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

How To Defend Your Dividend Stocks With Covered Calls

By Robert Hauver

With the recent choppy market action, you may be wondering how best to protect your gains, without abandoning your income-producing dividend paying stocks. Selling Covered Calls offers you another income stream from your stocks, in the form of option premiums.  This week we’ll walk through covered call trades for three dividend stocks from our High Dividend Stocks By Sector Tables.  Two of these stocks, ABT and PG, are Dividend Aristocrats:

ABT-GE-PG-DIVS

Financials:

ABT-GE-PG-ROE

Covered Calls (Expiring Jan. 21, 2012):

ABT-GE-PG-CALLS

(We’ll use a one contract sale in our examples, for simplicity’s sake. Each call options contract corresponds to 100 shares of the underlying stock.)

ABT covered call trade:

1. Buy 100 shares of ABT at $52.40.

2. ABT closed at $52.40, and you’d “sell to open” a Jan. 2012 $52.50 call option, “at the money”, i.e., close to the stock’s current price.

You receive a premium of $2.17/share, ($217.00 per option contract), more than twice ABT’s dividend during this 6-month period.

3.During the next 6 months, you’d also collect 2 quarterly dividends, for a total of $96.00.

So you’ve collected $96.00 in dividends, plus $217.00 in call option premiums, thereby turning a 3.69% dividend yield into a 12.05% static yield, 0ver 3x the dividend yield.

(Static yield refers to a scenario in which your stock doesn’t rise enough to be assigned/sold away from you at expiration time. In general, if the underlying doesn’t rise to or past the  approx. combination of the strike price and the call premium, your shares won’t be called away. However, other factors, such as an upcoming ex-dividend date, can sometimes make it worthwhile for a call buyer to exercise the option to buy the shares.)

4. Two Possible Expiration Scenarios:

Static Yield – You keep your shares, for a static yield of 12.05%.

Assigned Yield – Your shares are assigned/sold at the $52.50 strike price, and you receive an additional $10.00, (the $.10 difference between the $52.40/share cost and the $52.50 strike price times 100 shares).  Your total annualized gain is 12.43%

Note: We used the $52.40 price to illustrate the yields in this trade. If you already owned ABT, just use your cost basis to calculate your yields and gains.

Advantages of selling Covered Calls:

1. Quicker Income/Better Cash Flow: You receive the option $ within 3 days of selling, often the same day, as opposed to waiting for quarterly dividends.

2. Lower Your Risk: The call option $ you receive also lowers your break-even cost, thereby giving you a stronger defense vs. market downturns.

3. Tax Deferral: If the call expires, or isn’t exercised until 2012, you don’t have to pay taxes on it until April 2013.

Disadvantage:

1. When you sell a call, you’re obligated to potentially have to sell your underlying shares at a specific strike price by the expiration date.  Your upside price gain potential is limited to the combo of the strike price plus the option $ you received. In the ABT example, it’s $54.77: the strike of $52.50, plus the $2.17 option premium, plus the potential $.10 if the shares are assigned/sold.

The judgment you need to make is whether or not you think your shares will rise considerably past this point, or if you’d prefer to get paid now, and gain more risk protection if the market falls.

GE covered call trade:

GE-Calls

(You can find more details on these 3 trades and other Covered Calls trades in our Covered Calls Table.)

This GE trade has the highest static and potential assigned yields of these 3 trades, due to its call bid premium of $1.14 yielding 12,23%.  GE decreased its dividend from $.31/quarter to only $.10 during 2009, but has brought it back to $.15/quarter in 2011.

Another advantage of selling covered calls is that, unlike dividends, the company can’t control your payout. Once you’ve sold a call, that $ is yours to keep, unlike future dividends, which may be cut at any time by the company, which happened quite often in the downturn.  Fortunately, firms are back on the track to restoring and increasing their dividends, so that negative trend has been reversed, for the time being.

This trade also expires in Jan. 2012, roughly 6 months.

1. Buy 100 shares of GE at $18.79.

2. Sell the Jan. 2012 $19.00 call for $1.14/share, and receive $114.00 within 3 days.

3. Collect $30.00 in dividends prior to expiration.

4. Expiration outcomes: The same two possible scenarios –

Assigned: GE rises approx. to or above $20.14, (the combo of the $19 strike price plus the $1.14 call bid), your shares get sold for $19.00, and you’ll receive an additional $21.00, (100 shares time $.21/share; the difference between $18.79 cost and the $19.00 strike). You’ve made 17.71% annualized, 5.5 times the original 3.22% dividend yield.

Static: GE doesn’t rise to approx. to or above $20.14, and your shares aren’t assigned/sold away.  You’ve made 15.45% annualized, nearly 5 times the original dividend yield.

(The details for the PG trade are listed in our Covered Calls Table.)

Valuations:

ABT-GE-PG-PEG

Disclosure: Author is long GE shares, long PG shares, and short PG calls.

Disclaimer: This article is intended for informational purposes only.

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.

Chasing High Dividends In The Basic Materials Sector

By Robert Hauver

If you’re looking for Basic Materials stocks paying high dividends, join the crowd.  Most Basic Materials stocks paying dividends have had quite a run over the past year, as it’s been the leading sector in price gains, due to strong demand from emerging nations, and a cheap dollar:

SXL-SectorPerf

The sector is still holding its own in 2011, although it’s been overtaken by the long out-of-favor Health and Conglomerates sectors, in addition to Industrials. (The Conglomerates sector is dominated by GE, which makes up approx. 47% of it.)

Here’s a look at overall P/E’s, projected EPS and PEG figures, and past EPS & Sales history for all of the sectors:

SXL-SECTOR-PEG

Only Tech outgrew Basic Materials in both Sales growth over the past 5 years, but Basic Materials had only average EPS growth.  Looking ahead, the projected  1.27 PEG ratio for Basic Materials stocks is cheaper than the avg. 1.41, but certainly nowhere near the Conglomerates sector’s low of 1.05.

So, are there any solid dividend paying stocks still undervalued in the Basic Materials sector? We found one, Sunoco Logistics, SXL, which is listed in our High Dividend Stocks By Sector Tables, as it currently has a dividend yield of over 5%.

SXL is an MLP that owns and operates refined products and crude oil pipelines and terminal facilities. Its Refined Products Pipeline System has approx. 2,200 miles of refined products pipelines located in the northeast, midwest and southwest US, and equity interests in four refined products joint-venture pipelines. The Terminal Facilities has approx. 10 million shell barrels of refined products terminal capacity and approx. 24 million shell barrels of crude oil terminal capacity (including 21 million shell barrels of capacity on the Gulf Coast of Texas). The Crude Oil Pipeline System consists of approx. 5,400 miles of crude oil pipelines, located principally in Oklahoma and Texas.

Industry Financial Comps:

SXL-ROE

SXL’s payout is in line with industry dividend yields, and its mgt. ratios are quite strong. Although its operating margin looks very slim, SXL, has managed to steadily increase dividends, from $3.03 paid out in 2006, up to $4.52 paid in 2010. Importantly, its Distributable Cash Flow has grown from $103 million to $248 million, and its Dividend Payout Ratio is only 48%.  They’ve also had an ongoing capex program, which has greatly expanded their pipeline capacity. In March, they announced the development of Project Mariner West, a pipeline project to deliver Marcellus Shale ethane from MarkWest Liberty’s Houston, Pennsylvania processing and fractionation complex to Sarnia, Ontario, Canada markets.

Valuation Comps:

SXL-PEG

SXL has a low PEG ratio for the next 12 months, especially when compared to its peers. Given their ongoing capex emphasis, the 7% 5-year EPS growth estimate may be low also, which would improve their long term PEG ratio.

There are options available for SXL, but the long term, (Nov.) out of the money Covered Calls are currently only yielding under 2%.

However, the Nov. $85.00 Cash Secured Puts  are yielding over 5%, and would give you a break-even of $82.30. You can see details in our Cash Secured Puts Table.

SXL pays quarterly dividends. Their next ex-dividend date should be approx. May 4th.

Disclosure: Author is long shares of GE.

Disclaimer: This article is written for informational purposes only. © 2011 DeMar Marketing  All rights reserved.

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.

Dogs Of The Dow & Instant Dividends

By Robert Hauver

This year’s Dogs of the Dow are: Exxon, (XOM), Walmart, (WMT), (GE), and Procter & Gamble, (PG). Here are the 2009 Performance and current Dividend Yields for these 4 dividend paying stocks:

Ticker Price Performance (Year) Dividend Yield
PG $60.63 1.18% 2.90%
GE $15.13 -1.88% 2.64%
WMT $53.45 -2.59% 2.04%
XOM $68.19 -12.61% 2.46%

As you can see, these dividend yields, while respectable, aren’t that outstanding.

We’ve compared these dividend yields with Jan. 2011 puts on our Put vs. Dividend Comparison table:

Ticker Price Performance (Year) Dividend Yield Jan.2011 Put Yields Jan.2011 Put Strike Prices Breakeven
PG $60.63 1.18% 2.90% 10.25% $60.00 $53.85
GE $15.13 -1.88% 2.64% 13.80% $15.00 $12.93
WMT $53.45 -2.59% 2.04% 6.40% $50.00 $46.80
XOM $68.19 -12.61% 2.46% 8.23% $65.00 $59.65

In addition to achieving a much higher yield than the current dividends, selling put options gives you a lower breakeven price, cash within 3 days after making the trade, and defers your tax deadline on the trade until April 15, 2012. The downside: Your gains are taxed at your personal tax rate, and you won’t participate in any price appreciation, if there is one, but you will know what your return is now.

Dividends vs. Puts – A Short Term Profit Strategy – Aug. 29, 2009

By Robert Hauver

With the S&P 500 up over 50%, and the Dow up over 45% since March 9th, many investors are still on the sidelines, chewing on sour grapes, and still wondering if this incredible rally is going to last.

What can you do if you got left behind by the current rally, but still want to make a profit?

Click here to find out…

The Top 5 Dividend Stocks for 2009 – Part 2 – Protecting Your Dividend Yield – May 15, 2009

By Robert Hauver

In part 1 of this article, we identified 2009’s top 5 dividend paying stocks, based on total cash payouts to investors. We also posed the question, “What if you want the dividend income from these stocks, but you’re afraid of a market pullback, or, you think the prices are too high right now?”

1. Royal Dutch Shell (RDS-A, RDS-B) Pays $3.20/share, and currently yields 6.5%.

2. AT&T (T) – Pays $1.64/share, has a current dividend yield of 6.4%.

3. General Electric (GE) GE’s $.82/share 2009 payout currently equals a 6.1% yield. (The payout will decrease to $.10/share per quarter in the 3rd quarter of 2009, so the remaining payout/share for the balance of 2009 will be $.51, a yield of 3.8%, or 5.7% annualized).

4. Exxon Mobil (XOM) The company’s annual dividend rate is $1.60/ share, for a 2.46% current yield.

5. Chevron Corp. (CVX), has an annual dividend/share of $2.60, which equals a dividend yield of 3.8% at the current price.

There are 2 ways you can use options trading to protect yourself from a falling market. In strategy 1 you’ll still earn the dividend income, in addition to your option income. which can often multiply the dividend yield several times over.  In strategy 2, you’ll either end up owning the stock at a lower price and a higher yield, or you’ll earn a very attractive short term yield:

Strategy 1: Sell covered calls.

Strategy 2: Sell covered, (cash-secured), put options.

Click here… to continue reading.