The Best Defensive Dow Dividend Stocks To Buy

Posted on November 25, 2011

By Robert Hauver

In spite of over 75% of S&P 500 firms beating or meeting earnings expectations, the Eurozone debt crisis, a slow US economic recovery & the continuing DC stalemate on economic issues, plus slower growth in China are combining to scare investors into a “risk off” position in November. The market has pulled back -9.59% this month, nearly as much as the Sept. selloff, as each of the last 5 months have alternated between rallies and pullbacks.

If you’re an income investor looking for which Dow dividend stocks have been the best stocks to buy in recent months for income and defense, these 3 dividend stocks have all sold off less during these 2011 pullbacks, and have also participated nicely in the rallies. (The only exception is HD’s pullback during the July rally.) They’ve also declined even less in this most recent pullback, (Oct. 28 through Nov. 23, 2011), than in the previous Sept. pullback.

HD-KFT-MCD-PERF

Valuations: HD appears to be the most undervalued stock, on a recent and future EPS growth basis. This seems logical, as HD suffered mightily during the downturn, and homeowners still have to fix their homes eventually. HD’s Price/book is higher that the Home Improvement industry avg. of 2.24, but HD’s very low .83 Price/Sales ratio is in line with industry avgs.

HD-KFT-MCD-PEG

High Options Yields can lower your risk and pump up your dividend yields: Although they’re defensive stocks, MCD and HD have options yields which can help you to turn them into virtual, short-term high dividend stocks.

Covered Calls: If you want to buy these defensive dividend stocks, but gain some downside protection, in the form of a quick “rebate”, selling covered call options is one way to go. In these 2 call option selling trades, you’ll get paid over 6 times the dividend amount now, when you sell call options against the underlying shares.

Selling covered calls allows you to realize some of the stock’s upside potential immediately, and turn a 3% annualized dividend yield into a 15% – to – 23%-plus overall yield. The rub is that you’re committing to sell the stock at the option strike price, even if the stock rises far beyond that price by the Feb. or March expiration date. But if you think the stock and the market will stagnate or swing back and forth during that time period, selling covered calls is a proven way of hedging your bet.

(These call options expire in March for MCD, and expire in Feb. for HD.)

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

HD-MCD-CALLS

Cash Secured Puts: If the recent monthly market reverses have your head spinning , and you want to be more conservative, another strategy is to sell cash secured puts at a strike price below a stock’s current price. This usually offers you an even lower break-even price, which lowers your risk even more, and improves your cash flow, since you’ll get paid put option premiums within 3 days of the trade, (often the same day), instead of waiting for quarterly dividends. (Unlike covered call sellers, put sellers don’t collect dividends.)

Your broker will hold in reserve an amount equal to the value of the strike price times 100, for every put contract that you sell, until the contract expires, or the position is closed out. Each options contract corresponds to 100 shares of the underlying stock.

These put options pay approx. 7 to 8 times more than the stocks’ dividends during this 3-4 month period.

The put options below also expire in March for MCD, and expire in Feb. for HD.

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

HD-MCD-PUTS

Financials: KFT’s Mgt. efficiency ratios are the weakest in the group, and are also below their peer group avgs, while MCD and HD both have above/avg. ROE and ROI for their peer industries.

HD-KFT-MCD-ROE

Technical Data: As usual with defensive stocks, these equities all have low beta’s. MCD and HD are still over 30% above their 52-week lows, but selling the put options listed above would give you a break-even that’s only 19% above MCD’s low, and 21% above HD’s low:

HD-KFT-MCD-BETA

Disclosure: No positions at this time.

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

How To Turn Dividend Aristocrats Into High Dividend Stocks

Posted on November 16, 2011

By Robert Hauver

The Dividend Aristocrats are thought by many dividend investors to be the best stocks to buy for dependable dividends. This makes sense, since these dividend stocks have raised their dividends every year for the past 25 years. However, even with investors scrambling for low risk yield, some of these dependable dividend paying stocks are out of favor in the market, and appear undervalued:

Dividends:

ADM-WAG-DIVS

ADM-WAG-PEG

Valuations: ADM and WAG both have low PEG’s for next year and the next 5 years. They also have very low Price/Sales and Price/Book ratios. WAG has been discounted by the market this year, as a result of its ongoing negotiation with Express Scripts, over pay rates for prescription drugs. If WAG drops the Express Scripts deal, (approx. up to 5% of revenue), they estimate it’ll take off $.21/share from its 2012 earnings, which will put WAG’s projected 2012 earnings about flat with 2011.

Options: Although ADM and WAG aren’t high dividend stocks, you can easily earn a high yield on them, via selling options.

(These put and call option trades all expire in March for ADM, and April for WAG.)

Covered Calls: These 2 trades have call option premiums that will pay you 9 to 12 times the amount of the dividends during the 4-5 month terms. (See the highlighted areas in the tables below.)

Other bonuses: You’ll get paid your option premiums within 3 days of the trade, (often the same day), and you’ll lower your risk via having a lower break-even price.

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

ADM-WAG-CALLS

Cash Secured Puts: If you’re wary of this current market, and you’d like to be even more conservative, another strategy is to sell cash secured puts at a strike price near or below the stock’s current share price. You can often achieve an even lower break-even price, as seen below with WAG, and lower your risk even more. Selling cash secured put options is a strategy via which you get “paid now to wait”. However, unlike covered call sellers, put sellers don’t collect dividends.

The put options below pay approx. 11 to 13 times more than the dividends during this 6-7 month period.

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

ADM-WAG-PUTS

Earnings: Although WAG and ADM aren’t growth stocks, they both had strong EPS growth quarter-over-quarter, and are projected to grow at steady rates during their next fiscal year:

ADM-WAG-EPS

Financials: ADM just announced this week that it will build a 265 million liter (70 million gallon) biodiesel plant in Alberta, Canada, which will increase ADM’s North American biodiesel production capacity by 50%. Biodiesel produced at ADM’s facility in Lloydminster will help fulfill Canada’s renewable diesel mandate. (Since July 1, 2011, all diesel fuel and heating oil sold in Canada must contain at least 2 percent biodiesel.)

ADM, as the 2nd largest ethanol producer, has had its ethanol margins squeezed by ongoing rising corn prices, hence the lower than avg. operating margin seen below:

ADM-WAG-ROE

Disclosure: No positions at this time

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

2 Easy Ways To Triple Your Yields On Dow Dividend Stocks

Posted on November 11, 2011

By Robert Hauver

Do you think that Dow dividend stocks are the best stocks to buy now for dividends and safety? You’re not alone – the Dow has beaten these other major indexes year to date, and also in November, as of 11/10/11:

Although it trails the NASDAQ and the RUSSELL 2000 small caps, the Dow is also nearly even with the S&P 500 since the start of the March 2009 rally.

We found 2 Dow dividend stocks with good metrics and low beta’s, which are therefore less volatile than the market, but which also offer attractive dividends. Coca Cola Co. is also one of the Dividend Aristocrats, a group of dependable dividend paying stocks that have increased their dividends every year for the past 25 years:

CVX-KO-DIVS

You could also more than double your dividends on these stocks, via selling Covered Calls and Cash Secured Puts. (The call and put option trades listed below for CVX expire in June, and those for KO expire in May.)

Covered Calls: One of the big pluses of selling covered call options is that the call option premiums you sell are often more than 2 to 3 times the amount of the dividends during the term of the trade. (See the highlighted areas in the tables below.)

Two other bonuses: You’ll get paid your option premiums within 3 days of the trade, if not the same day, and, you’ll lower your risk by virtue of having a lower break-even price.

(You’ll find more details on this and over 30 other high yield covered call trades in our Covered Calls Table.)

cvx-ko-calls

Cash Secured Puts: If you want to be even more conservative, and achieve an even lower break-even price, selling cash secured put options below the stock’s current price is an options strategy via which you get “paid now to wait”. Unlike covered call sellers however, put sellers don’t collect dividends.

The put options below pay approx. 4 to 4.5 times more than the dividends during this 6-7 month period.

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

CVX-KO-PUTS

Financials: For the most part, CVX and KO have better metrics than the DOW 30 averages, and both firms also have better metrics than their industry peers.:

CVX-KO-ROE

Valuations/Earnings: Although these monolithic firms certainly wouldn’t be considered growth stocks, they both had strong growth in their most recent fiscal years, and quarter over quarter. Analysts are currently predicting that CVX won’t be able to increase their earnings in their next fiscal year, but they may be wrong, given the volatility of oil prices that have arisen from the socio-political dramas of the Arab Spring, and many other oil-producing parts of the world. Coke has also managed to grow its earnings better than its beverage industry peers.

CVX-KO-PEG

Disclosure: Author is long shares of CVX.

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

3 Defensive Dividend Stocks That Also Rallied In October 2011

Posted on November 1, 2011

By Robert Hauver

With the turbulent market spinning between rallies and corrections in 2011, are you looking for defensive dividend paying stocks that also have upside rally performance? The 3 Utilities dividend stocks in this article were some of the best stocks to buy in 2011 so far, since they’ve all beaten the S&P year to date, during the recent correction, and have also gained in price during the October 2011 rally:

ED-DUK-WGL-PERF

All 3 of these dividend stocks pay quarterly dividends and are listed in our High Dividend Stocks by Sector Tables.

DUK-ED-WGL-DIVS

Only Duke Energy has somewhat high options yields, and is listed in both our Covered Calls Table and our Cash Secured Puts Table.

Company Profiles:

WGL Holdings: WGL is a public utility holding firm that serves the D.C. metropolitan region.
Washington Gas, its leading subsidiary, has provided natural gas service to customers in the D.C. area for over 160 years and currently serves over one million customers in DC, Maryland and Virginia. WGL’s unregulated subsidiaries provide energy-related services to residential and commercial customers, including government organizations.

Con Edison: For over 180 years, Con Ed has served the metropolitan New York marketplace. Its principal business segments are: regulated electric, gas and steam utility activities, competitive energy businesses. Con Edison of New York provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County, and also provides steam service in parts of Manhattan. The O&R division provides electric service to 301,000 customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to 130,000 customers in southeastern New York and adjacent areas of eastern Pennsylvania.

Con Ed is a member of the S&P Dividend Aristocrats, having increased its dividends every year over the past consecutive 25 years.

Duke Energy: Duke is one of the biggest electric power companies in the US, supplying and delivering energy to approx. 4 million U.S. customers. Duke has approx. 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest, and natural gas distribution services in Ohio and Kentucky. Duke’s commercial and international businesses own and operate diverse power generation assets in North America and Latin America, including a portfolio of renewable energy assets. Headquartered in Charlotte, N.C., Duke Energy is a Fortune 500 company.

Financials:

Valuations/Earnings:

Con Ed just reported Q3 2011 EPS of $1.31, vs. $1.24 for Q3 2010, and 9 months’ EPS of $2.94 vs. $2.69 during the same period in 2010.

Duke just reported Q3 2011 adjusted diluted earnings per share (EPS) of $.50, vs. $.51 for Q3 2010, and also increased its full year guidance to $1.40 – $1.45/share, from $1.35 – $1.40.

All 3 firms have valuations below the broad utility sector avgs:

Disclosure: Author owns no shares of WGL, ED, or DUK as of 11/3/11.
This article is written for informational purposes only and author will not be held responsible for
errors or omissions or losses sustained by third parties as a result of acting upon information herein.