The Top 5 US Dividend Stocks For 2012

By Robert Hauver

Which dividend paying stocks paid out the most cash in dividends in 2011? Did they raise their dividends enough to stay among the top US dividend stocks in 2012 for cash payouts? 2011’s winners were all Dow dividend stocks, all raised their dividends in 2011, and have the size and cash necessary to make this short list.

This group paid investors approx. $6 billion to $10 billion-plus in 2011, and appear likely to increase those amounts in 2012, given their historic and recent dividend growth rates. (Although though GE lowered its dividends in 2009, it started increasing them again in 2010, and continued to do so in 2011, with a huge 21% hike):

T-XOM-DIVGROWTH

Pending Quarterly Dividends: These stocks pay quarterly dividends, and three of them are listed in our High Dividend Stocks By Sectors Tables. The projected dividends listed in the following table are all based upon the most recent quarterly dividends paid:

T-XOM-GE-DIV2012

Other than GE, investors rewarded these stocks for their dividend payouts in 2011- their share performance beat the S&P, which returned a big goose egg for 2011.  Chevron, Exxon, and J&J also beat the Dow’s 5.53% return in 2011.  So far in 2012, investors are favoring small caps, but that increased “risk on” approach will probably fade, in favor of large caps, when volatility returns to the market:

T-XOM-PERF

Selling Covered Calls: Even though these stocks don’t have the high options yields that we often write about, you can still substantially increase your dividend yields, via selling covered call options. We’ve listed only options for T, XOM, and GE here, as JNJ and CVX currently have much lower options yields.

In the July 2012 XOM covered call trade below, XOM’s call options sell for nearly 4 times the amount of its next 2 dividends.  The trade-off is that your shares will potentially be sold/assigned if they rise above the $87.50 July strike price for XOM. But you’d also receive a capital gain of $.73/share, the difference between the price/share of $86.77 and the $87.50 strike price, if the shares are sold/assigned.

The call options in the table below expire in Oct., July, and Sept. for T, XOM, and GE respectively.

(You can find more details for these and 30 other trades in our Covered Calls Table.)

T-XOM-CALLS

Selling Cash Secured Puts: As T, XOM, and GE are all relatively close to their 52-week highs, some investors may choose to sell cash secured puts below the current stock price, in order to achieve a lower break-even entry price.

Selling cash secured put options is an investing approach which pays you to wait: just like selling call options, you’ll get paid now for selling put options. But, if the stock goes below the put strike price at or near expiration, you’ll have it assigned/sold to you for a cost equal to the strike price.  However, your break-even will be lower than the strike price, due to the put premium you receive when you sell puts.

In general, most options aren’t exercised until sometime near or at their expiration date. As an option seller, this works in your favor, as the time value of the option that you’ve sold declines steadily.

The T Jan. 2013 $30.00 put strike price below pays you $3.25, making a break-even of $26.75, which is below T’s 52-week low.  (The puts in the table below expire in Jan. 2013, July 2012, and June 2012 for T, XOM, and GE respectively.)

(Note: You can see more info on these and over 30 other Cash Secured Puts trades in our Cash Secured Puts Table.)

T-XOM-PUTS

Valuations: Although these venerable large caps wouldn’t be considered growth stocks, GE’s PEG ratio is very near to the 1.00 undervalued threshold. XOM has a  negative PEG, due to analysts’ current negative growth forecasts for its next fiscal year. However, as we’ve seen before, oil could rise, or even spike much higher, in reaction to world events, particularly in the Middle East.  XOM has also turned in earnings surprises in 3 out of the last 4 quarters.

Ather issue for XOM is its increased exposure to natural gas via its 2010 purchase of natural gas giant XTO. With supplies coming on, natgas prices are forecasted to drop until US infrastructure can be built up enough to support increased demand.  However, with the current US administration just this week coming out with trucking tax incentives for natgas truck purchases, and other firms building a chain of US natgas fueling stations and liquid natural gas export treminals, demand for natgas may catch up with supply again sooner than later.

T-XOM-PEG

Financials: GE’s debt/equity ratio is much higher than the rest of the group, but it does have an interest coverage of 2.3.  XOM and CVX have metrics that are mostly in line with their Oil Majors peers. JNJ’s numbers are superior to its peers, and, with the exception of a slightly lower ROA, T’s numbers outshine its peers.

T-XOM-ROE

If you’re an income investor, this elite group holds some of the best stocks to buy in 2012 for dependable dividends.

Disclosure: Author is long GE, CVX, XOM, and T shares, and short GE call 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

Make Over 20 % By Hedging This Top Dow Dividend Stock

By Robert Hauver

Although it’s nearly flat for the past year, the Industrial sector has been rising strongly over the past few months:

SECTOR-PERF-1-19-12

Promising earnings forecasts are one of the main reasons for this sector’s momentum, as it’s projected to be one of the top sectors for EPS growth over the next 5 years:

SECTOR-PEG-1-19-12

So far, Caterpillar, (CAT), has been one of the best stocks to buy in 2012 for price gains. If you bought CAT in late 2011, you’d have a nice gain already:

CAT-PERF-1-19-12

Although the market has been climbing so far in 2012, many analysts are forecasting a volatile road ahead in the first half of 2012.  So how can you protect your gains in CAT?

Fortunately, CAT has some of the highest options yields of any Dow dividend stocks, which will help you to protect a large % of your gains, via selling covered calls.

Different strategies you can use to hedge your gains and earn high yields:

1. Sell covered call options further out in time, to capture a bigger premium, and hedge more of your gains. This table uses CAT’s 2011 year-end price as a cost basis, and illustrates how, the further out in time you sell these $105.00 call options, the more option premium $ you’ll receive.

In the table below, the May option pays $7.50, which hedges almost 50% of the $15.11 year-to-date gain for CAT, whereas the Jan. 2013 option pays $13.65, which hedges over 90% of the gain. The higher, longer-term call premiums will also lower your break-even price.

The trade-off is that your annualized yields decrease as you sell further out in time. However, all of these trades achieve double-digit annualized “static yields”, and much higher potential assigned yields.  Static yield equals the call bid premium dividend by the cost basis of the underlying stock, and refers to a scenario in which the stock doesn’t rise above the strike price near expiration, so you keep the underlying shares:

CAT-EXPS-2012-01-19

(You can see more details on over 30 high yield Covered Call trades which we’ve discussed in recent articles in our Covered Calls Table.)

2. If you’re more bullish on the market and/or CAT, you could sell covered call options at a higher strike price, leaving yourself more opportunity for future price gains.

The table below uses CAT’s 1/19/12 closing price as a cost basis, and shows the differences in potential price gains at different strike prices, all expiring in August 2012.

Potential assigned yield refers to the yield on the difference between the stock’s price and the strike price.

In this example, the $105.00 strike price is $.71 below CAT’s $105.71, so if the stock rises above $105.00 near expiration time in August, the underlying shares may get sold/assigned away from you at $105.00.  This is the big trade-off of selling covered calls at a strike price “in the money” – you sacrifice potential future price gains for a higher option payment now.

The other two higher strike prices leave you more room for potential price gains/higher potential assigned yields, but pay lower call option premiums:

CAT-STRIKES-2012-01-19

The above call options pay almost 6 to over 10 times the amount that CAT’s dividends pay during this 7-month trade period.

Selling Cash Secured Put Options:

Conversely, if you’re interested in buying CAT, but you’re leery of its current price, you can sell cash secured puts at a strike price below CAT’s current price, and achieve a lower break-even price.

Selling put options obligates you to potentially have to buy the underlying stock at whatever strike price you sell the puts at.  “Cash reserve” refers to the amount your broker will set aside in your account, to insure that you have the money to pay for the stock, if it gets sold/assigned to you at expiration. For example, the $105.00 strike price requires a cash reserve of $10,500.00, which equals $105.00 x 100 shares of CAT.  (Each option contract corresponds to 100 shares of the underlying stock)

In these August 2012 put options trades, each lower strike price gives you a lower break-even, but also has a lower option premium.  So, you have to decide how aggressive to be – should you “nibble at the edges”, and sell put options further out of the money for a lower break-even, such as the $97.50 strike price below, OR, be more aggressive, and sell at a strike price closer to a stock’s current price, such as the $105.00 strike?:

CAT-PUTS-1-19-12

(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

Financials: CAT’s mgt. efficiency ratios are higher than its peers’.  CAT’s Debt/Equity ratio is higher, but it has an Interest Coverage ratio of 5.9:

CAT-ROE-1-19-12

Valuations: Although CAT’s Price/Book is much higher than its peers, it appears undervalued on a PEG basis, and has enjoyed solid growth during its most recent quarter and fiscal year.  CAT is due to give its earnings report on Jan. 26, 2012.

CAT-PEG-1-19-12

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

Hollywood Dividend Stocks With High Yields And Growth

By Robert Hauver

Whether its theme parks, movies, or TV – we all love to be entertained, and modern society rewards greatly those who entertain us. This week we’ve found 3 dividend stocks which profit handsomely from the endless demand for entertainment.  These may be some of the best stocks to buy in 2012 for undervalued growth and income within the Entertainment Industry:

DIS-TWC-VIAB-DIVS

Valuations: Compiling meaningful Industry Avgs. is complicated for these companies – although they all operate within the Cable TV industry, Disney and Viacom also are active in the film industry.

Viacom and Time Warner Cable both look very undervalued on a Next Fiscal Year PEG basis, (P/E dividend by EPS Growth), while Disney is close to the 1.00 undervalued PEG threshold. TWC also looks undervalued on a cash basis – its Price/Free Cash/Share is only 3.15 vs. the 10.05 industry avg.

DIS-TWC-PEG

High Options Yields: These firms have modest to avg. dividend yields, but by using options, you can achieve much higher yields, as seen below.

Covered Calls: Disney’s next annual ex-dividend date isn’t until December, but you can create a much higher “virtual” dividend by selling covered call options, plus, you won’t have to wait until December to get paid – option sales are credited to your account within 3 days of trading, often the same day.  However, unlike qualified dividends, which receive a 15% tax treatment, options are taxed as short term capital gains.

The TWC and VIAB call options now yield over 4 to 6 times the amount of their dividends over the 5-6 month period for these trades.  (The call and put options listed for Disney and Time Warner expire in July, and those listed for Viacom expire in June.)

You can see additional info on over 30 high yield Covered Calls trades that we’ve discussed in recent articles in our Covered Calls Table.

DIS-TWC-CALLS

Cash Secured Puts: What can you do if you’d like to own a stock, but you feel that the stock’s price is too high? You can sell cash secured puts at or below the stock’s current price, get paid your put premium $ now, and have a lower break-even – essentially, you’ll get paid to wait.

If you want to be more conservative, you could sell put options at strike prices even further below a stock’s current price and get an even lower break-even.  The catch is that the further “out of the money” you sell, the less put premium $ you’ll receive.  The key with selling cash secured puts is to only sell puts on a stock that you’d like to own, so that, even if the stock gets assigned/put to you, you end up owning it at a price you’re comfortable with.

Some options skeptics argue that, if you just wait for a market pullback, you can end up owning the stock cheaper anyway.  This may or may not happen, but meanwhile you wouldn’t receive any income by just waiting.

TWC’s puts have a break-even closest to its 52-week low. Similar to the call options, these put options pay 4 to 7 times the dividend payouts during this term:

DIS-TWC-PUTS

(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

Financials: TWC’s Debt/Equity ratio of 3.5 is higher than the industry avg. of 2.16, but its 1.44 Current ratio is better than its industry peers’ 1.06. Viacom has the best ratios of this group:

DIS-TWC-ROE

Performance: Although DIS and TWC are just about flat for the past 12 months, they’ve gathered momentum in the past month.  VIAB h,as been the most loved of the group, having made impressive gains during the past year, quarter, and month, and continues to have its fans thus far in 2012:

DIS-TWC-PERF

Disclosure: Author owns no shares at time of publication, but has always been a fan of Jiminy Cricket.

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

3 Large Cap Tech Dividend Stocks With Double Dividends

By Robert Hauver

Searching for undervalued dividend paying stocks with strong growth?  The Tech sector offers some of the best stocks to buy in 2012 for growth and dependable income. The cash-rich Tech sector gained just 1.03% in 2011, in spite of sector earnings growing by over 18%.  However, Standard & Poors is projecting the Tech sector to achieve the largest 2012 EPS increase, and Tech’s P/E is also currently below its 4-year average:

SP-SECTOR-EPS

(Data Source: Standard & Poors)

3 Large Cap Tech Dividend Paying Stocks – Although Tech isn’t normally known for high dividend stocks, there are now dependable dividend stocks in this sector, including these iconic firms, all of whom sport low dividend payout ratios. Better yet, their dividend growth rate is on the rise – all 3 companies had big dividend increases in 2011-  MSFT: up 25%; INTC: up 16%; IBM: up 15%.

ibm-INTC-MSFT-DIVS

Covered Calls: Want to double or triple your dividends? Selling covered call options is a strategy that allows you to vastly improve upon the dividend yields of a stock. These 3 trades have call options that pay from 3 to 11 times what the dividends pay during their approx. 3-month terms. (All options mentioned in this article expire in April 2012.)  Another bonus is that you receive your option premium $ within 3 days of selling a put or call option. In fact, many brokers, such as Schwab, credit your account the same day.  The covered call strategy also helps you to hedge gains in a stock that you own, as we’ve detailed in previous articles. This strategy is also used for locking in income and/or lowering risk when buying new stocks.

You can find additional details on over 30 high yield Covered Calls trades we’ve discussed in our recent articles in our Covered Calls Table.

IBM-INTC-CALLS

Cash Secured Puts: Selling cash secured puts below or close to a stock’s current price is an alternative strategy to use, if you want to buy shares below the current market price, and have a lower break-even cost.  Your break-even is the difference between the put premium and the put strike price. In the table below, the break-even for MSFT is $23.65, which equals the $27.00 Put Strike Price, minus the $1.10 Put Bid Premium.  As with the call options, these April put options pay many times over what the quarterly dividends pay.

(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

IBM-INTC-PUTS

Valuations: MSFT and INTC both currently have P/E’s close to their 5-year low P/E’s.

INTC, however, recently warned that their 4th quarter revenue and earnings will be negatively impacted by the floods in Thailand: “The company now expects fourth-quarter revenue to be $13.7 billion, plus or minus $300 million, lower than the previous expectation of $14.7 billion, plus or minus $500 million. Sales of personal computers are expected to be up sequentially in the fourth quarter. However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages. The company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012.” (Source: Intel website)

Will Intel regain these lost sales in the second half of 2012? Even with the supply issues, he current estimate of under 1% 2012 growth for Intel seems very low, especially since Intel has traditionally been very conservative in its earnings projections, and had 4 consecutive quarterly upside earnings surprises in 2011.

IBM’s new CEO, Ginni Romett, has already made a new acquisition, buying cloud software testing firm Green Hat.  IBM also had 4 2011 consecutive earnings surprises, (low single-digits), while Microsoft had 3 much larger ones, (approx. 9% to 19%).

IBM-INTC-PEG

Financials: Although IBM carries the highest debt load, but they earn enough $ to cover their interest payments by 53 times – quite a cash machine, to say the least.

IBM-INTC-ROE

Performance:  IBM and Intel both outperformed the Tech sector in 2011, but MSFT got no respect.  However, MSFT is up the most so far in the first few days of 2012:

IBM-INTC-PERF

Disclosure: Author is long INTC and IBM shares, and short INTC calls at the time of publication.

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

Profiting Now From A 2014 US Housing Rebound

By Robert Hauver

Do you think the US housing industry will bounce back in 2012 or 2013? The housing recovery theme has attracted more believers in recent months, as US economic data has mostly improved, and homebuilder stocks have risen.

Warren Buffett has been calling for a housing rebound for quite some time, and is predicting the start of a recovery in 2012, citing 1 million housing starts/year as a key target of industry growth. The NAHB reported that the pace through Nov. calls for 685,000 starts in 2011, which is 98,000, (16.7%), higher than 2010. The Northeast jumped 41%, the West rose 36%, the South rose 12%, and the Midwest fell 8%.

Fed Chairman Bernanke has also stated in a Fall 2011 speech that, “Over the medium term, housing activity will stabilize and begin to grow again, if for no other reason than that ongoing population growth and household formation will ultimately demand it”.  A Sept. 2011 Harvard University study forecasts the amount of new US household formations during the decade between 2010 and 2020 will be at least 11.8 million.

Toll Bros., (TOL), a mid- to upscale market builder, has survived the housing crash reasonably well, and was, unexpectedly, one of the best stocks to buy in 2011 for price gains, as it rose over 7%, vs. 0% for the S&P.  TOL continues to capitalize on cheap land prices, via a combination of land purchase options and outright purchases.  They’ve taken substantial impairments on their existing pre-crash land portfolio.

TOL is one of the few US homebuilder stocks who have positive earnings, however, this is still due to the use of accrued tax benefits which they’ve accumulated from prior years’ losses. They have tax benefits worth $104 million-plus that they can still write off, as of 10/31/11.  Toll Bros. also has one of the lowest debt loads in the housing industry, with a Debt/Equity Ratio of .65.

TOL-PEG

TOL’s recent quarter EPS growth decline was due to FY 2011’s fourth quarter only including a tax expense of $0.2 million, vs. a $59.9 million net tax benefit in FY 2010’s fourth quarter. On a pre-tax basis, TOL’s income rose by nearly $25M , as they reported FY 2011 fourth-quarter pre-tax income of $15.3 million, vs. FY 2010’s fourth-quarter pre-tax loss of $9.5 million.

TOL has also moved into lucrative urban markets, such as New York’s Manhattan and Brooklyn boroughs, and DC suburbs, where housing in trendy neighborhoods has traditionally been a tight, lucrative market. Their 2011 10K report states, “In order to serve a growing market of affluent move-up families, empty-nesters and young professionals seeking to live in or close to major cities, we have developed and are developing a number of high-density, high-, mid- and low-rise urban luxury communities and are in the process of converting several for-rent apartment buildings to condominiums”

“These communities, which we are currently developing on our own or through joint ventures, are located in Dublin and San Jose, California; Singer Island, Florida; Chicago, Illinois suburbs; North Bethesda, Maryland; Hoboken, New Jersey; the boroughs of Manhattan and Brooklyn, New York; Philadelphia, Pennsylvania and its suburbs; and Leesburg, Virginia.”
“We believe that the demographics of the move-up, empty-nester, active-adult, age-qualified and second-home upscale markets will provide us with the potential for growth in the coming decade.  According to the U.S. Census Bureau, the number of households earning $100,000 or more (in constant 2010 dollars) at September 2011 stood at 24.3 million, or approximately 20.5% of all U.S. households. This group has grown at four times the rate of increase of all U.S. households since 1980.” (Source: Toll Bros. 12/22/11 10Q Report)
TOL’s pre-tax income and revenue breakdown by geographic segment shows mostly improving trends, and also shows that the North and Mid-Atlantic regions are currently driving their profits, which is in line with the Northeast’s housing starts gains we mentioned earlier. Toll noted that its North segment’s 2011 revenue decrease was mainly due to many communities there being sold out:
TOLL-GEOG-INC
If you feel that the US employment picture will eventually improve in 2013, and improve Toll Bros’ sales and profitability along with it, TOL may be one of the best stocks to buy in 2012 for a long term speculative US housing trade, via selling cash secured puts, below TOL’s current share price. There are LEAPS available, (long-term equity appreciation security options), which don’t expire until Jan. 2014, which would give these trades the benefit of time to develop:
TOL-PUTS
The table illustrates how the put options’ yields and premiums decrease, the further below TOL’s current stock price the put strike price is. As always, there’s a trade-off between risk and reward. Although the annualized yields aren’t very high on these trades, unlike dividends, you’ll receive your put premium $ within 3 days of selling put options. Your broker will hold a cash reserve equal to the amount of puts that you sell, times the strike price, times 100. (Each options contract corresponds to 100 shares of the underlying stock.)  For example, selling one $13.00 put option requires a cash reserve of $1,300.00, and obligates you to potentially have to buy 100 shares of TOL at $13.00, if it falls below $13.00 before expiration in Jan. 2014.  Generally, most options aren’t exercised until close to or at expiration, because it’s usually more profitable for the option buyers to just trade the options themselves, instead of selling the underlying stock.
The other attraction that selling options offers is tax deferral: If you’re able to let these options expire in Jan. 2014, your tax bill won’t be due until April 2015. So, you’ll get paid up front, and have tax-deferred use of the option $ you receive for over 2 years.
(Note: You can see more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Although Toll doesn’t pay dividends, they do have a 20 million share buyback program, which they started in 2003, and greatly accelerated in 2011. The plan still has 8,786,000 shares that can be repurchased:
TOL-SHARE-REPURCH
One thing to beware of in this long term speculative trade, is that there’s a fair amount of short interest against TOL, and many other US homebuilders. In comparison, Lennar has a short float nearing 20%, and a higher beta of 1.71:
HOME-TECH'L
The homebuilders have had quite a runup in recent months, and TOL looks overbought on a stochastic chart, so you may be able to achieve even higher put premiums by waiting for the next pullback, when TOL’s share price should decline, and its put prices rise.
TOL-CHART

Disclosure: Author has no positions in TOL, LEN, or DHI at the time of publication.

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

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved