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:
- 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.
- Your breakeven cost is lower. In the MRK example, your $30.55 breakeven is below the 52-week low of $31.25.
Disadvantages:
- 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.
- 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.
