Chevron, and was just above industry averages. Although BP is only projected to grow 6.36% in its next fiscal year, its very low P/E gives it an enticing PEG ratio:

BP-PEG

Dividends: After the 2010 Gulf spill, BP needed to eliminate its $.84 quarterly dividend payout for the balance of 2010, but then reinstated in 2011, at 50% less, ($.42/quarter). In 2012, BP has been able to increase its quarterly dividends, for the first time since the spill, raising them over 14%, to $.48/share. BP has been a cash machine for a long time, and as it works through the Gulf settlement payouts, its cash flow will only get even better.

BP foresees future dividend increases, as it stated earlier in 2012: “With operating cash flow generated by BP in 2011 reaching some $22bn – over 60% higher than in 2010 – CEO Bob Dudley confirmed the company’s expectation that net cash flow in 2014, in a $100 oil price environment, would be around 50% higher than in 2011. Half of the additional cash is expected to be used for re-investment and half for other purposes including increased shareholder distributions. 2012 will be a year of increasing investment and milestones as we build on the foundations laid last year. As we move through 2013 and 2014, we expect financial momentum will build as we complete payments into the Gulf of Mexico Trust Fund, restore high-value production and bring new projects on stream.” (Source: BP website)

BP’s dividend yield is now above those of CVX and Exxon, and is also above industry averages:

BP-CVX-XOM-DIVS

Covered Calls: Many income investors have begun selling covered call options in order to increase their income from dividend paying stocks. This options trading strategy is an easy way to double, or even quadruple your dividends, depending on the stock.

If you already own the stock, you can then sell 1 call option contract for each 100 shares that you own. (One option contract corresponds to 100 shares of the underlying stock.)

If you don’t own the stock, here’s the sequence for selling covered calls on dividend stocks:

1. Buy the stock, in 100 share lots – example, buy 200 or 300, instead of 250 shares.

2. Sell 1 call option contract for each 100 shares that you own, at a strike price above the stock’s current share price. The further above the share price you sell, the less premium you’ll receive. The further out in time you sell, the more premium you’ll receive, which will lower your break-even. You receive this option $ within 3 days of selling, often even the same day.

3. Collect whatever quarterly dividends are due, as they pass their ex-dividend dates.

4. At expiration time, if the stock has risen above the strike price, your shares will be sold at the strike price, and you’ll also pocket the difference between the strike price and your cost per share. If the stock isn’t above the strike price then, the call option will expire, leaving you with the initial call premium $ that you received, plus your dividends, as your profit.

These BP Oct. 2012 call options pay nearly 3 times the amount of BP’s 2 quarterly dividends during this 7-month period. This $45 Oct. 2012 call option also holds a potential assigned yield of 2.66% annualized, ($.65/share, the difference between the $45 strike price and BP’s $44.35 share price.) The catch is that your BP shares will be sold/assigned at or near expiration time, if BP rises above the $45 strike price.

(You can find more details for this trade and over 30 other high options yields trades in our Covered Calls Table.)

BP-CALLS

Cash Secured Puts: If you’re still wary of BP’s gulf spill headline exposure, an alternative options trading strategy would be to sell cash secured put options, and literally “get paid now to wait”.

The BP OCT. $44.00 put option, which is below BP’s share price, would pay you $3.65/ share, ($365 per option contract). This gives you a lower break-even price, of $40.35.

High Options Yields: This put option pays out 3.8 times what BP’s dividends pay over the next 7 months. In addition, you’ll receive your options premium $ within 3 days of making the trade, often even the same day, so you’ll have the use of this $ now, instead of waiting for the quarterly dividends. (Note: Put sellers don’t receive dividends.)

If BP is below $44.00 at or near the Oct. expiration, you’ll be sold/assigned 100 shares of BP, for every put contract that you sold. However, your net cost will only be $40.35, ($44 strike price, minus the $3.65 put bid premium you received when you sold the put).

(You can find more info for this trade and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

BP-PUTS

Financials: While they aren’t quite as impressive as some of Chevron’s and Exxon’s figures, BP’s financial metrics are all above industry averages, with the exception of its operating margin. Although BP’s Debt/Equity ratio is higher than CVX and XOM, BP has a very high Interest Coverage figure of 31.8:

BP-ROE

Disclosure: Author is long shares of BP and XOM, and is short BP put options.

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

Tags: best stocks to buy, Big Oil stocks, BP, call options, cash secured puts, Chevron, covered call, covered calls, CVX, dividend, dividend growth, dividend paying stocks, dividend stocks, dividend yield, dividends, ex-dividend date, Exxon, high dividend stock, high dividend stocks, high options yields, options trading strategy, put options, XOM
Posted in Dividend Stocks, Option Trading | 2 Comments »

2 Dow Dividend Stocks With Undervalued Earnings Growth

March 23rd, 2012

Although the market has had a large rally over the past few months, the Dow 30 still lags the NASDAQ significantly in 2012, (the DOW is only up 6.78% YTD vs. NASDAQ’s 17.59% gain as of 3/22/12), This led us to look for undervalued Dow dividend stocks with low PEG ratios, and strong earnings. Our search produced these two familiar stocks, Boeing, and Microsoft:

BA-MSFT-PEG

Boeing has gained nearly 7% in 2012, (there’s a Performance table at the end of this article), but it’s still only up less than 3% over the past 12 months. Meanwhile, BA has grown its earnings substantially, so that it now has a much lower P/E than its industry peers.

With its strong growth forecast for its next fiscal year, BA has the second lowest PEG ratio of all the Dow 30 stocks. Although BA has a very high Price/Book, this is partially explained by its very high Return On Equity, (ROE), of 127.72%. (See Financials table further on in article.)

After being range-bound within the $20’s for around two years, Microsoft has risen into the low $30’s. However, it still looks fairly cheap on a PEG basis, coming in at .97. Even though its earnings and sales growth trail its industry averages, MSFT is one of the few dividend paying stocks within its industry, and offers a fairly good dividend yield, and a very good dividend growth rate.

Dividends: MSFT increased its quarterly dividend by 25% in 2011, from $.16 to $.20/share. Boeing increased its quarterly dividend in Feb. 2012, to $.44/share from $.42/share. Both stocks have a conservative dividend payout ratio:

BA-MSFT-DIVS

Covered Calls: Income investors wanting to hedge their bets often sell covered call options, creating additional immediate income by receiving call options premiums, and thereby lowering their break-even cost.

As the table below illustrates, in these 2 covered call trades, the call options pay you 3 to 6 times what the dividends pay during the 4-5 month period. What’s the catch? By selling a call option, you’re obligated to potentially have to sell the shares at the call strike price by expiration time. (Generally, your shares will get assigned/sold if the stock goes above the strike price at or near expiration.)

There are 2 strategies in the trades listed below – the BA call has a higher strike price than BA’s share price, which gives you some room for potential price gains- (BA $75 .00 strike price is $1.08 above BA’s $73.92 share price). Conversely, the MSFT call strike price is right “at the money”, meaning the $32.00 strike price equals MSFT’s $32.00 share price. This leaves no room for potential price gain, but gives you a higher call option premium.

More bullish covered call sellers sell at higher strike prices, earning a lower call premium, whereas less bullish call sellers would sell calls with strike prices that are closer to the share price, and would get paid a higher call premium.

(You can see additional details for this and over 30 other high options yields trades in our Covered Calls Table.)

BA-MSFT-CALLS

Cash Secured Puts: An alternative option trading strategy is to sell cash secured puts, which obligate you to potentially have to buy the stock at the strike price, if the stock goes below the strike at or near expiration. Generally, call and put options don’t get assigned until sometime near the expiration date, since call and put buyers don’t want to forfeit too much of the options’ time value.

Why would you sell cash secured put options? If you want to buy a stock at a lower price than its current price, the put premium $ that you receive lowers your break-even cost, so that, even though you may end up being assigned/sold BA at the $72.50 strike price, your net cost is only $68.70, the difference between the $72.50 strike price and the $3.80 put premium you received. Meanwhile, you have the use of that put premium $.

Investors are often surprised to hear that Warren Buffett has been known to sell put options, via private off-market deals, on companies he’s interested in buying, sometimes pocketing millions in put premiums now on expiration dates that go out a few years – it’s a very good cash flow deal.

These put options pay out 4 to over 7 times what the dividends pay out during this 4-5 month term. (You can see more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

BA-MSFT-PUTS

Financials: BA and MSFT both have mgt. efficiency ratios that far outshine their industry averages. BA’s debt load is higher than avg., but their interest coverage is very strong, but not as high as MSFT’s very high interest coverage of 77. BA’s ROE of 127.72% is currently the highest of any stock in the Industrials sector.

BA-MSFT-ROE

Performance: Although MSFT has been one of the best stocks to buy in 2012 for price gains so far, it’s still has a moderate Relative Strength of 55.55. With its RSI of 43.33, BA is closer to the sub-40 oversold area:

BA-MSFT-PERF

Disclosure: Author holds no shares of any stocks mentioned in this article at this time, but may sell cash secured puts during future market pullbacks.

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

Tags: ba, best stocks to buy, boeing, call options, cash secured puts, covered call, covered calls, dividend, dividend growth rate, dividend paying stocks, dividend payout ratio, dividend stocks, dividend yield, dividends, Dow dividend stocks, high dividend stocks, high options yields, microsoft, msft, put options
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3 Financial Dividend Stocks With Institutional Buying And Solid Growth

March 16th, 2012

After being the worst sector in 2011, and losing over -17%, Financial stocks are among the best stocks to buy in 2012 for price gains thus far, beating all other sectors. Even with this major turnaround, Financials are still down -2.3% over the past year:

SECR-PERF-3-15-12

Part of the recent momentum for Financials came from the Greek debt agreement being signed, and improving US economic data. Another major plus was the Fed’s mainly successful stress tests for major banks this week, but the big impetus is that this sector had much better 2011 4th earnings, even though its sales growth was flat:

SECTOR-EPS

(Data Source: Standard & Poors)

Which Financial sector dividend paying stocks are the big boys buying? It looks like some of the brokerage firms and one exchange are getting institutional support, particularly this small cap stock, Interactive Brokers, which is just -3% below its 52-week high, but only up 10.79% for the past year:

IBKR-PERF

Dividends: Although these dividend yields aren’t as high as some of the High Dividend Stocks we often write about, they all have above-average dividend yields for their industry. In addition, you can improve upon these dividend payouts dramatically by using options trading strategies, such as selling covered call options, (see further below). *CME also had a special $3.00/share dividend that went ex-dividend in March, and increased its quarterly payouts by 22%, to $1.40, from $1.15, in 2011.

IBKR-CME-DIVS

Valuations: So, why are Institutional buyers so supportive of IBKR? Many reasons: IBKR has a very low PEG ratio, outstanding yearly and quarterly EPS and Sales growth, and its Price/Book and Price/Sales valuations are way below industry averages. CME also has a low PEG, low Price/Book , and good EPS growth, but buyers are probably worried about potential future gov’t regulations for exchanges, stemming from the MF Global scandal. Schwab’s PEG is also low, but like CME, its recent quarterly sales slowed vs. Q4 2010:

IBKR-CME-PEG

Financials: All of these stocks have above-avg. industry Mgt. Efficiency Ratio and Operating Margins, and carry a lot less debt than the industry average. IBKR and Schwab go head to head in the online discount brokerage segment, but IBKR has a much higher operating margin:

IBKR-ROE

Covered Calls: If you’re looking to earn more income now from these dividend stocks, but still participate in some potential price gains, selling covered call options above the stock’s current price is one way to go. Covered Call sellers get paid an often lucrative call premium now, in return for committing to potentially have to sell the underlying stock at a given strike price by expiration time. (Each option contract corresponds to 100 shares of the underlying stock.)

If you’re more bullish on a stock, you’d sell covered call options further above its current price/share, but you’ll give up some immediate call option $ now for potential future price gains down the road. In all of the trades below, the call option premiums are up to 7 times the dividend payouts. (Annualized potential assigned yield equals the difference between the strike price and the stock’s share price, divided by the share price.)

The Annualized Total Potential Assigned Yields listed below are comprised of 3 income streams. The $ amounts for CME are:

1. Dividends: $2.80/share, ($280.00 per option contract sold). You’d collect 2 quarterly $1.40/share dividends.

2. Call option premiums: $18.80/share, ($18.80 per option contract sold). You’d get paid this $ within 3 days of selling the call options, often even the same day.

3. Potential Assigned Price Gains: $3.75/share, ($375.00 per option contract sold). This usually occurs at or near expiration time.

(You can discover additional details for this and over 30 other high options yields trades in our Covered Calls Table.)

IBKR-CALLS

Cash Secured Puts: SInce these stocks have rallied so much in 2012, you may wish you could turn back the clock and dive in at a lower price. One way you can do this, is by selling cash secured put options at a strike price below the stock’s current price. You’ll be paid a put premium that is often much higher than the stock’s dividends over the next 2-3 quarters, in return for committing to buy the stock at the put strike price. For example, in the 2 put trades below, these puts pay over 7 to 9 times what the dividends pay. (We listed the dividends for comparison sake only – put sellers don’t receive dividends.)

In the SCHW trade below, you’d be paid $1.10 for committing to potentially buy SCHW at $15.00 by Sept 22, 2012, if SCHW’s price goes below $15.00 at or near expiration time. But, if you end up buying SCHW at $15.00, your cost will only be $13.90, (the $15.00 strike price, less the $1.10 you were paid for selling the put option.

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

CME-SCHW-PUTS

Company Profiles:

Interactive Brokers (IBKR): Over the last 35 years, IBKR has grown internally to become one of the premier securities firms with over $4 billion in equity capital following payment of a special cash dividend of approximately $1 billion pre-tax.

Interactive Brokers conducts its broker/dealer and proprietary trading businesses on over 90 market destinations worldwide. In its broker dealer agency business, IB provides direct access (”on line”) trade execution and clearing services to institutional and professional traders for a wide variety of electronically traded products including stocks, options, futures, forex, bonds, CFDs and funds worldwide. In its proprietary trading business, IB engages in market making for its own account in about 6,500 different electronically traded products. Interactive Brokers Group and its affiliates execute nearly 1,000,000 trades per day. (Interactive Brokers was named #1 online broker again in 2011 by Barron’s.)

CME Group (CME): An exchange which builds on the heritage of CME, CBOT, NYMEX and COMEX, CME Group serves the risk management needs of customers around the globe. CME provides the widest range of benchmark futures and options products available on any exchange, covering all major asset classes.

Charles Schwab (SCHW): Launched in April, 1971, as First Commander Corporation, to conduct a conventional broker-dealer securities business and publish the Schwab investment newsletter, Schwab grew to become one of the leading discount brokerage firms, focusing on individual investors.

Disclosure:

Author holds no shares of any stocks mentioned in this article at this time.

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

Tags: call options, cash secured puts, cme, covered call, covered calls, dividend, dividend paying stocks, dividend stocks, dividend yields, dividends, ex-dividend date, high dividend stocks, ibkr, option trading strategies, schw
Posted in Dividend Stocks, Option Trading | No Comments »

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A Major Oil High Dividend Stock With Undervalued Growth

2 Dow Dividend Stocks With Undervalued Earnings Growth

3 Financial Dividend Stocks With Institutional Buying And Solid Growth

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