2 Dividend Aristocrats With Room To Run

by Robert Hauver
Looking for dividend stocks with a long term record of dividend increases? The S&P Dividend Aristocrats index contains 50 such stocks, all of which have increased their dividends paid per share yearly for the past consecutive 25 years.
This group contains many household names across various industries – some of the largest companies on the planet. Here are the top 15 companies, sorted by market cap. Healthcare giant Johnson & Jonson, (JNJ), tops the list, followed by Exxon Mobil, (XOM), after which the market cap drops to the mid-$200B range, with Procter & Gamble, (PG), Walmart, (WMT), and AT&T, (T):

The sector breakdown shows Consumer Staples as the leading weighted sector in the index by far, with a 26% weighting, followed by Industrials, with 17.4%, and Healthcare, with 13.4%: Click here to read more…

This Week’s Top 5 Performing Dividend Stocks

by Robert Hauver
With all of the recent market turmoil, we thought we’d take a look at which dividend stocks performed the best this past week. While these aren’t high dividend stocks, we screened for stocks with a dividend yield above 3%, and a moderate dividend payout ratio.

Not surprisingly, these top 5 dividend stocks are from 2 well-known defensive sectors – Utilities and Consumer Staples, which are also the 2 best performing sectors of the past month.

Performance: These stocks have all outperformed the market this week, and over the past trading month, vs. a -1.36% weekly decline and a -2.07% monthly decline for the S&P 500. One of the big reasons for their strong support by the market right now is that they all have low beta’s, which signifies a low correlation to market volatility.

Click here to read more…

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.

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.

Dow Dividends vs. Selling Long-Term Puts

By Robert Hauver

Consumer Goods Dow 30 component Procter & Gamble, (PG), languishes at the bottom of our High Dividend Stocks by Sector consumer goods table, with a lower dividend yield, (2.82%), than the other dividend paying stocks in this sector table.

Looking at other solid Dow 30 giants, their dividend yields were equally unimpressive.  For example, Coke, (KO), has a 2.87% dividend yield, and Exxon only pays 2.24%.  Is there a way to invest in these great companies, but get paid a higher yield?  Absolutely.  By selling long-term puts, with a January 2011 expiration, you can earn nearly 3 times the current dividend yields on these stocks.  In addition, you’ll get paid this money now, and not have to wait to collect it over the next year. (Brokers have to deposit the option premium money in your account by 3 days after the trade).

Here’s a table illustrating this strategy for these 3 stocks:

STOCK SYMBOL PRICE ANNUAL YIELD JAN 2001 PUT STRIKE PRICE JAN. 2011 PUT YIELD ANNUALIZED
Coke KO $57.18 2.87% $55.00 7.74%
Procter & Gamble PG $62.48 2.82% $60.00 8.40%
EXXON XOM $74.87 2.24% $70.00 7.76%

Here are some other considerations about selling puts vs. just buying stocks and collecting dividends:

1. Taxes: Your put gains will be taxed at your personal tax rate, not the 15% qualified dividend tax rate. Compare your personal rate to see if it’s worth it to you. For example, if you had a Federal tax rate of 35% and a State tax rate of 10%, you’d net 3.48% for the Coke put, vs. 2.44% for the Coke dividend, after taxes. The lower your personal tax rates are, the more advantageous the put selling strategy is, in terms of yield.

2. Capital Gain Timing: Your put gains are taxable when the put expires, is assigned, or you close out your postion.  So, in the above examples, if you simply let the puts expire in 2011, you’d be liable for taxes on these gains on your 2011 taxes.

3. Price Appreciation: The put premium you receive now is the only income and gain you’ll earn on this trade, vs. possible future price appreciation in the stock.

4. Long-term exposure: Although your break-even will be lower on the stock after you’ve sold puts, you’re still obligated to buy the stock, if it gets assigned to you at any time before expiration. So, if you’re wary of another market meltdown , you may not want to sell puts this far out in time.  There are other premiums available, with 2010 expiration dates that would accomplish this.  Just keep in mind that your capital gain would then be in 2010, not 2011.

Disclosure: Author long XOM, PG

Disclaimer: This article is for informational purposes only.


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…