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

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.

Top 5 Dogs Of The Dow – Highest Dividend Stocks & Options Yields

By Robert Hauver

Looking for well-known high dividend stocks?  The Dogs of the Dow strategy advocates buying the 10 Dow dividend paying stocks with the highest dividend yield.  This week we narrowed this group down to 5 stocks with the highest dividend yields and the highest option yields.  As usual, there are mixed metrics among the group:

DOGS-Dow-ROE-2010-11-04

Verizon’s ROE, (Return On Equity), of just 1.08, looks particularly flea-bitten, when compared to the rest of the pack.

Valuation metrics:

DOGS-Dow-VAL'N-2010-11-04

While the long-term PEG ratios for these stocks aren’t very compelling, the next year PEG’s for 2 of them, Merck and Kraft, look attractive, as they’re below 1.  This plays into the idea of a shorter term strategy, such as selling Covered Calls or Cash Secured Puts, with Feb. – April expiration dates.

The basic Covered Call option yields for these dividend stocks are listed below.  We’ve listed the complete info for these trades, including expiration dates, and the additional potential price gains, in our Covered Calls table.

DOGS-Dow-CALLS-2010-11-04

The Cash Secured Put options for these stocks also currently offer high options yields:

DOGSDow-Puts-2010-11-04

We’ve added these trades this week to our Cash Secured Puts Table, where you’ll find more details.

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

Disclaimer: This article is written for informational purposes only.

© 2010 DeMar Marketing.  All rights reserved.