Tag Archives: mrk

Dogs Of The Dow – Double Your Dividend With Options

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By Robert Hauver

We checked the top 5 current Dogs of the Dow, (the current Dow component stocks with the highest dividend yields), to see how their dividends stack up vs. their covered calls and cash secured puts.  Selling covered calls can be an effective way to protect your portfolio in a down market.

The current Dow Dogs are:

DOW-DOGS-6-11-DIV-PERF

As is often the case, Telecoms have the highest dividend yields in the group, with AT&T and Verizon topping the list.  These 2 dividend paying stocks are in the Telecoms section of our High Dividend Stocks By Sector Tables.  Two Healthcare dividend stocks and Tech giant Intel round out the list.  Verizon has the most aggressive dividend payout ratio, and Intel the most conservative.  Performance-wise, only Pfizer has gained much year-to-date, while Intel and Merck have lagged the others over the past year, which, in Intel’s case, belies the strong EPS growth over the recent past:

DOWDOGS-PEG-6-11

All 5 firms posted sequential EPS gains in the most recent quarter, but Pfizer was the laggard.  Analysts don’t currently believe that Intel can improve a great deal next fiscal year, given the outstanding 160% EPS growth it had this past fiscal year, which gives INTC a high 12-month PEG.  AT&T has the lowest 12-month PEG, 1.25, and the two healthcare stocks look very over-valued, when taken on a PEG basis. Looking out further, only Intel has a 5-year PEG under 1. Intel’s 10.12 P/E is also way below the average 16.41 P/E for the semi-conductor industry.

Financial Ratios:

DOWDOGS-ROE-6-11

AT&T and Intel are the clear winners in Mgt. efficiency ratios and margin, while Intel is nearly debt-free.

So, how do the dividends for these stocks compare to their January 2012 options? These call options range up to 3 times the dividend amounts.  Selling a covered call from any of the trades listed below allows you to at least double your dividend, giving you a 10%-plus static yield, and the potential for additional assigned yield gains. You’ll also get some additional downside protection, via a lower break-even point, by selling covered calls.  The catch is that you’ll have limited participation in upside price gains, should any of these dogs start to run. You can find more info on these and other covered call trades in our Covered Call Table.

Covered Calls:

DowDogs-6-11-CALLS

Feeling not so bullish? Selling cash secured put options can give you an even lower break-even point than the calls listed above. The put premiums below range up to 6 times the dividend amounts for this period.  Your net cash outlay will be the cash reserve minus the put premium you receive. Ex.) For AT&T, you’d have a net outlay of $2,778.00, ($3000.00 less $222.00 received for selling one put. Each options contract corresponds to 100 shares of the underlying stock).  You can find more info on these and other covered call trades in our Cash Secured Puts Table.

Cash Secured Puts:

DOwDogs-6-11-PUTS

Disclosure: Author is long AT&T and Intel.

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

Top Dow Dividend Stocks – Dividends vs. Options

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By Robert Hauver

The Dogs Of The Dow strategy focuses on the Dow dividend paying stocks with the highest dividend yields. Currently, the 3 highest dividend paying stocks in the Dow are AT&T, (T), Verizon, (VZ), and Merck, (MRK).  This week we’ll compare current covered calls and cash secured put options to the dividend payouts for these stocks, all of whom are listed in our High Dividend Stocks By Sector tables.

Here’s how these 3 stocks have performed:

T-VZ-MRK-Perf

Like most other Healthcare stocks, Merck has lagged the market over the last year.  In 2011 it has also lagged the Healthcare sector, which is up nearly 10%.  AT&T and Verizon have both surged over the past year, partially due to the smartphone revolution.  AT&T benefited greatly from its exclusive sales arrangement with Apple, (AAPL), for selling the IPhone, an exclusivity which was lost, when Apple also granted Verizon selling rights in 2011.

Selected Financial Metrics:

T-VZ-MRK-ROE

AT&T is the clear winner in terms of ROE. The 2 Telecoms also have much higher operating margins than MRK.

Valuations:

T-VZ-MRK-VALUE

Again, AT&T has outperformed these other 2 firms, in past EPS and present EPS growth, in addition to having the lowest Price/Book, and PEG ratio, which, at 1.63, isn’t that attractive. However, its PEG for next year, at 1.31, is closer to being undervalued.  Although all 3 stocks are currently far below their values on a Discounted Future Earnings basis, Merck is sporting a very high PEG ratio for the next year, thanks to its stratospheric current P/E.

Covered Calls vs. Dividends:

T-VZ-MRK-CALLS

Selling 6-month covered call options is one way you can increase your income on these stocks. Note how the call premiums are all higher than the dividends paid out during this term.  You’ll find more details on these and other covered calls  in our Covered Calls Table.

Cash Secured Puts:

T-VZ-MRK-PUTS

These cash secured puts will give you an entry point/break-even even further below those of the covered calls.   Our Cash Secured Puts Table has more details on these and other put options trades.

Disclosure: Author is long shares of AT&T, and short puts of AAPL.

Disclaimer: This article is written for informational purposes only and is not intended as investing advice.

Top 5 Dow Dividend Stocks- How To Double Your Dividend

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By Robert Hauver

Unless dividend increases keep pace with the price/share of dividend paying stocks, their dividend yield will decrease.  Conversely, if the price/share falls, the dividend yield will increase.  This week we looked at the top 5 Dow dividend stocks, (2 of which are in our High Dividend Stocks By Sectors Tables), and compared each stock’s dividend yield to a year ago, to see how they fared:

TOP5DOW-DIVCOMP-2011-01-13

As you can see, it’s a mixed bag: AT&T’s  and Pfizer’s dividend yield % increased, Merck’s is flat, while Verizon’s and Kraft’s have decreased, as their price/share has risen quite a bit. Verizon raised its quarterly dividend from $.475 to $.488/share, but this wasn’t enough to keep pace with their 18% price rise. Kraft didn’t increase its $.29/share quarterly dividend.  AT&T raised its dividend from $.42 to $.43, plus AT&T’s price/share has fallen over 3% in 2011, which also accounts for the higher yield.  Pfizer raised its quarterly dividend from $.18 to $.20/share in 2011.

With the top 5 Dow dividend stocks yielding from a low of 3.68% up to 6.13%, income investors might look elsewhere for higher yields.  However, you can easily double the dividend yields of these blue chip stocks, by selling covered calls and cash secured puts.  Here’s a comparison of the annualized dividend yields vs. 6-7 month covered call and cash secured put trades for these 5 Dogs Of The Dow:

TOP5DOW-CALLvsDIV-2011-01-13

With the Covered Call strategy, you collect the dividends AND the call option premium, which is often twice the amount or more of the dividend payout prior to the option expiration date.  The Cash Secured Put Strategy only gets you the put premiums, but these are also often much higher than the dividend payouts, and your break-even price for owning the stock is lower than the current price/share.

Covered Calls Comparison:

TOP5DOW-CALL-2011-01-13

In addition to the dividend and call option income, covered call sellers also have the potential for “assigned” price gains – the difference between their cost/underlying share and the call strike price.

For example, AT&T’s share price in this example is $28.04, and the strike price is $29, so the potential price gain is an additional $.96, which would raise the total yield to 18.57%, 3 times that of AT&T’s 6.13% dividend yield. (There are further details for these call options trades in our Covered Calls Table.)

Cash Secured Puts Comparison:

TOP5DOW-PUT-2011-01-13

Even without the benefit of collecting dividends, selling the put options in these trades would achieve yields of 2 to 3 times that of these stocks’ dividend yields. (There are further details for these put options trades in our Cash Secured Puts Table.)

Note: Selling cash secured puts normally requires your broker to hold a 100% cash reserve in your account, during the term of the trade. For example, if you sold one $28.00 AT&T put, your broker would hold $2800.00 of the funds in your account in reserve.

Disclosure: Author is long shares of and short puts of T, and short puts of VZ.

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

Top 5 Dogs Of The Dow – Highest Dividend Stocks & Options Yields

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By Robert Hauver

Looking for well-known high dividend stocks?  The Dogs of the Dow strategy advocates buying the 10 Dow dividend paying stocks with the highest dividend yield.  This week we narrowed this group down to 5 stocks with the highest dividend yields and the highest option yields.  As usual, there are mixed metrics among the group:

DOGS-Dow-ROE-2010-11-04

Verizon’s ROE, (Return On Equity), of just 1.08, looks particularly flea-bitten, when compared to the rest of the pack.

Valuation metrics:

DOGS-Dow-VAL'N-2010-11-04

While the long-term PEG ratios for these stocks aren’t very compelling, the next year PEG’s for 2 of them, Merck and Kraft, look attractive, as they’re below 1.  This plays into the idea of a shorter term strategy, such as selling Covered Calls or Cash Secured Puts, with Feb. – April expiration dates.

The basic Covered Call option yields for these dividend stocks are listed below.  We’ve listed the complete info for these trades, including expiration dates, and the additional potential price gains, in our Covered Calls table.

DOGS-Dow-CALLS-2010-11-04

The Cash Secured Put options for these stocks also currently offer high options yields:

DOGSDow-Puts-2010-11-04

We’ve added these trades this week to our Cash Secured Puts Table, where you’ll find more details.

Disclosure: Author is short T calls and puts, and long T shares.

Disclaimer: This article is written for informational purposes only.

© 2010 DeMar Marketing.  All rights reserved.

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.

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.