Monthly Archives: November 2009

Dow Dividends vs. Selling Long-Term Puts

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By Robert Hauver

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.


A Utility Making The Right Moves – Brookfield Infrastructure Partners

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By Robert Hauver

If you’re looking for dividend paying stocks with exposure to overseas infrastructure, AND a high dividend yield, Bermuda-based Brookfield Infrastructure Partners, BIP, may be one of the best stocks to check out.

BIP has the highest dividend in the Utilities section of our High Dividend Stocks by Sector tables.  BIP owns electricity transmission systems, timberlands and social infrastructure in North and South America, the United Kingdom and Australia.

By closing a deal with Australian company, Babcock & Brown Infrastructure, BIP is about to make itself even more attractive by acquiring interests in a broad range of infrastructure projects in more key areas.  These new acquisitions include:  Natural gas pipelines in western Australia, a midwestern U.S. gas pipeline, port concessions in China, a coal terminal in Australia, and other gas and electricity distribution assets in the U.K., New Zealand and elsewhere.

BIP compares quite favorably to its peers in the Electric Utilities industry:

Brookfield Infrastructure Partners Electric Utility Industry Avgs.
Debt/Equity Zero Debt 54.00%
Gross Margin 91.67% 33.48%
P/E 7.63 14.89
Price/Free cash/Share 3.08 18.46
ROA 8.50 2.96
ROI 81.46 3.40

BIP pays a $.265/share dividend quarterly, which is currently a 6.78% dividend yield.

There are also options available for BIP, for those interested in covered calls and covered puts, or cash-secured puts. A possible covered call trade would be to sell the June $17.50 strike, (BIPFW), which has a big bid/ask spread of $.60/$1.60.

Conversely, more skeptical investors might sell the June $15.00 put option, BIPRC, for a 10% yield, ($1.50 bid) , or possibly more, since the ask is at $2.50.

Disclosure: No positions yet.

Disclaimer: This article is written for informational purposes only.

National Health Investors, (NHI) – A Healthcare REIT With Earnings Growth

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By Robert Hauver

NHI is listed in the Financial table section of our High Dividend Stocks by Sector Tables .  This month they reported growth in earnings and revenue for the 3-month and 9-month periods ending 9/30/09:

Total revenues for the three months ended September 30, 2009, increased 25.6%.  Net income increased 9.5%. 
Diluted 2009 EPS was $.63 per share vs. $.57 per share in 2008.

Net income for the nine months ended September 30, 2009 increased 8.6%. 
Diluted 2009 EPS was $1.74 per share vs. $1.59 per share in 2008.  Total revenues for the nine months ended September 30, 2009 increased 9.3%.

NHI has investments in real estate and mortgage notes receivable in 125 health care properties located in 18 states consisting of 84 skilled nursing facilities, 15 assisted living facilities, 4 medical office buildings, 4 retirement centers, 1 acute care hospital and 17 residential projects for the developmentally disabled. These investments consisted of approximately $230,658,000 of net real estate investments with 16 lessees and $98,372,000 aggregate carrying value of loans to 14 borrowers.

Of the 76 health care properties leased to operators, 41 are leased to National HealthCare Corporation (“NHC”), a publicly-held company and NHI’s largest customer. The current lease with NHC expires December 31, 2021 (excluding 3 additional 5-year renewal options).

NHI beats its peers handily in several key ratios, including financial strength, valuation, profitability, and management effectiveness, in our Industry Comparison Chart:

NHI Real Estate Operations Industry
Total Debt/Equity 64.00% 199.80%
Profit Margin 87.67% 14.23%
P/E Ratio 15.47 33.37
Price/Free Cash/Share 12.47 38.89
ROE 12.74 4.70
ROI 86.96 1.92
ROA 12.02 1.38

NHI’s current dividend yield is approx. 7%, and it traded on Thursday just below $32.00.

They recently announced that they’ll pay a $.55 dividend on Jan. 29, 2010, to shareholders of record as of December 31, 2009.

For dividend investors looking for solid dividend paying stocks, NHI appears to be one of the best stocks in its industry.

There are no options available for NHI.

Disclosure: No positions

Disclaimer: This article is written for informational purposes only.

Banco Santander, (STD) – A Backdoor Into Brazil – Nov. 12, 2009

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By Robert Hauver

Although our High Dividend Stocks by Sector Tables don’t break out foreign stocks, there are still some impressive foreign dividend paying stocks to be found there.  Spain’s Banco Santander, (STD), is the biggest Eurozone bank, and has fared much better than most other megabanks during the crisis, partially as a result of stringent Spanish banking laws forcing it to avoid toxic assets.

Overall, it appears to be one of the best stocks in the financial sector.

While other big banks have been forced to curtail spending, Banco Santander raised $7 billion to fund additional Brazilian expansion, by selling a minority stake its Brazilian operation .  It’s currently the number 3 bank in Brazil, and it has targeted the hottest area for Brazilian GDP growth – the southern region near Sao Paolo.

Business Week reports that, “Brazil accounted for more than one-fifth of Santander’s $6.8 billion in “attributable profit,” or net minus capital gains, in the first half of this year. (Attributable profit is the only earnings measure for which the bank provides a breakdown by country.)

That’s up from just 11% for the same period in 2008. Analysts say the change is due primarily to the consolidation of Brazil’s Banco Real, which Santander bought for $16 billion in 2007 as part of the ill-fated takeover and carve-up of Dutch financial giant ABN Amro by Santander, Royal Bank of Scotland, and Fortis.”

“While RBS and Fortis have struggled ever since, Santander’s gamble paid off handsomely. Its expanded footprint in Brazil helped offset the bank’s slowing operations in other regions—particularly Spain and Britain—during the worst of the downturn.  Lending in Brazil, for instance, jumped 16% during the first half of 2009, compared with just 1% in Spain over the same period.”

STD also has options available.  Investors wanting to improve upon the dividend yield could sell covered calls.  The March 2010 $17.50 call option for STD listed in our Covered Call Table is currently worth a $1.15 bid.  In addition, you’d qualify for $.16/share in dividends during that period.   At STD’s closing price of $17.23, this would equal a 7.6% static yield for just over 4 months, or 21.00%-plus annualized.

Conversely, if you’re feeling skeptical about STD’s current price, which is only 2% below its 52-week high, you may want to look at selling cash-secured Put options against STD.  The March $15.00 put that’s currently listed in our Covered Put Table is bid at $.75, which equals over 14% annualized.  The breakeven is $14.25.

Investors should be aware that selling covered calls necessitates buying the underlying stock before selling calls against it.  When selling cash-secured puts, check your broker’s cash reserve rules – some brokers require a cash reserve equal to 100% of the underlying shares value, while others may require less cash up front.

Disclosure: No Positions

Disclaimer: This article is written for informational purposes only.

The Top 4 Healthcare Dividend Stocks – Covered Call Trades – Nov. 6th, 2009

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By Robert Hauver

Starting with picks from the Healthcare section of our High Dividend Stocks by Sector tables, we ran a screen for Healthcare stocks with the highest yields from a combination of the highest dividend yield and covered call options.

We came up with the following 4 firms:

Company

11/05/09 Price

Dividend/Share (pre-expiration)

Dividend %

Covered Call Expiration/ Strike Price

Covered Call Options/Premium

Covered Call %

Total Nominal Static Yields

Annualized Yields

Astra Zeneca (AZN)

$44.82

$1.50

3.35%

April $45

$2.60

5.80%

9.15%

21.95%

Merck (MRK)

$32.83

$0.76

2.31%

April $34

$1.80

5.48%

7.80%

18.71%

Lilly (LLY)

$34.39

$0.49

1.42%

April $35

$1.95

5.67%

7.10%

17.03%

Glaxo Smith Kline (GSK)

$40.33

$0.98

2.43%

May $42.50

$1.90

4.71%

7.14%

14.28%

Within this group, Astra Zeneca and Merck also appear to have the best combination of debt load, management effectiveness, and valuation ratios.  As always with high profile stocks, there may be many other contributing factors that will weigh upon these companies’ futures.  This is particularly true in the Healthcare industry, with the advent of a major healthcare reform bill in the U.S., plus periodic FDA drug reviews, and litigation that often move big pharma stocks’ prices.  In addition, this industry has been undergoing consolidation recently, as firms move to shore up their drug pipelines.

If you’re skeptical about the future of Healthcare stocks, but you still want to “nip at the edges” for profits, you might consider selling cash-secured puts against the ones your research pinpoints as the best stocks.

There are some current put yields on display for some of these and other sectors’ stocks in our Covered Puts Table .

Disclosure: No positions

Disclaimer: This article is written for informational purposes only.

Capstead Mortgage, (CMO) -A Fed Interest Rate Beneficiary – Nov. 4, 2009

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By Robert Hauver

Looking for a strong dividend paying stock that will benefit from the Fed’s historically low interest rate program?

With the recession apparently over, the Federal Reserve on Wednesday held a key interest rate at a record low and again pledged to keep it there for an “extended period” to foster the fragile economic recovery.

Capstead Mortgage, (CMO), a mortgage REIT from our High Dividend Stocks by Sector tables, (they’re in our Financials table), now yielding 17.79%, has the highest dividend yield in the Mortgage Investment sub-industry.  CMO invests in residential Adjustable Rate Mortgages issued and backed by U.S. government agencies, Fannie Mae, Freddie Mac, and Ginnie Mae.

They recently reported a modest decline in Q3 earnings, (down 3.44%), but increased their book value to $12.21 per common unit, which brings their current Price/Book to 1.05, in line with the other 3 high dividend stocks in their peer group: Hatteras Financial, (HTS), Annaly Capital, (NLY), and MFA Financial , (MFA), whose Price/Book values are running from 1.01 to 1.09.

CMO earned $.56/common unit in Q3 and declared a $.56 payout as well, in line with the high payout ratios mandated for REIT’s, in return for not paying corporate taxes.
Businesswire reported these comments from CEO  Andrew F. Jacobs:

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