2 Easy Ways To Earn 20% On Industrial Dividend Stocks

By Robert Hauver

Although Industrials are down approx. -4% year-to-date, this sector may hold some of the best stocks to buy moving forward. Standard & Poor’s ranks Industrials as #2 in projected EPS growth for 2012, right behind Tech, which gives it the 3rd lowest PEG ratio for 2012:

S&P-EPS-Q3

(Data source: Standard & Poors)

Thus far, 86% of S&P 500 Industrials have beaten or met their Q3 2011 Earnings Estimates, 2nd only to Tech.

S&P-EPS-BEAT-Q3-'11

(Data source: Standard & Poors)

Although this sector looks attractive, finding undervalued high dividend stocks here with strong metrics is still a challenge.  A different approach would be to look for a lower-yelding dividend paying stocks, that have stronger growth and financials, and then utilize options to ramp up the dividend yields on these dividend stocks. Both Caterpillar and Cummins have less-than-avg. dividend yields, but you can greatly improve upon their dividends by selling options.

CAT-CMI-DIVS

Covered Calls: Take a look at the big difference between these high option yields and the dividend yields during these 6-7 month trades.

CAT’s call options pay over 9 times their dividends, while CMI’s pay over 15 times.

(The call and put options listed in this article for CAT expire in May, and those for CMI expire in June.)

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

CAT-CMI-CALLS

Cash Secured Puts: Another proven tactic is selling cash secured puts below the stock’s current share price, in order to achieve an even lower break-even price. The put trade listed here for CMI has a break-even only 3% above CMI’s 52-week low. These put options pay 9 to 16 times more than the dividends in these trades.

Your broker will secure a cash reserve in your account, equal to however many put contracts you sell, times the strike price of the put you sell. This amount is released once the puts expire or the trade is closed. Hence the term, cash secured puts. You’ll get paid for any puts and calls that you sell within 3 days of the trade, often even the same day. Note: put sellers don’t receive dividends, but call sellers do.

The best time to sell cash secured puts is normally when the stock is at the lower part of its range, which will give you an even lower break-even. Both CAT and CMI are higher-beta stocks, which fluctuate widely with the market, so check out their put prices during the next pullback.  If you need to be even more conservative, you could also sell cash secured puts at a strike price further below the current share price. This will give you a lower premium, but a lower break-even also.

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

CAT-CMI-PUTS

EPS/Sales Growth: Both CAT and CMI had strong EPS growth in their most recent fiscal years, and also strong sales and EPS growth in their most recent quarter:

CAT-CMI-EPS

Valuations: CAT’s PEG for its next fiscal year is very low, while CMI’s is consistent with the sector’s .87 PEG. CAT’s Price/Book and Price/Sales are consistent with its industry, while CMI’s Price/Book is a bit higher than its industry avg. of 2.58, but its Price/Sales is lower than the avg. of 1.30

CAT-CMI-PEG

Financials: Although CAT carries a heavier debt load, its interest coverage ratio is 5.9x.

CAT-CMI-ROE

Disclosure: Author is short puts on CAT and CMI.

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

Growing Dividends Down On The Farm

By Robert Hauver

Which Farm & Construction Machinery stocks are the best stocks to buy now?  The stocks in this formerly very popular group been heavily beaten down, like many other Industrials,  due to global slowdown concerns. However, emerging nations, like Brazil, offer big opportunities for agricultural equipment makers, due to the need for increasing crop yields.

Although there aren’t too many dividend paying stocks within this industry, we did find 3 undervalued, conservatively run dividend stocks there, each with a low dividend payout ratio, attractive metrics, low valuations, and good growth:

CASC-DE-NC-DIVS

Deere has paid, and mostly increased its dividends since 1984; Cascade has paid out dividends since 1986, and Nacco has paid dividends since 1985. Cascade slashed its quarterly dividend from $.20 down to $.01 in 2009, but restored it to $.20 in 2011, and just increased it to $.25 in September.  Deere and Nacco both increased their dividends in 2011.

CASCADE is a worldwide supplier of lift truck attachments and related products based in Oregon. It serves the pulp & paper, grocery, textiles, consumer goods, and recycling industries. In addition, it serves original equipment manufacturers of vehicles for agriculture, mining, construction, and industrial uses.

JOHN DEERE operates in 3 segments: Agriculture & Turf (77% of sales), Construction & Forestry, and Credit. Deere forecasts that, “Worldwide sales of the company’s agriculture and turf division are forecast to increase by about 21% for full-year 2011.  Sales of construction and forestry equipment are forecast to increase by about 45% for full-year 2011.”

NACCO operates globally in these main industries: lift trucks, small appliances, specialty retail and mining.

Earnings & Valuations: All 3 firms had impressive earnings growth in their most recent quarter and fiscal years, and they have low PEG valuations.

Nacco’s valuations look very low on a PEG  and Price/Book basis. Their estimated growth rate for the next 5 years is currently 59%, which accounts for the very low .08 5-year PEG.

Deere announced this week that it will build 2 new factories in Brazil, to meet growing market demand for its construction equipment products in Brazil and other South American countries.  Deere’s CEO feels that machinery demand in the BRIC nations will eventually rival that of the US.

CASC-DE-NC-PEG

Financials: Deere has the most debt of these stocks, but it has an interest coverage ratio of 5.1.

CASC-DE-ROE

Options: There are high options yields currently for Deere’s call options and put options. Deere is the only stock in this group that has options.

(The 2 trades listed below are both based on options which expire in March 2012.):

Covered Calls:

There are further details on this and over 30 other high yield covered call trades in our Covered Calls Table.

These call options pay over 13 times as much as the quarterly dividends over a 5-month period, ($5.50 vs. $.41).

Also, if the shares get assigned, there’s an additional potential $3.25/share profit, for a total yield of over 13.23%, or 32.84% annualized.

DE-Calls

Cash Secured Puts: DE’s puts have even higher options yield, thanks to the ongoing market volatility. Selling out of the money cash secured puts below the current underlying price gives yo a break-even price of $60.85, just above Deere’s 52-week low of $59.92.  You can find more details on this and over 30 other high yielding cash secured put trades in our Cash Secured Puts Table.

DE-PUTS

Disclosure: No positions.

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

© 2011 DeMar Marketing. All Rights Reserved.

Ares Capital- (ARCC):A BDC with High Dividend & Put Options Yields

By Robert Hauver

Ares Capital is a Business Development Corp., (BDC), that was recently added to the Financial section of our High Dividend Stocks by Sector tables.   ARCC is a closed-end mgt. investment company which invests in US mid-market firms, via mezzanine debt, first and second lien senior loans, and warrants.  Ares just completed its purchase of ailing competitor Allied Corp., (ALD), in a drawn-out $905 million deal that began last October.

Ares looks good in our Industry Comparison table:

Ares Capital (ARCC) Misc. Financial Services Industry
Dividend Yield 9.27% ($1.40/yr) 2.82%
ROE 17.23% -4.33
ROI 75.61% -3.89
Profit Margin 83%
P/E 7.47 9.36
PEG .39 .30
Long Term EPS Growth 19% 8%
Long Term Revenue Growth 69% 0%
Price/Cash Flow/Share 9.75 12.38

ARCC’s 4th quarter 2009 earnings, (excluding one-time merger costs), beat estimates:

EPS of $.35 vs. $.33 in 2008 Q4.

ARCC’s next quarterly ex-dividend date should be approx. June 11th.

Ares closed at $15.10 this week, which puts it less than 2% below the high end of its 52-week range, ($4.12 – $15.28).  For income investors looking for a lower entry point, selling put options also offers a high yield on this dividend paying stock:

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Disclosure: Author short puts of ARCC.

Disclaimer: This article is written for informational purposes only.