Posts Tagged ‘put option’

Cato Corp., (CATO), An Apparel Dividend Stock With Fashionable Option Yields

Friday, July 9th, 2010

Cato Corp., is a fashion specialty retailer which is listed in the Consumer Discretionary section of our High Dividend Stocks by Sector tables. They target value and fashion-oriented females, and operate over 1200 women’s fashion stores, primarily in the southeastern U.S. They just reported that same-store sales are up 5% year-to-date, and that June sales increased 1%.  In their last fiscal quarter, ending 5/01/10, their revenue rose 8.9%, and their net income jumped 44%.

This is a conservatively managed firm, with zero debt, and it fares well in our Industry Comparison Table:

CATO Apparel Industry
P/E 11.81 16.24
Price/Free Cash Flow 11.27 19.98
Price/Book 2.11 2.88
Debt/Equity NO DEBT 28.47%
ROE (TTM) 18.09% 3.66%
ROI (TTM) 17.14% 2.26%
Dividend Yield 3.33% 1.81%

There are attractive covered calls and cash secured put options trades available for CATO.

These two covered call trades yield from 14.7% up to a potential 34.9% annualized:

(July 8. 22, 2010 closing price) Dividends Pre-expiration Expi-ration month/Call Strike Price Call Bid Premium Total Static Yield (Annualized) Potential Assigned Yield (Ann’d) Total Potential Yield (Ann’d)
$22.56 $.37 Jan.2011/$22.50 $2.25 21.7% -.06% 21.01%
$.37 Jan.2011/$25.00 $1.40 14.84% 20.2% 35.19%

For more conservative investors, there’s also an attractive put option trade, with a 22%-plus yield and a lower break-even price, listed in our Put Selling Table.

CATO pays an $.185/share quarterly dividend, with their next ex-dividend date coming approximately Sept. 10th.  They have a 35% dividend payout ratio.

Disclosure: No shares held at this time

Disclaimer: This article is written for informational purposes only.

© 2010 DeMar Marketing. All rights reserved.

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Linear Tech, (LLTC) – An Undervalued Tech Dividend Stock With Growth Potential

Friday, May 14th, 2010

If you’re looking for undervalued dividend paying stocks in the Tech sector, you may want to consider Linear Technology, (LLTC), a firm which designs, manufactures and markets integrated circuits in the Specialized Semiconductor sub-sector.  A recent addition to the Tech section of our High Dividend Stocks by Sector tables, LLTC currently has a 3.26% dividend yield, paying $.23/share quarterly.  You can also increase your yield on LLTC, via options trading strategies, such as selling covered calls or selling put options.

LLTC fares well in our Industry Comparison table:

LLTC Semiconductor Industry
P/E 22.24 28.30
Price/Cash Flow/Share 18.92 22.83

ROE

 45.01 10.74
ROA 18.55 8.06
ROI 49.37 9.65
Debt/Equity NO DEBT 19.30

LLTC also offers investors strong prospects for growth. In April, LLTC reported a 100% increase in net income of $.44/share, and a 55% jump in revenue.  Forbes reports that, LLTC’s “trailing 12-month earnings have already replicated its best ever four consecutive quarters”…”subsequent comparisons will necessarily moderate, but likely sustain 25 % to 30% or even higher rates of growth through 2012.” Indeed, using a baseline valuation method, even using a much lower growth rate of 15%, indicates an intrinsic value of $49.36.

Using the current consensus 2011 growth rate of 31% shows a PEG of just .74 for LLTC, which would also indicate that it’s undervalued.

More defensive, income-oriented investors may wish to hedge their bets on LLTC by selling covered calls.  However, they may miss out on a substantial upside gain.

Our Covered Call table lists the Jan. 2011 $30.00 call, which had a bid today of $2.20, an 11.5% annualized yield.  In addition, covered call sellers should receive two dividend payments of  $.23/quarter prior to the Jan. expiration, for a total payout of  $2.66/share.

The total static yield on this 8-month trade would be 9.4%, or 13.9% annualized.  The breakeven on this covered call trade is $25.52.

The potential assigned yield offers an additional $1.06/share, (3.79%), which could increase your total potential assigned yield to 13.29%, or 23.40% annualized.

Alternatively, if you wanted an even lower break-even point, you could sell cash-secured put options. Our Covered Puts table currently lists the Jan. 2011 $25 put, which was bid at $2.05 today, for an 8.2% yield in 8 months, or 12.07% annualized.

This would give you a $22.95 breakeven, which makes LLTC’s $.92/share dividend equate to a 4.1% yield. (These put-selling yields are based upon 100% cash reserve.)  LLTC closed today at $28.18.

Disclosure: No positions at this time.

Disclaimer: This article is written for informational purposes only.

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Posted in Dividend Stocks, Option Trading | 2 Comments »

Selling Put Options – Immediate Cash Yields, Deferred Taxes

Saturday, December 26th, 2009

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.

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Lilly & Merck – Selling Puts vs. Dividends

Friday, December 18th, 2009

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.

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

Wednesday, November 4th, 2009

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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Drilling For Dividends With EV Energy – Oct. 3,2009

Saturday, October 3rd, 2009

If you’re searching for strong dividend paying stocks, make sure that you take a look at our new High Dividend Stocks by Sector tables, where you’ll find some of the best dividend stocks in each industry sector.

EV Energy, (EVEP), which currently tops our Energy Sector table, is one of the best stocks on this list, in terms of their industry comparisons. Not only do they have the highest dividend in the Oil & Gas Drilling/Exploration group, they outshine their peers by many other important metrics:

EVEP Oil&Gas Drilling-Exploration Industry
Dividend Yield 13.01% 2.24%
P/E 1.33 13.45
P/B 0.77 2.85
Current Ratio 8.43 1.3
P/Cash Flow/Share 1.26 8.23
Operating Margin 20% 10.08%
ROE 81.64% 12.58%
ROI 63.00% 6.86%
ROA 45.64% 4.97%

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Bottom Fishing For High Dividend Stocks – Part 4 – June 19, 2009

Monday, August 24th, 2009

In this article, we’ll look at another high dividend stock with a great balance sheet, high dividend yield, (over 6%), and low dividend payout ratio, (under 40%), and a steady history of increasing dividends.

Another uncommon characteristic of this stock is its very low PEG ratio of .57, which means that its price is very cheap , relative to earnings growth.

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The Top 5 Dividend Stocks for 2009 – Part 3 – Buying Stocks At A Discount – May 20, 2009

Monday, August 24th, 2009

In parts 1 & 2 of this series, we identified 2009’s top 5 dividend paying stocks, based on total cash payouts to investors. We also discussed a strategy that will protect your dividend yield against a market pullback.

In this article, we’ll discuss an option trading strategy through which you can buy a stock at a discount to its current price, or, at least earn a nice yield by trying to.

If you have your eye on some high dividend stocks, or you’ve put together a best stocks watch list, but the current prices are too high, you can often utilize selling put options to make sure you still profit from these stocks.

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Using Put Options To Sneak Up On A Stock” – April 11, 2009

Monday, August 24th, 2009

Selling put options is an option trading technique that we often utilize to “sneak up” on the best stocks on our watch list that we want to take a position in.

You may not realize it, but trading options, such as selling covered calls and puts, is a strategy that even many conservative investors use to augment their dividend stock income.

Have you ever found yourself in a position where you’d like to buy dividend paying stocks, but the current prices are just too expensive, and the dividend yield is too low to justify buying right now?

Instead of just buying this stock, take a look at selling puts against it. To illustrate this strategy, let’s look at the data for Kraft Foods, (KFT), which closed this week at $22.35.

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