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

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

The Best Defensive Dow Dividend Stocks To Buy

By Robert Hauver

In spite of over 75% of S&P 500 firms beating or meeting earnings expectations, the Eurozone debt crisis, a slow US economic recovery & the continuing DC stalemate on economic issues, plus slower growth in China are combining to scare investors into a “risk off” position in November. The market has pulled back -9.59% this month, nearly as much as the Sept. selloff, as each of the last 5 months have alternated between rallies and pullbacks.

If you’re an income investor looking for which Dow dividend stocks have been the best stocks to buy in recent months for income and defense, these 3 dividend stocks have all sold off less during these 2011 pullbacks, and have also participated nicely in the rallies. (The only exception is HD’s pullback during the July rally.) They’ve also declined even less in this most recent pullback, (Oct. 28 through Nov. 23, 2011), than in the previous Sept. pullback.

HD-KFT-MCD-PERF

Valuations: HD appears to be the most undervalued stock, on a recent and future EPS growth basis. This seems logical, as HD suffered mightily during the downturn, and homeowners still have to fix their homes eventually. HD’s Price/book is higher that the Home Improvement industry avg. of 2.24, but HD’s very low .83 Price/Sales ratio is in line with industry avgs.

HD-KFT-MCD-PEG

High Options Yields can lower your risk and pump up your dividend yields: Although they’re defensive stocks, MCD and HD have options yields which can help you to turn them into virtual, short-term high dividend stocks.

Covered Calls: If you want to buy these defensive dividend stocks, but gain some downside protection, in the form of a quick “rebate”, selling covered call options is one way to go. In these 2 call option selling trades, you’ll get paid over 6 times the dividend amount now, when you sell call options against the underlying shares.

Selling covered calls allows you to realize some of the stock’s upside potential immediately, and turn a 3% annualized dividend yield into a 15% – to – 23%-plus overall yield. The rub is that you’re committing to sell the stock at the option strike price, even if the stock rises far beyond that price by the Feb. or March expiration date. But if you think the stock and the market will  stagnate or swing back and forth during that time period, selling covered calls is a proven way of hedging your bet.

(These call options expire in March for MCD, and expire in Feb. for HD.)

(You can see more details on this and over 30 other high yield covered call trades in our Covered Calls Table.)

HD-MCD-CALLS

Cash Secured Puts: If the recent monthly market reverses have your head spinning , and you want to be more conservative, another strategy is to sell cash secured puts at a strike price below a stock’s current price. This usually offers you an even lower break-even price, which lowers your risk even more, and improves your cash flow, since you’ll get paid put option premiums within 3 days of the trade, (often the same day), instead of waiting for quarterly dividends. (Unlike covered call sellers, put sellers don’t collect dividends.)

Your broker will hold in reserve an amount equal to the value of the strike price times 100, for every put contract that you sell, until the contract expires, or the position is closed out. Each options contract corresponds to 100 shares of the underlying stock.

These put options pay approx. 7 to 8 times more than the stocks’ dividends during this 3-4 month period.

The put options below also expire in March for MCD, and expire in Feb. for HD.

(You can find more details on this and over 30 other high yield options trades in our Cash Secured Puts Table.)

HD-MCD-PUTS

Financials: KFT’s Mgt. efficiency ratios are the weakest in the group, and are also below their peer group avgs, while MCD and HD both have above/avg. ROE and ROI for their peer industries.

HD-KFT-MCD-ROE

Technical Data: As usual with defensive stocks, these equities all have low beta’s. MCD and HD are still over 30% above their 52-week lows, but selling the put options listed above would give you a break-even that’s only 19% above MCD’s low, and 21% above HD’s low:

HD-KFT-MCD-BETA

Disclosure: No positions at this time.

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

2 Easy Ways To Triple Your Yields On Dow Dividend Stocks

By Robert Hauver

Do you think that Dow dividend stocks are the best stocks to buy now for dividends and safety? You’re not alone – the Dow has beaten these other major indexes year to date, and also in November, as of 11/10/11:

11

Although it trails the NASDAQ and the RUSSELL 2000 small caps, the Dow is also nearly even with the S&P 500 since the start of the March 2009 rally.

We found 2 Dow dividend stocks with good metrics and low beta’s, which are therefore less volatile than the market, but which also offer attractive dividends. Coca Cola Co. is also one of the Dividend Aristocrats, a group of dependable dividend paying stocks that have increased their dividends every year for the past 25 years:

CVX-KO-DIVS

You could also more than double your dividends on these stocks, via selling Covered Calls and Cash Secured Puts. (The call and put option trades listed below for CVX expire in June, and those for KO expire in May.)

Covered Calls: One of the big pluses of selling covered call options is that the call option premiums you sell are often more than 2 to 3 times the amount of the dividends during the term of the trade. (See the highlighted areas in the tables below.)

Two other bonuses: You’ll get paid your option premiums within 3 days of the trade, if not the same day, and, you’ll lower your risk by virtue of having a lower break-even price.

(You’ll find more details on this and over 30 other high yield covered call trades in our Covered Calls Table.)

cvx-ko-calls

Cash Secured Puts: If you want to be even more conservative, and achieve an even lower break-even price, selling cash secured put options below the stock’s current price is an options strategy via which you get “paid now to wait”. Unlike covered call sellers however, put sellers don’t collect dividends.

The put options below pay approx. 4 to 4.5 times more than the dividends during this 6-7 month period.

(There are more details on this and over 30 other high yield options trades in our Cash Secured Puts Table.)

CVX-KO-PUTS

Financials: For the most part, CVX and KO have better metrics than the DOW 30 averages, and both firms also have better metrics than their industry peers.:

CVX-KO-ROE

Valuations/Earnings: Although these monolithic firms certainly wouldn’t be considered growth stocks, they both had strong growth in their most recent fiscal years, and quarter over quarter. Analysts are currently predicting that CVX won’t be able to increase their earnings in their next fiscal year, but they may be wrong, given the volatility of oil prices that have arisen from the socio-political dramas of the Arab Spring, and many other oil-producing parts of the world. Coke has also managed to grow its earnings better than its beverage industry peers.

CVX-KO-PEG

Disclosure: Author is long shares of CVX.

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

2 Solid Dow Dividend Stocks With 2 Ways to Earn 20% Yields

By Robert Hauver

Looking for the best stocks to buy in 2011? With the S&P down over 9% year to date, you may be looking for dividend paying stocks that have outperformed the market. In this respect, the Tech sector offers some of the best stocks around, as this sector has beaten all other sectors except Utilities over the last trading quarter. We found 2 well-known, undervalued Dow dividend stocks in the Tech sector with good earnings growth, strong financials, both of which offer high options yields for covered all sellers and cash secured put sellers

One of these stocks, Intel, is listed in our High Dividend Stocks By Sector Tables, since it has a higher dividend yield than average for the Tech sector. Intel increased its quarterly dividends from $.1812 to $.21 for the 3rd quarter of 2011. Microsoft just announced an even bigger dividend increase for the third quarter, rising to $.20 from $.16/share.

INTC-MSFT-DIVS

Selling Options Offers Much Higher Yields:

Even though these aren’t in the upper realm of high dividend yields, by selling options, you can greatly increase your yield to over 20% annualized on these stocks. In these 2 strategies the option yields outstrip the dividend yields by up to over 10 times.

Covered Calls: The INTC call option expires in December, and the MSFT calls expire in Jan. 2012.

The call option premiums for MSFT pay nearly over 9 times that of MSFT’s dividends during this 4-month period, ($1.78/call premium vs. $.20/dividend).

You’ll find more details on this and many other high yielding covered call trades in our Covered Call Table.

INTC-MSFT-CALLS

Cash Secured Puts: If you want to be more conservative, and achieve a lower break-even entry price, you can sell cash secured put options just below the current stock price and receive some rather high option yields. Due to the present market volatility, the difference in put options premiums vs. dividends is even higher than calls vs. dividends.

Again, MSFT offers the most dramatic advantage for selling options vs. dividends:  MSFT pays $2.10 for puts. vs. $.20 for dividends. The puts listed below all expire in Jan. 2012.

There are more details on this and many other cash secured puts trades in our Cash Secured Puts Table.

Note: Dividends in our puts tables only for comparison – unlike covered call sellers, put sellers don’t receive dividends.

INTC-MSFT-PUTS

Financials: In addition to having very low debt loads, (INTC is nearly debt-free), both of these stocks have strong management efficiency and margin metrics.

INTC-MSFT-ROE

Valuations: The 3.39% EPS growth figure for INTC might be too low, given that analysts typically undervalue Intel’s future earnings, as evidenced by INTC’s 4 consecutive earnings surprises over the past year. Thus, Intel’s PEG for the next fiscal year looks high. The Price to Book metrics for both firms are below the 3.91 average for the Tech sector.

INTC-MSFT-PEG

Technical Data: Intel has had a better time of it in 2011 than Microsoft, and has fared well in the correction. MSFT’s Relative Strength of 39.11 puts it just inside oversold territory.

INTC-MSFT-PERF

Disclosure: Author is long shares of Intel.

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

3 Dow Dividend Stocks With High Options Yields

By Robert Hauver

Looking for blue chip dividend paying stocks with a decent dividend yield? As the rally continues, and share prices climb, many dividend yields aren’t keeping pace, posing an ongoing challenge for income investors.  If you want to earn higher yields over the next few months, here are 3 Dow dividend stocks that all have double-digit high options yields on Covered Calls and Cash Secured Puts:

American Express (AXP). Intel (INTC), and JP Morgan Chase (JPM).

AXP-INTC-JP-ROE-2011-02-17

Not surprisingly, JP Morgan has the weakest mgt. metrics, due to hangover from the financial crisis, but it does have a higher Profit Margin than American Express. However, JPM has appreciated the most year-to-date, up 13.15%.  JPM has also talked about raising its dividend in the future, as conditions approve. Currently, Intel has the best dividend yield of these 3 stocks, and is above the Dow 30 2.71% average.  We’ve added INTC to the Tech section of our High Dividend Stocks by Sector Tables.

Intel’s higher dividend yield hasn’t translated into higher share performance yet in 2011, as it’s up only 4.32%, due to analysts’ concerns over slower growth in 2011, after 2010’s record earnings. Thus far, JPM has the lowest 2011 PEG ratio, but Intel may very well keep surprising to the upside, if Tech spending continues to pick up in 2011:

AXP-INTC-JP-PEG-2011-02-17

You’d think that American Express would be poised to capitalize on rising consumer spending, but pending legislation on credit card fees is holding back EPS growth forecasts. However, the Fed just weighed in on possible fallout from this bill, so, things may change: “The Dodd-Frank Act enacted in July requires the Fed to establish the cap on so-called interchange fees charged to merchants. The central bank proposed in December to set the limit at 12 cents per transaction, setting off a lobbying battle between retailers who favor the rule and lenders, who stand to lose more than $12 billion in annual revenue if the proposal as written becomes final” (Reuters)

Here’s how Covered Calls stack up vs. the dividends for these stocks:

AXP-INTC-JP-CALLS-2011-02-17

As none of these stocks boasts a huge dividend yield, their call options yields easily outstrip their dividends by at least 6 to 1. These are all relatively short-term 4- to 5-month trades, expiring in June and July. There are more details about these and other trades in our Covered Call Table.

For investors looking for a lower entry point, selling Cash Secured Puts also offers double-digit annualized yields:

AXP-INTC-JP-PUTS-2011-02-17

Intel has the least volatility of this group, at under 14 over the past few months, hence its put options yields trail AXP and JPM, both of which have 20-plus volatility. You’ll find more details about these and other options trades in our Cash Secured Puts Table.

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

Disclaimer: This article is written for informational purposes only.

Top 5 Dow Dividend Stocks- How To Double Your Dividend

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.

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.