Monthly Archives: December 2009

Selling Put Options – Immediate Cash Yields, Deferred Taxes

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By Robert Hauver

With the New Year looming, 2010 market forecasts are becoming more focused.  There appears to be an early consensus that 2010 will begin well, and taper off in the second half, due to less Fed support, and many other factors.

But maybe you don’t want to wait for a possible market downturn to “buy on the cheap”, but would rather get paid sooner than later?  Income investors looking to lock in some income in 2010 should consider selling puts on dividend paying stocks that they want to own at a cheaper level than today’s prices.  Here are some points to consider:

1. What dividend yield % do you want from a given stock?  If the current yield is too low, determine what price you’d have to pay to reach your goal.  Is there a put strike price with a breakeven point that will bring you close to your target buying price and  dividend yield?

2. Compare the dividend yield to the put option yield.  Is it worth it to sell put options, or would you be better off buying now or waiting for a downturn?  Put option premiums often outstrip dividend payments, but there are tax considerations also.

3. Taxes – If you sell a January 2011 put option, you’ll be taxed as a short term gain at your personal tax rate, BUT, not until the 2011 tax year, if you hold the option until expiration.  Depending upon your tax rate, this could be a pretty good deal – you collect now, but you don’t have to pay taxes on this money until April 15, 2012.

If you close out, (buy to close), the sold put option, this trade is taxed during the year in which it was closed out.

Interestingly enough, the IRS site states that if the underlying stock is assigned to you, instead of reporting a gain on the put sale, you simply reduce your cost basis in the assigned shares by the amount of put premium you received. This means that you won’t pay any tax on this trade until you sell the assigned shares, which would further defer your tax bite.

In our previous articles about Selling Puts vs. Dividends, we listed some specific put selling trades for well-known Dow stocks, that further illustrate this concept.

Nobody can foretell the future, but selling put options is at least one conservative, cash-generating strategy worth considering when looking toward the New Year.

Lilly & Merck – Selling Puts vs. Dividends

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By Robert Hauver

In this article we’ll compare projected dividends to selling long-term Put options for 2 well-known dividend paying stocks in the Healthcare section of our High Dividend Stocks by Sector tables:  Merck, (MRK), and Eli Lilly, (LLY).

LLY is trading today at around $35.56, and pays $1.96/share in dividends, giving it a 5.51% dividend yield.  MRK is currently at $37.66, and pays $1.52/share in dividends annually, which equals a 4.04% dividend yield.

This table compares January 2011 put yields to dividend yields for MRK and LLY:

Current Price Dividend Yield Put Yield Put Strike Price Dividend/Share Put Premium Put Breakeven 52-Week Lows
Eli Lilly (LLY) $35.56 5.51% 12.57% $35.00 $1.96 $4.40 $30.60 $27.21
Merck (MRK) $37.66 4.04% 12.71% $35.00 $1.52 $4.45 $30.55 $31.25

As the table illustrates, selling the Jan. 2011 $35 MRK put option would give you nearly 3 times the yield of MRK’s current dividend payout.

Other advantages of this strategy:

  1. You receive the put option premium within 3 days after the trade, as opposed to having to wait for the next 4 quarters for the dividend payments.
  2. Your breakeven cost is lower. In the MRK example, your $30.55 breakeven is below the 52-week low of $31.25.

Disadvantages:

  1. Taxes – Put sales are taxed as a short term gain, whereas qualified dividends are taxed at 15%, so this strategy is more beneficial the lower your personal tax rate is.
  2. Term – This is a 13-month strategy.  A lot could happen during that time, so you want to be sure that you’re bullish enough on a stock that you’d be comfortable owning it at your breakeven point if it gets put to you.  As usual, it comes down to effective valuation research that will give you a valid entry point.  Investors usually calculate what the dividend rate would be at the breakeven price, as one of many research points.

Our Covered Put table has shorter term put options listed that also compare dividends to put premiums.

Disclosure: No positions

Disclaimer: This article is written for informational purposes only.

USMO – A Wireless High Dividend Paying Stock

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By Robert Hauver

U.S. Mobility, USMO, currently is the highest dividend paying stock in the telecom section of our High Dividend Stocks Sector tables.

A leading wireless communications provider to healthcare, government organizations, and large enterprise companies, USMO’s has the largest one-way and advanced two-way paging systems in the U.S. They focus on business-to-business, and supply a majority of the Fortune 1000 U.S. firms.

At today’s price of $10.64, USMO  currently has a very attractive dividend yield of 9.40%, and has very attractive financial ratios vs. the wireless communications industry, in our industry comparison table:

USMO Communications Industry
P/E 3.46 17.70
P/Book 1.48 2.45
P/Cash Flow/Share 2.08 6.86
Quick Ratio 2.99 .65
Total Debt/Equity NO DEBT 125.00%
Profit Margin 23.32% 8.12%
ROE 42.35% 8.27%
ROA 28.47% 3.44%
Dividend Yield 9.40% 5.90%

USMO has a well-covered dividend, with a dividend payout ratio of 65.60%.  In addition, they just announced that they’ll continue their share buyback program for the 1st quarter of 2010.

USMO pays a $.25/share dividend on a quarterly basis, and its next ex-dividend  date should be approx. Feb. 13, 2010, with a payout date of approx. March 9, 2010, (this hasn’t been declared yet).

For those investors looking for additional yields or downside protection, there are also option trading strategies available for USMO, such as covered calls, or selling put options.

The July $12.50 call, UEFGV, has a bid/ask spread of  $.35 to $.60, so selling this option in a covered call trade would net you an additional 3.3% over 7-plus months, in addition to the $.50/share in dividends, (4.7%), you’d probably get paid during this period.

If assigned, you’d realize an additional $1.86/share, or 17.48%.

The July $10.00 put, UEFSB, is now bid at $.95, an 8.93% yield for 7-plus months.

All things considered, USMO looks like one of the best stocks in the wireless field.

Disclosure: Author owns USMO shares.

Disclaimer: This article is for informational purposes only.

United Guardian (UG) – A High Dividend Stock with Earnings Growth

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By Robert Hauver

With a 5%-plus dividend yield, United Guardian, (UG), is one of the top dividend paying stocks in the Consumer Goods section of our High Dividend Stocks by Sector tables.  UG recently reported record earnings for Jan-Sept. 2009, achieving 20% growth over the same period of 2008.  Net sales were also up 8% compared to Jan-Sept. 2008.

UG negotiated significant price discounts for its main raw ingredient, which cut their cost of sales by 10%, and flowed right through to higher earnings.

The increased earnings has prompted UG to declare a $.32/share increased dividend, payable on Jan. 4, 2010, to shareholders of record on Dec. 18. This dividend brings 2009′s total dividends declared to $.60/share, a 5.77% yield at today’s $10.77 price.

UG also looks like one of the best stocks in the Personal Products group:

United Guardian Personal Products Industry
Debt/Equity NO DEBT 76%
Profit Margin 26.54% 12.50%
P/E 14.87 20.29
Price/Book 3.39 5.54
ROI 35.66 13.88
ROA 21.28 9.98

UG also has a 5-year dividend growth rate of over 40%, vs. an industry average of  11.12%. Their dividend payout ratio is approx. 79%.

Disclosure: No positions yet.

Disclaimer: This article is written for informational purposes only.