3 High Yield Plays On Outperforming Energy High Dividend Stocks

by Robert Hauver
The Energy sector continues to lead all other sectors in 2014. As of 7/16/14, this sector, as measured by the XLE etf, was up 12.73% year to date, vs. 7.16% for the S&P500, and only 3.3% for the DOW. The XLE etf is dominated by large cap dividend stocks, such as Conoco Phillips, (COP), which is its 4th largest holding, after Exxon, Chevron, and Schlumberger.
When looking at performance, however, the majors, such as Exxon and Chevron, have greatly underperformed independent Conoco, which is up over 22% so far in 2014, vs. gains of only 5.2% for Chevron and 2.6% for Exxon.
COP also has the second highest dividend yield in the group, at 3.39%, having just raised its quarterly dividend from $.69 to $.73.
We screened for other dividend paying independent oil & gas stocks, to see if there are some other worthwhile outperformers in that sub-industry. We came up with Delek Logistics LP, (DKL), a relatively new, (NOV 2012 IPO),small cap high dividend stock, which we recently added to our High Dividend Stocks By Sectors Tables.

Dividends/Distributions: After spinning off its refining division, Phillips 66 (PSX), in 2012, COP has gone from paying $.66 to $.69, and now $.73 a quarter. DKL has raised its quarterly distribution 5 straight times since its IPO.
COP-DKL-DIV

Options: Although COP just went ex-dividend, you can still earn an attractive options yield on it, via selling November 2014 covered calls, which will also allow you to either capture the next quarterly dividend, in October, or get paid even more $ if your shares get assigned. DKL has a much higher option yield, but its shares are much closer to its strike price.
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Disclaimer: This article was written for informational purposes only. Author not responsible for any errors, omissions, or actions taken by third parties as a result of reading this article.
Copyright DeMar Marketing 2014. All rights reserved.

How To Buy Dividend Stocks Below The Market

By Robert Hauver

Hey income investors, what would you say if someone told you that you could consistently buy certain dividend stocks below the market, get paid now to do it, earn more $ than the stocks’ dividends paid, and defer your taxes on this money for a year?

Sounds like a pretty good deal, right? Well, it is, with a couple caveats, which are often negligible.

We’re talking about selling cash secured put options, a conservative strategy that may seem counter-intuitive at first, but can be quite a lucrative cash cow once you understand how it works.

Here are 2 examples, using dividend paying stocks from our High Dividend Stocks By Sectors Tables:

Selling “out of the money” cash secured puts for Southern Copper (SCCO):

1. Instead of buying SCCO outright, at $35.43, go to SCCO’s options chain, and find the January 2012 option table.

SCCO-SchwabPut

(Source: Schwab Streetsmart)

SCCO was selling at $35.43, so I picked the $35.00 strike price, just under the stock’s current price, i.e. “out of the money”.

The current bid for the $35.00 Jan. 2012 put was $3.70, meaning that a put “buyer” is willing to pay you $370.00 for each Jan. 2012 SCCO $35.00 put that you sell.

This is a 10.57% yield for a 190-day term, or approx. 20.31% annualized:

SCCO-PutExmple

(Note: We listed the $1.12 in dividends for comparison to the option $ only. Put sellers don’t receive dividends. However, in this case, the option $ you’d receive is over 3 times the dividend $.)

You’ll find more details on this and other put sales in our Cash Secured Puts Table.

Step-by-step trade details. (We’ll only sell one put option, to keep it simple):

1. “Sell to open” one Jan. 2012 $35.00 put option for SCCO: (symbol SCCO 01/21/2012) This sale obligates you to buy, (have “put” to you), 100 shares of SCCO at $35.00 until the Jan. 21, 2012 expiration date, which may or may not happen. (More info below).

2. Your broker reserves/freezes $3500.00 in your account: Each option contract corresponds to 100 shares of the underlying stock. Thus, 100 shares of SCCO at $35.00 equals $3500.00.

3. Your broker credits your account for $370.00 within 3 days. (Schwab usually does this immediately.)

Possible outcomes at the Jan. 2012 expiration:

1. SCCO’s stock price stays the same or rises: You don’t end up having to buy the 100 SCCO shares. Your $370.00 profit is a 2012 short term capital gain, with taxes due by April 15, 2013.

2. SCCO’s stock price falls by less than approx. $3.70, (i.e. it stays above $31.30, your breakeven price): Same result as #1; your $370.00 profit is taxable in 2013.

3. SCCO’s stock price falls to or below $31.30, your breakeven price: You are assigned/sold 100 shares at $35.00, BUT, your actual net price is $31.30, (the $35.00 strike price, minus the $3.70 option premium $ you received).

There’s an interesting tax break you get when this happens: You don’t have to pay a short term capital gains tax on the $370.00 you received. Instead, the IRS says that you must use the $370.00 to lower your tax basis on the 100 shares you had to buy.

So, if you end up holding your 100 shares of SCCO longer than 12 months, (past Jan. 21 2013), your short term capital gain is then treated as a long term cap. gain, whenever you sell.  In other words, your taxes on the $370.00 are deferred until you sell the underlying 100 SCCO shares.

That’s a pretty good tax deal – you get the use of the $370.00 now, but you don’t have to pay taxes on it until April 2013, providing it expires or is assigned in 2012. This is one of the reasons why Warren Buffet has made some massive put sales out into the future – he gets paid the put premiums up front, gaining the use of the $ now, while simultaneously delaying paying taxes on it until the year after they expire.

Example 2: Selling “in the money” Cash Secured Puts for Conoco Philips (COP):

You’ve probably heard about the proposed breakup of Conoco into 2 divisions that was announced Thursday, which analysts are valuing north of $90/share.

If you want to get in on this action, but you don’t want the risk of buying COP outright, take a look at this next trade.

COP was selling at $76.38, but if you want to be aggressive, you could sell the Jan. 2012 $80.00 puts, and still have a $71.70 breakeven, well below the current price:

COP-Schwab

Again, the put option premium outstrips the dividend, this time by over 6 times:

COP-putsArticle

You’ll find more details on this and other put sales in our Cash Secured Puts Table.

Notes:

1. Some traders feel that it’s not worthwhile selling puts, because the put premiums you receive may be less than the upside price gains, if a stock takes off. While this can be true, selling cash secured put options gives you the benefit of instant cash participation now, vs. possible future higher gains.  So, you take your put premium cash now and re-deploy it elsewhere, vs. having all of the money tied up in buying the stock outright, and waiting for dividends.

2. Other traders say that, if the stock goes down, you could have bought it for even less than your breakeven price from a put trade.  Since nobody knows the future, you have to decide if you’d like to get “paid to wait”, by collecting a put premium now, or hope that the stock does decline to your desired entry point.

3. What to do if the stock declines past your breakeven: Unlike just buying a stock, the put selling strategy also allows you to “retreat”, if the trade goes against you, by “buying to close” your sold puts, (closing out the position), and selling lower strike price puts, to recoup part or all of a loss. You can also sell further into the future, and get more $, since the time value normally is higher, the further out into the future that you sell.

4. You can often sell for more than the put bid price being offered. In the SCCO example, put bidders were offering $3.70, and put sellers were asking $4.20. Try selling at somewhere in the middle, or at least above the bid price, if there’s a wide spread. The relative amount of bidders and sellers also impacts the price you’ll get – there were 526 put sellers, vs. only 218 put bidders, so the balance is in the bidders’ favor in this example.

Disclosure: Author is short SCCO puts and COP puts.

Disclaimer: This article isn’t intended as individual or personal investment advice. Please do your own due diligence.

3 Major Oil Dividend Stocks With High Options Yields

By Robert Hauver

Looking for ways to play $100+ per barrel oil?  The Energy Sector has many dividend paying stocks, in fact, many of them are listed in the Energy section of our High Dividend Stocks By Sector Tables. Although most of the Major Integrated Oil stocks don’t have such high dividend yields, there are some that can still give you double digit high options yields, via selling covered call options and cash secured puts. We found 3 Oil dividend stocks with attractive mgt. metrics, good margins, and good growth prospects for 2011:

Conoco Phillips, (COP), PetroChina, (PTR), and, the big kahuna, Exxon Mobil, (XOM). Here’s how these 3 firms compare vs. their peers in the Oil Majors group:

ROE-XOM-COP-PTR2011-02-24

Conoco has the lowest margins of this group, due to its heavier exposure to refining, a lower margin part of the oil biz.  However, Conoco has been divesting poor-performing assets, and is moving to concentrate more on exploration and production, which should improve margins.  Two other factors favor COP’s future earnings: 1. COP has a higher proportion of natural gas than its peers and should benefit from environmental concerns that favor natural gas. 2.  COP also has significant ownership in pipeline and other transportation assets, which offer steady income that is not as tied to variations in commodity prices. (Source: Morningstar)

PetroChina, China’s largest oil and gas company, looks to secure future domestic and international supply to feed a nation hungry for energy. Refining operations lost money over the past few years as the price of crude oil soared while the price for refined products in China remained stagnant, due to government controls. Now, the Chinese government will revise product prices if oil prices fluctuate over a given period of time. The new system should improve refining margins. (Source: Morningstar)

ExxonMobil sets itself apart among the other supermajors as a superior capital allocator and operator. Resource nationalism is becoming an increasingly greater challenge to international oil companies’ (IOC) ability to grow production. Countries rich in oil and gas reserves are increasingly picky when choosing partners, such as Exxon, to work with their national oil companies (NOC) to explore for, produce, and transport to market their oil and gas reserves. With its deep pockets, expertise, and integrated operations, Exxon can tackle nearly any mega-project regardless of scale, location, or operational difficulty. (Source: Morningstar)  In addition, Exxon’s purchase of XTO positions it as a major player in the growing utilization of natural gas, which Exxon predicts will overtake coal as the 2nd most utilized fuel source in the coming years.

Looking ahead to 2011 earnings, Conoco and PetroChina appear undervalued:

XOM-COP-PTR-PEG-2011-02-24

While XOM’s 2011 PEG is over 1, it generally commands a premium to its peers in the market, hence the higher P/E and PEG’s.

Here’s how you could lock in high option yields now, by selling Covered Call options:

XOM-COP-PTR-CALLS-2011-02-24

Note how the above call options are approx. 3 times the price of the dividends. Another positive to the Covered Call and Cash Secured Put options strategies is that you receive the option premium $ within 3 days of selling calls and puts, as opposed to waiting for each quarterly dividend. The flip side, is that your participation in possible future price gains is limited to your potential assigned yield – (the difference between the strike price and the stock’s cost basis).  Our Covered Calls Table can give you more info about these and other Covered Call options trades.

Conversely, if the current high market prices make you nervous, you could also earn high options yields by selling Cash Secured Puts for any of these stocks, thereby receiving much more $ from their put options, than their current dividend yield will earn you. You’d also have a lower break-even price:

XOM-COP-PTR-PUTS2011-02-24

There’s more info about these and other put options trades in our Cash Secured Puts Table.  (Note: Put option sellers don’t receive dividends, we listed the dividends for comparison only .)

Disclosure: Author is long XOM shares, and may be short COP puts in the near future.

Disclaimer: This article is written for informational purposes only.

Conoco Phillips – A Basic Materials Dividend Stock With Earnings Growth

By Robert Hauver

Finding undervalued dividend paying stocks in this ongoing rally can be very challenging, to say the least. If you’re looking for Basic Materials dividend stocks with good earnings growth, Conoco Phillips is worth a look.

They just reported Q4 and full year 2010 earnings, and they blew away last year’s earnings and sales – Q4 sales up 23%, Q4 adjusted net income up 10%, Full year 2010 sales up 27%, and Full Year adjusted net income up 80%.

Company Profile: Conoco Phillips is the 3rd largest integrated U.S. oil firm, by market cap and reserves.

COP operates in 6 segments:

Exploration and production, Refining and marketing, Midstream, A 20% stake in the Russian oil company Lukoil, Chemicals, and Emerging businesses.

As of end of the third quarter of 2010, COP had received about $6.3 billion from the sale of its Lukoil shares, and expects to sell its remaining shares of Lukoil by the end of 2011.

COP vs. its Oil Majors Industry Peer Group:

COP-ROE-2011-02-01

As you can see, COP’s mgt. metrics are mostly similar to industry averages.  However, Conoco paid down $3 billion of debt in 2010, and now enjoys a better Debt/Equity than its peers’ avg.

COP’s earnings growth figures surpass its peers avgs.:

COP-PEG-2011-02-01

You can increase your yield on Conoco by selling Covered Calls:

COP-CALL-2011-02-01

This covered call trade’s option payout is over twice that of the dividend yield.

There are more details about this and other call options trades in our Covered Call Table.

If you want to play it more conservatively, you might consider selling Cash Secured Puts:

COP-PUT-2011-02-01

This put options trade gives you a lower break-even point than the covered call trade, and a higher yield.

There are more details about this and other put options trades in our Cash Secured Puts Table.

Conoco Phillips increased its quarterly dividend in 2010, from $.50 to $.55/share, and its next ex-dividend date should be approx. February 18, 2011.

Disclosure: No positions

Disclaimer: This article is written for informational purposes only.

The Most Undervalued Energy Dividend Stock In The S&P 500

By Robert Hauver

This week we looked for undervalued S&P 500 dividend paying stocks in the under-appreciated Energy sector, which has only risen 3.40% year-to-date, vs. the leading Consumer Discretionary sector, which is up nearly 16%.  Fortunately for income investors, the Energy sector also happens to include many dividend stocks.

Our search led us to Conoco Philips, (COP), which is listed in the Energy Stocks section of our High Dividend Stocks By Sector Tables. We then compared COP to its Major Oil & Gas Firms peer group, and came up with favorable ratio comps in valuation, financial, and management efficiency, although COP doesn’t come out on top in every metric.

Valuation:

COP-PEG-2010-10-15

As the the above table illustrates, COP’s next-year PEG ratio, (Price/Earnings Growth), and its next 5 years PEG ratio are both way below that of its peers.

Financial Ratios & Dividend Info:

COP-ROE-10-15-10

COP pays $.55/share quarterly, and its next ex-dividend date is Oct. 27th, with a pay date of Nov. 30th.  As the table above shows, COP’s current dividend yield of 3.65% lags its peer group’s 3.94% average dividend yield.

However, you can improve upon this via 2 options trading strategies: selling covered calls and selling cash secured puts.  The table below lists bid premiums you’d receive for selling Feb. 2011 covered call options and cash secured put options.

COP-CALL-PUT-2010-10-15

There is more detail listed for both of these trades in our Covered Call Table and in our Cash Secured Put Table.

In the covered call trade listed above, you’d receive $3.20/share in call premiums, in addition to the $1.10 in dividends prior to expiration, thereby nearly quadrupling your cash yield during this 4-month trade, and bringing your breakeven down to $55.70. The above put option trade would also greatly improve upon the dividend payout, netting you $3.80 in put option premiums, vs. only $1.10 in dividends for the same 4-month period, and lowering your breakeven to $56.20.

Disclosure: No positions at this time.

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

3 Undervalued S&P Dividend Stocks With High EPS Growth & Attractive Option Yields

By Robert Hauver

We screened the S&P 500 this week for low PEG, high EPS growth, low debt, dividend stocks with attractive option yields.  These 3 firms all had strong EPS growth this year, ranging from 46% to almost 400%.  They also are projected to have EPS growth next year of 11% to 16%+, and have similar strong 5-year growth figures, which contributes to their low PEG ratios.

One of these firms, Conoco Philips, (COP), is listed in the Energy section of our High Dividend Stocks by Sector tables. While the other 2 firms, Comcast, (CMCSA), and Prudential, (PRU), don’t have high dividend yields, you can achieve good yields on them by selling covered calls or by selling cash secured puts.

Here are the EPS growth and related PEG ratios for these 3 firms:

COP-CMCSA-PEG

Here are their dividend yields, ROE, debt and profit figures:

COP-ROE

These 3 firms also all have a low dividend payout ratio, ranging from only 8% to 34%. As you can see, these dividend paying stocks don’t have the highest dividend yields around, but you can still earn a respectable yield on them by selling covered call options, which are currently achieving double digit annualized yields of 16%-plus to over 19%:

COP-CMCSA-Calls

(Static Yield also includes the dividends you’d collect before expiration. There’s a breakdown of this in our Covered Calls table).

Likewise, selling cash secured put options can also give you a double-digit annualized yields, while also lowering your breakeven cost:

COP-Pru-Puts

(These put yields are based upon a 100% cash reserve). You can find further details in our Cash Secured Puts table.

If you’re looking for income from dividend stocks that have fared well in this challenging economy, undervalued stocks with good growth prospects offer a good place for further research. Thus far in 2010, growth stocks have outpaced value stocks in large, mid, and small cap stocks.

Disclosure: No positions yet.

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

3 Large Cap Dividend Stocks With Attractive Options Yields And Low PEG Ratios

By Robert Hauver

We screened for large cap dividend stocks with low PEG ratios, 3%-plus dividend yields, and attractive options yields for both covered calls and cash secured put options. We’ve added them this week to our Covered Calls table and to our Cash Secured Puts table.  These are short-term trades, (5-6 months), that should capitalize on the current low PEG ratios for next year for these 3 firms.

Conoco Philips (COP): A major integrated Oil & Gas co., (Basic Materials sector), COP’s revenues increased 42% to $95.89B for the six months ended 30 June 2010. Net income totaled $6.3B, up from $1.7B for the same period. (These figures include the sale of Syncrude).  ConocoPhillips intends to sell the remaining 60% of its entire stake in Lukoil for $3.44 billion in 2011.  (Source: Morningstar)

Eaton Corp. (ETN): An Industrial & Electrical Equipment firm, (Industrial Goods sector).  Eaton Corporation’s revenues increased 13% to $6.48B for the six months ended 30 June 2010, and net income totaled $381M vs. a loss $21M year-over-year. Revenues reflect a rise in the income from Truck segment, the Automotive segment,the international Electrical segment, and higher sales from their Hydraulics segment.  International sales have grown from 20% of the total in 2000 to 55% in 2009 (including 22% to developing markets, up from 8%).  Eaton now serves a wide swath of industrial markets, including aerospace, energy, agriculture, and construction. (Source: Morningstar)

McGraw Hill (MHP): A major Publisher, (Services sector), MHP was founded in 1888, and is a member of the S&P Dividend Aristocrats, an elite group of firms who’ve increased their dividend every year for a minimum of the past 25 years.  MHP’s revenues increased 2% to $2.66B for the six months ended 30 June 2010, and net income increased 30% to $294.4M. Revenues reflect an increase in income from Financial Services and higher income from McGraw-Hill education segment.  McGraw-Hill’s branded information services include the likes of Standard & Poor’s, J.D. Power & Associates, Platts, Aviation Week, and McGraw-Hill Education.   (Source: Morningstar)

All 3 of these dividend paying stocks have options trading strategies available.  Considering the current wave of uncertain expectations descending upon the economy and the market, income investors looking for near-term income may want to consider selling covered calls or cash secured puts, both of which offer higher yields than these firms’ dividends.

(Note: Option yields below are annualized for ease of varying time-length comparison):

COP-ETN-MHP-Options

Here are the valuation comparisons:

COP-ETN-MHPVal2

Here are key efficiency and financial ratios:

COP-ETN-MHP-Effy

Conoco Philips is currently also listed in the Energy section our

High Dividend Stocks By Sector Tables.

Disclosure: No positions at this time.

Disclaimer: This article is for informational purposes only.

5 Undervalued Basic Materials/Energy Dividend Stocks

By Robert Hauver

Are you looking for bargain basement dividend paying stocks with good earnings growth forecasts? Here’s a good place to start your search:

Our Stock Market Data page shows the Energy sector is off 8.65%, while the Basic Materials sector is down -8.43% year-to-date.  Additionally, our Market Cap/Style table shows that Large Cap Growth has taken the  biggest hit, dropping -3.92% YTD.  These two sectors have lagged way behind other industry sectors over the past year, as investors have  questioned the strength of the global recovery, and future demand.  If you believe that there will be steady or increased future demand for oil, natural gas, copper and the like, then you may want to research these 5 dividend stocks further.

We screened for low PEG ratios, strong next-year and next 5-year EPS growth figures, low Debt/Equity ratios, 3%-plus dividend yields.

The 5 stocks are: China Petroleum & Chemical (SNP), Chevron (CVX), Southern Copper (SCCO), Conoco Phillips, and Ensco (ESV):

Ticker

7/16/10 Price

Dividend Yield

P/E

PEG

EPS growth next year

EPS growth next 5 years

Total Debt/Equity

SNP

$76.96

3.35%

7.52

0.25

15.88%

29.70%

0.58

CVX

$72.07

3.94%

11.08

0.57

13.56%

19.60%

0.11

SCCO

$29.31

3.89%

20.54

0.71

38.29%

29.11%

0.33

COP

$52.09

4.16%

13.87

0.77

20.72%

18.05%

0.46

ESV

$40.63

3.36%

8.29

0.79

15.45%

10.50%

0.05

COP features the highest dividend yield of this group, currently at 4.16%, and is also in our High Dividend Stocks by sector tables.

Here are management and performance metrics, earnings dates, and volatility:

Ticker

ROE

ROA

ROI

Perform-ance (Year)

Perform-ance (YTD)

Earnings Date

Volatility (Month)

SNP

17.56%

7.78%

12.73%

-0.92%

-8.87%

4/29

1.64%

CVX

14.45%

8.09%

9.68%

17.45%

-3.32%

7/30

1.91%

SCCO

34.35%

21.83%

23.99%

41.99%

-6.70%

7/22

3.61%

COP

9.69%

3.88%

4.64%

32.22%

5.64%

7/28

2.34%

ESV

13.36%

11.11%

11.84%

10.88%

5.46%

7/22

3.56%

There are also puts and call options available on these stocks, for investors who want to hedge their investment via covered calls, or selling cash secured puts. In light of the upcoming earnings reports for 4 of these stocks, bid premiums may rise near earnings dates. Ensco (ESV), and Southern Copper (SCCO) have the highest % option yields, in keeping with their higher volatility.  In addition, Ensco, being a driller, is a rather contrarian pick right now, which also accounts for the high cash secured put bid premiums, (over 12%), for ESV in our Put Selling Table.  SCCO has even higher put options bid premiums, currently over 14%.

Disclosure: Author owns CVX shares.

Disclaimer: This article is written for informational purposes only.