2 Blue Chip Dividend Stocks Going Ex-Dividend Soon, With High Options Yields

by Robert Hauver
Looking for a safe way to increase your yields?
Our DoubleDividendStocks.com investing service has been specializing in combining options-selling with high dividend stocks since 2009.

Our Covered Calls Table features over 25 covered calls trades, which we update throughout each reading day. Two trades that caught our attention this week are for blue chip dividend stocks Boeing, (BA), and Intel, (INTC).

Both BA and INTC go ex-dividend in early August:  BA goes ex-dividend ~8/9/18, and INTC goes ex-dividend ~8/6/18. They both have conservative payout ratios, but a relatively low dividend yield.

Options:
Although neither one is in the realm of high divided stocks, you can make up for that, via selling covered calls. The August quarterly dividends make for an attractive setup for these covered call plays.
For BA, we chose a $365.00 call strike which is ~3% above its current $354.44 price/share. This call strike pays $5.20, with a tight bid/ask of $5.20/$5.30.
The $5.20 call option payout is ~3X BA’s quarterly $1.71 dividend. It transforms it from a ~7% annualized yield to a ~21% annualized yield, since the trade has just 25 days until it expires.

Here’s a breakdown of the 3 profitable scenarios for the BA trade. Since the $365.00 call strike is $10.56 above BA’s price/share, there’s ample compensation for potentially missing out on the quarterly $1.71 dividend, if the shares rise to $365.00 and get called away prior to the August ex-dividend date. We listed the nominal yields for each scenario:

The INTC trade is right at the money, with a $52.50 call strike, vs. INTC’s $52.30 price/share. The call bid of $1.44 is well over 4X INTC’s $.30 quarterly dividend.

Since both BA and INTC have had very strong price gains in the past year, and are fairly close to their 52-week highs, here’s another strategy to consider.
We’ve added these August put-selling trades to our Cash Secured Puts Table, which has over 30 trades that are updated throughout each trading day.
The August $345.00 BA put strike pays $6.40, which is well over 3X BA’s quarterly dividend, and offers a breakeven of $338.60.
The INTC August $50.00 put pays $.81, which is over 2X INTC’s $.30 quarterly dividend, and has a breakeven of $49.19.
There are plenty of other Put option and Call option strike prices you can choose from. As you get further away, (higher) from the underlying stock’s price/share, the call option bid premiums are lower in value. Conversely, lower put strikes don’t pay as much as those which are closer to the underlying stock’s price/share. One other note – put sellers don’t receive dividends.

Performance:
As we noted above, both BA and INTC have had quite a price run over the past year – BA is up 68.77% and INTC is up 49.38%.

Price Targets:
At their current prices, both BA and ~12% below analysts’ consensus target prices.

Financials:
That bodacious ROE figure for BA isn’t a typo – BA’s management has opted to use more debt than equity in financing its growth over the years. So, its ROE is very high, but its Debt/Equity ratio is also quite high, vs. industry averages.
Like BA, INTC has stronger than average ROA, ROE, and ROI figures, and also has a much better Operating Margin. Its Debt/Equity ratio is higher than industry averages, but not nearly as much as BA’s is.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure:
Author owns no shares of BA or INTC at present time.
Copyright 2018 RH Group Inc. All Rights Reserved.

The Top Dow Dividend Stocks For First Quarter 2012 Earnings

By Robert Hauver

25 of the 30 Dow Jones Industrials have reported 1st quarter 2012 earnings so far. 18 firms have reported positive growth, and 7 have reported negative growth, with the range running from Boeing, (BA), with 54% year-over-year 1st quarter growth, down to beleaguered Bank of America, (BAC), with -82%. These 2 Dow dividend stocks reported the best 1st quarter 2012 earnings growth year-over-year:

Click here to read more…

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

2 Dow Dividend Stocks With Undervalued Earnings Growth

By Robert Hauver

Although the market has had a large rally over the past few months, the Dow 30 still lags the NASDAQ significantly in 2012, (the DOW is only up 6.78% YTD vs. NASDAQ’s 17.59% gain as of 3/22/12),  This led us to look for undervalued Dow dividend stocks with low PEG ratios, and strong earnings. Our search produced these two familiar stocks, Boeing, and Microsoft:

BA-MSFT-PEG

Boeing has gained nearly 7% in 2012, (there’s a Performance table at the end of this article), but it’s still only up less than 3% over the past 12 months.  Meanwhile, BA has grown its earnings substantially, so that it now has a much lower P/E than its industry peers.

With its strong growth forecast for its next fiscal year, BA has the second lowest PEG ratio of all the Dow 30 stocks.  Although BA has a very high Price/Book, this is partially explained by its very high Return On Equity, (ROE), of 127.72%. (See Financials table further on in article.)

After being range-bound within the $20’s for around two years, Microsoft has risen into the low $30’s.  However, it still looks fairly cheap on a PEG basis, coming in at .97. Even though its earnings and sales growth trail its industry averages, MSFT is one of the few dividend paying stocks within its industry, and offers a fairly good dividend yield, and a very good dividend growth rate.

Dividends: MSFT increased its quarterly dividend by 25% in 2011, from $.16 to $.20/share.  Boeing increased its quarterly dividend in Feb. 2012, to $.44/share from $.42/share.  Both stocks have a conservative dividend payout ratio:

BA-MSFT-DIVS

Covered Calls: Income investors wanting to hedge their bets often sell covered call options, creating additional immediate income by receiving call options premiums, and thereby lowering their break-even cost.

As the table below illustrates, in these 2 covered call trades, the call options pay you 3 to 6 times what the dividends pay during the 4-5 month period. What’s the catch?  By selling a call option, you’re obligated to potentially have to sell the shares at the call strike price by expiration time. (Generally, your shares will get assigned/sold if the stock goes above the strike price at or near expiration.)

There are 2 strategies in the trades listed below – the BA call has a higher strike price than BA’s share price, which gives you some room for potential price gains- (BA $75 .00 strike price is $1.08 above BA’s $73.92 share price). Conversely, the MSFT call strike price is right “at the money”, meaning the $32.00 strike price equals MSFT’s $32.00 share price. This leaves no room for potential price gain, but gives you a higher call option premium.

More bullish covered call sellers sell at higher strike prices, earning a lower call premium, whereas less bullish call sellers would sell calls with strike prices that are closer to the share price, and would get paid a higher call premium.

(You can see additional details for this and over 30 other high options yields trades in our Covered Calls Table.)

BA-MSFT-CALLS

Cash Secured Puts: An alternative option trading strategy is to sell cash secured puts, which obligate you to potentially have to buy the stock at the strike price, if the stock goes below the strike at or near expiration.  Generally, call and put options don’t get assigned until sometime near the expiration date, since call and put buyers don’t want to forfeit too much of the options’ time value.

Why would you sell cash secured put options?  If you want to buy a stock at a lower price than its current price, the put premium $ that you receive lowers your break-even cost, so that, even though you may end up being assigned/sold BA at the $72.50 strike price, your net cost is only $68.70, the difference between the $72.50 strike price and the $3.80 put premium you received.  Meanwhile, you have the use of that put premium $.

Investors are often surprised to hear that Warren Buffett has been known to sell put options, via private off-market deals, on companies he’s interested in buying, sometimes pocketing millions in put premiums now on expiration dates that go out a few years – it’s a very good cash flow deal.

These put options pay out 4 to over 7 times what the dividends pay out during this 4-5 month term. (You can see more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

BA-MSFT-PUTS

Financials: BA and MSFT both have mgt. efficiency ratios that far outshine their industry averages.  BA’s debt load is higher than avg., but their interest coverage is very strong, but not as high as MSFT’s very high interest coverage of 77. BA’s ROE of 127.72% is currently the highest of any stock in the Industrials sector.

BA-MSFT-ROE

Performance:  Although MSFT has been one of the best stocks to buy in 2012 for price gains so far, it’s still has a moderate Relative Strength of 55.55. With its RSI of 43.33, BA is closer to the sub-40 oversold area:

BA-MSFT-PERF

Disclosure: Author holds no shares of any stocks mentioned in this article at this time, but may sell cash secured puts during future market pullbacks.

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

Analysts Are Clueless About These Dow Dividend Stocks

By Robert Hauver

Earnings season is on a roll, and traders are playing the old “earnings estimates beats/misses” game, which often has tenuous ties to reality, at best, as analysts go from being over-excited to being overly pessimistic.  Here’s just how wrong analysts have been about Caterpillar over the last 4 quarters:

CAT-ANLYSTMISSES

Could it be that CAT is just a special case?  Not really – analysts were even more clueless about Boeing.  Can you just imagine, (I shudder to think), if you were to submit an estimate to your boss that was off by over -80%, and then followed up that brilliant piece of work with another estimate that was off by over -30%?   Do you think it might possibly prompt a reassignment or even a permanent vacation?  Not so on Wall St. – where being consistently and often egregiously wrong is OK.

Why is that?  Because it supports the trading excitement of “Earnings Beats & Misses”.  Just think about it, the market often bases its decisions on the estimates of a group of external people, who don’t have access to the daily, inside info of the stocks they’re supposed to be informing us about.  If this sounds like folly, it often is:

BA-ANLYSTMISS

Instead of just listening to analysts “pie in the sky” or “gloom and doom” predictions, try looking at what companies actually earned each quarter vs. a year ago:

BA-CAT-EPS GROWTH

We can also look at their quarterly Revenue Growth vs. a year ago:

BA-CAT-SALES

CAT has been one of the best stocks to buy in 2012 and in 2011 for price gains, but Boeing shares haven’t risen nearly as much. Here’s one reason why.  BA is forecasting lower 2012 earnings per share, of $4.05 to $4.25, vs. 2011’s $5.33 EPS, whereas CAT is forecasting continued strong growth. Even though BA has a record order backlog, unlike other companies, they can’t rush their highly technical products to market.

BA is forecasting just $4.05 to $4.25, but analysts are estimating $4.46/share 2012 EPS, AND, guess what?  Analysts are currently forecasting EPS of $5.67 for BA in 2013, which is 6.4% over BA’s 2011 earnings. Do you believe them?:

CAT-BA-PEG2012

How can a value investor take advantage of Analysts’ mistakes?  By waiting for the analysts’ next overheated incorrect estimate, which may be so ridiculously high that even a company posting strong gains can’t “beat” it, which is what happened with CAT in 2011, when analysts had somehow not factored in the expenses of CAT’s multi-billion dollar purchase of mining equipment maker Bucyrus.

When the stock gets beaten up, and discounted unnecessarily, make your move, and buy it, OR, do this:

Sell Cash Secured Puts: If you want to give yourself more breathing room, you can sell  cash secured put options below the stock’s current price, which will give you a lower break-even price. 2 other important benefits:  you’ll get paid now to wait, and you’ll often get paid much more than the next few quarters’ dividends.  Fortunately, CAT has rather high options yields which are much higher than its dividend yield.

In these two examples, CAT’s put options pay over 9 to 12+ times the amount of its dividends. The further out in time you sell options, the more premium you’ll get paid, and the lower your break-even price will be.  However, your annualized yield will also be lower, because your broker will be holding a cash reserve of 100 times the Put Strike Price in your account against each Put that you sell, until the put expires or is assigned or you buy it back to close out your position.

(You’ll find more info on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.):

CAT-PUTS-2-23-12

How to hedge your gains with Covered Calls: Conversely, if you now own CAT shares, and you’re leery of a market pullback, selling covered call options will protect some of your profit, by giving you additional option income on your shares. The caveat is that, by selling a call option, you’re obligating yourself to sell your shares at whatever strike price you sell the calls at. Typically, the shares will get assigned near or at expiration, if the stock rises above the strike price.  So, you’re foregoing potential price gains, in return for immediate option income.

However, these 2 covered call trades each have strike prices above CAT’s current stock price, offering you the potential for an additional $3.80/share in price gains, if your shares get assigned. The longer-term August call options pay more than the May calls, and both call options heavily outstrip the corresponding dividend payouts. (One options contract corresponds to 100 shares of stock.)

(You can see more details for these and over 30 other lucrative option trades in our Covered Calls Table.):

CAT-CALLS-2-23-12

Financials: Although they aren’t high dividend stocks, these two DOW dividend stocks both have attractive Mgt. Ratios, and good interest coverage, but if you’re looking for 2012 growth at a reasonable price, CAT is the more undervalued of the two.  In fact, CAT is one of the few DOW 30 stocks to have a low 2012 PEG ratio. However, as CAT has risen almost 29% year-to-date, you may want to wait for a pullback before jumping in.

BA-CAT-ROE

Disclosure:  Author is short CAT put options.

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

5 Undervalued Dow Dividend Stocks With Strong Growth & Double Digit Covered Calls

By Robert Hauver

We’re halfway through 2011, with the Dow up 7.23%, and the S&P up 5.01% so far. Not bad, especially when you compare it to the first half of 2010, in which the Dow fell -6.3%, and the S&P was down -7.9%.  Of course, the second half of 2011 most likely won’t have the benefit of a massive QE2 $ injection, like 2010 had.  So, what do you do to lock in some gains on some undervalued dividend paying stocks?

Selling covered calls is one proven way to more than double your dividends, and also lower your downside risk.  This week, we found 5 Dow dividend stocks with low Price/Earnings Growth ratios, (PEG),  and double-digit covered call option yields.

BA-CAT-GE-DIVS

Although they don’t qualify for our High Dividend Stocks By Sectors Table, a majority of these firms’ dividend yields are above the current 2.39% S&P average, and they all have a conservative dividend payout ratio.  JPM has also indicated that it’s hoping to increase its dividend in the near future.

Valuations:

BA-CAT-GE-PEG

All 5 firms achieved EPS growth in the past fiscal year and quarter-over-quarter. They all also all look undervalued on a PEG basis for their next fiscal year. TRV lags behind the other firms big EPS growth figures, mainly because their Business Insurance segment’s underwriting results in 2010 deteriorated, largely due to a sharp increase in catastrophe losses. The combined loss and expense ratio increased to 91.3% in 2010, vs. 86.1% in 2009.

Share Performance/Technical Data:

BA-CAT-GE-PERF

TRV has outperformed the S&P year-to-date, but CAT and BA trounced it by nearly 3 times.  GE, still re-focusing its many segments, was just below the S&P’s performance, while JPM, as a part of the still-dreaded Financials sector, is actually negative through June 30, 2011.

JPM, TRV, and CAT are approaching the oversold, sub-40 Relative Strength Index threshold, whereas GE’s 51.69 RSI is neutral, and CAT’s 60.39 RSI is on the cusp of Overbought territory. All 5 stocks had good gains this week, and CAT has made 40% of its YTD gains this week.

Covered Calls – (Jan. 2012 Expiration):

Look at the disparity between the call option yields and the dividend yields for this 8-month term.

The call options pay over 3 to 7 times the amount of the dividends. There are also some additional potential price gains with these covered call trades, most notably with CAT, BA and TRV.

BA-CAT-GE-CALLS

You can find more details on these and other Covered Call trades in our Covered Calls Table.

Cash Secured Puts – (Jan. 2012 Expiration):

If you’re less bullish, you can take a more conservative stance, and still earn attractive options yields, via selling cash secured put options at a lower strike price than the current underlying stock price.

This will give you the added protection of a lower break-even price. (Note: The dividends are listed on this table for comparison only – put sellers don’t collect dividends.)

BA-CAT-GE-PUTS

You can find more details on these and other Cash Secured Put trades in our Cash Secured Puts Table.

Financial Metrics:

BA-GE-CAT-ROE

The Financial metrics are a mixed bag for this group, ranging from stellar mgt. efficiency ROE figures for BA and CAT to low ROI figures for GE and JPM, 2 firms which are still recovering from the impact of the recession.  Except for TRV, all these firms are leveraged, with high Debt/Equity ratios, but also appear to have reasonable interest coverage. (For what it’s worth, the aggregate Debt/Equity ratio for the S&P is only .69, but, of course, debt/equity varies by industry.)

Disclosure: Author is long GE, and short CAT puts & JPM puts.

Disclaimer: This article is written for informational purposes only.

Dow Dividend Stocks – Top 7 Cash Secured Put Options

By Robert Hauver

Dow dividend stocks aren’t usually mentioned in the world of high dividend stocks, but selling cash secured put options is a way you can earn some impressive double-digit annualized yields out of even these modest dividend paying stocks.

We screened for the top 7 put selling yields for DOW dividend stocks and came up with these 7 option trades:

DowPuts9-7-10

(All of the above put bid yields are based upon 100% cash reserve)

As you can see, these put yields far outstrip the dividend yields, and in a shorter 5-6 month time period.  Hence, the annualized yields are pretty impressive.

We’ve added some of these put options this week to our Cash Secured Puts Table, which will show more detail.

Why sell cash secured puts, instead of just buying the stock outright?

  1. More Risk Protection – By earning the higher put option $, you’re lowering your break-even cost, and giving yourself greater downside protection.
  2. Better Cash Flow –  You get paid the put premium within 3 days of selling puts, as opposed to waiting each quarter for a dividend payout.
  3. Higher Yields – This happens 2 ways: In the above trades, the put yields are 2 to 9 times that of the dividend yields.  Also, with your lower breakeven cost, if the shares do get assigned/put to you, the ultimate dividend yield on the underlying shares will be higher, due to its lower cost.
  4. Potential Tax Deferral –  The IRS rules state that,”If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.” (Source:www.IRS.gov/publications)         This means that you don’t have to pay taxes on the put $ you received until you sell the assigned underlying shares. If you hold the underlying assigned shares for more than 1 year, you’ve also converted a short-term gain into a long-term gain.
  5. Knowing your “trade range” before trading–  This strategy tells you your maximum gain and break-even cost, before you invest, as opposed to buying, and hoping for price appreciation.

Cons

  1. Options gains are always taxed at short-term capital gains rates, which will be higher than qualified dividend tax rates.
  2. Put options sellers are required to have 100% “cash reserve” by their brokers, i.e., your broker will set aside 100% of the value of the underlying shares against which you sell puts. 100% cash reserve is always required in an IRA account, but, investors with thorough options experience may qualify for Options Level 3 trading status, which lets the broker reduce the cash reserve to a lower 25-35% approx. range, thereby employing leverage.  A note of caution here: if you do employ this type of leverage, it’s very important to keep track of your potential exposure, and not get in over your head.
  3. Cash secured put selling is a strategy that requires a bit more of a hands on approach, as opposed to the “buy and hold” strategy. However, this strategy shouldn’t be confused with day trading – Put sellers make their sale, collect the put $, and monitor the put’s value during the investment term, as opposed to jumping in and out of a trade every day.
  4. Less rally participation – The maximum gain on selling cash secured puts is the amount of $ you receive when making the put sale, so, this profit could potentially be less than the eventual price appreciation of a stock.

Is it worth it?

Some investors would argue that, if you do nothing, and the stock’s price declines, you could also own the stock a lower cost.  That could be happen, but looking at the possible outcomes in the market, selling cash secured put options offers a greater chance for income:

PutSellingOutcomes

Another issue to consider here is time value of money, and what you’ll earn on your money, while you wait for a stock to hit your price.

In addition, due to the timing factor in options, time favors an option seller over an option buyer, since the buyer must guess the stock’s ultimate price direction and price level, and must be correct before the option expires.  That’s often a very tall order, and it’s one of the reasons that 3 out of 4 options expire worthless – which is a distinct advantage for an option seller – time is on your side.

Disclosure: Author is short INTC puts.

Disclaimer: This article isn’t intended as investing or accounting advice.

Dow Dividend Stocks – Top 5 Covered Calls

By Robert Hauver

Maybe you want to buy blue chip Dow dividend stocks, but you don’t have much faith in price appreciation, given the market’s performance in 2010 thus far.  Selling covered calls often allows you to lock in a much higher yield than the current dividend yield of most dividend paying stocks.

We screened for the highest at the money covered call trades for the Dow 30, and came up with yields ranging from 8.54% to 10.17% for CAT, GE, BA, MSFT, and INTC. (Full names in table below.)  Pretty nice yields, especially when you consider that the annual yields for these 5 stocks range from just 2.18% to 3.20%.  Given that these option trades are all 6 to 8 month trades, their annualized yields are even higher, as you can see below:

DowCovCalls-9-1-10

(We’ve listed these trades this week in our Covered Calls Table, which gives you more specifics.)

Here’s a Performance table which lists each stock’s Year-to-Date, 2nd Quarter, and 1-Year price performance:

Dow5-Perf.2010thru9-1

This group’s Industrials far outperformed the Techs in a declining market YTD.  The overall Tech sector also lagged Industrials over the past year, with Industrials up 18.3% and Tech up only 9.8%.  Year-to-date, Tech is down -2.9%, and Industrials are up 3.1%.

As most value investors will tell you, lagging sectors can often be a good place to look for bargains.  The 2 Tech firms in this group, Intel, (INTC), and Microsoft, (MSFT) both have PEG ratios below 1, a statistic which is generally recognized as indicating that a stock may be undervalued.

Dow5PEGS-9-1-10

As with any strategy, there are pros and cons you should consider when selling covered calls.

Pros:

  1. Immediate Cash Inflow – Instead of waiting each quarter to collect dividends, when you sell a covered call, you’ll receive the call bid premium money into your account within 3 days from making the sale, often even the same day, depending upon your broker.  Of course, you’ll also keep collecting the dividends on the underlying shares.
  2. Superior Yield – As you can see from the table, these particular call yields are 3 to 4+ times the dividend yields.  This strategy allows you to transform a modest yield into a superior one.
  3. Downside Protection – The call premium $ you receive lowers your break-even cost, giving you more downside protection.
  4. You Know The Trading Range Before Making The Trade – This strategy tells you your exact upside profit potential, and your downside break-even, before you trade, as opposed to buying a stock and trying to determine what your upside potential will be.
  5. The Odds Are With You – It’s been proven that 3 out of 4 options expire worthless. When you’re an option seller, time is on your side, as opposed to the options buyer, who must not only guess the stock’s ultimate direction and approximate price, but must do it before expiration.

Cons:

  1. Limited Rally Participation – Once you sell a covered call, you’re obligated to deliver the underlying shares at your sold call’s strike price if they get assigned, (sold) away from you, no matter how high the stock goes. So, if you think there’s going to be a big rally, then you may not want to sell covered calls.
  2. Higher Entry Costs – You must own 100 shares of the underlying stock for every covered call that you sell.  Therefore, covered call sellers have a greater initial outlay than call options buyers.
  3. Assignment Risk – Selling covered calls against a stock puts you in jeopardy of having your shares sold away from you.  You have to weigh many factors, such as the dividend yield today, and potential dividend growth, and possible price appreciation.  However, if you think that the market is going to be range-bound, or bearish, then the covered call strategy will give you some added downside protection.

Deciding whether or not to sell covered call options comes down to many issues, such as, your risk profile and your market outlook.  If you want to capture some cash yields immediately, and not wait for the market to decide its direction, then this strategy may be right for you.

Disclosure: Author is long shares of INTC, and short INTC calls.

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

7 Dow Dividend Stocks With 10%-Plus Put Option Yields

By Robert Hauver

If this week’s downturn is making you jumpy, maybe you ought to think about taking advantage of the pullback, by selling cash secured put options on some Dow dividend paying stocks. Although these stocks wouldn’t be considered high dividend stocks, they do currently have very attractive put option yields, ranging from just below 10% to over 12% for a 5-6 month trade.

The pullback has increased the volatility and the bid prices on these put options, which benefits option sellers, AND achieves a lower break-even price.  In fact, the put option bid yield far outstrips the dividend yield on all of these 7 Dow stocks:

COMPANY SYMBOL 8/12/10 STOCK PRICE PUT OPTION BID PUT YIELD ANNUALIZED PUT YIELD DIVIDEND YIELD EXPIRATION MONTH PUT STRIKE PRICE BREAK-EVEN PRICE
CATER-PILLAR CAT $67.59 $6.95 11.48% 25.87% 2.60% 11-Jan $67.50 $60.55
JP Morgan Chase JPM $37.84 $3.65 10.78% 24.29% 0.60% 11-Jan $37.50 $33.85
AMERICAN EXPRESS AXP $42.44 $4.00 10.53% 23.73% 1.70% 11-Jan $42.00 $38.00
BANK OF AMERICA BAC $13.16 $1.42 12.26% 23.55% 0.30% 11-Feb $13.00 $11.58
BOEING CO BA $64.95 $5.90 10.42% 20.02% 2.60% 11-Feb $62.50 $56.60
Hewlett Packard HPQ $40.25 $3.65 10.04% 19.29% 0.80% 11-Feb $40.00 $36.35
Home Depot Inc HD $27.60 $2.39 9.71% 18.65% 3.50% 11-Feb $27.00 $24.61

Although its put yield is just below 10%, Home Depot is on this list due to its 3.5% dividend yield, the highest in this group. We’ve also added Home Depot to our Cash Secured Put Table this week, as it has an attractive 18%-plus put yield. However, as you can see from the table above, most of these Dow 30 dividend stocks don’t have very attractive dividend yields, which is another reason for income investors to consider selling cash secured puts on them instead.

The benefits of this strategy are 4-fold:

  1. Immediate income – You receive the cash from put sales in your account within 3 days after the trade.
  2. Much higher yields – This varies, of course, but in times of increased volatility, put yields often outpace dividend yields.
  3. Lower breakeven – All of the above puts are “out of the money”, (put option strike price is below the stock price), which gives you a lower breakeven price, and more protection against a falling  share price than owning the stock outright would.
  4. Tax deferral – You don’t have to pay taxes on sold put options until they expire, or you close your position. Thus, if you hold any of the above puts until their Jan/Feb. 2011 expiration, you aren’t liable for taxes until the April 15, 2012 deadline for paying taxes on 2011 gains.  In fact, if you’re assigned the underlying stock, you don’t have to pay taxes on the put money that you received until you sell the underlying assigned stock, since the IRS states that your tax basis for the assigned stock is lowered by the money you received for selling the put options.  Quite a nice break for investors.

Caveats:

  1. Short term tax rate – Option profits are taxed at short term rates, even if they’re held for more than 12 months, as opposed to the qualified dividend tax rate, which is now 15%, but may rise in 2011.
  2. Selling vs. Buying options – Option sellers usually have to put up much more cash than option buyers, particularly when selling cash secured puts.  Brokerages generally will require a “cash reserve”, equal to 100% of the cost of the underlying shares.  If you have a 100% cash reserve requirement, your initial cash outlay for selling cash secured put options is similar to buying stocks, with one big difference: your cash outlay will be reduced by the premium $ you sell the options for, within 3 days. (Also, if you qualify for option level 3, your broker may reduce this reserve requirement to 25 -35%).

Disclosure: Author is short BAC puts.

Disclaimer: This article is written for informational purposes only.