Dow Dividend Stocks For 2014 – Dividends vs Covered Calls

by Robert Hauver

After the big gains in 2013, (and subsequent declining yields), income investors are scouring the market for safe yields in 2014. With this in mind, we took a look at the 2 highest yielding dividend paying stocks in the DOW 30: AT&T, (T), and its arch rival Verizon, (VZ). In particular, we compared these 2 stocks’ next quarterly dividends to covered call premiums, in order to see if you could increase your yield, while gaining some downside protection.

DIVIDENDS: Both of these stocks are listed in our High Dividend Stocks By Sector Tables, in the Telecoms section. AT&T has a higher dividend yield than Verizon, but Verizon’s 5-year dividend growth rate trumps AT&T’s.
T-VZ-DIV
COVERED CALLS: These April 2014 covered call options trades both have strikes above each stock’s price/share, which offers you a chance for some assigned price gains, in addition to increasing the yield above that of the dividends:
TVZ-CALL
Here are the 3 main income scenarios for each trade. You can find more details for these 2 trades and over 30 others in our free Covered Calls Table.
T-CALLINC
Since VZ’s strike price is further above its share/price, you have more of a chance for potential price gains:
VZ-CALLINC

EARNINGS: To be sure, neither of these stocks are growth stocks – here’s how they stack up against each other:
TVZ-PEG
VALUATIONS: The good news is that both stocks look to have more attractive P/E’s in 2014. VZ is commanding a premium over T in its Price/Book and P/E ratios.
TVZ-PB
FINANCIALS: VZ has used more debt for financing than AT&T has, and has a higher Operating Margin and ROI:
TVZ-ROE
PERFORMANCE: While VZ lagged the market during 2013, AT&T went absolutely nowhere over the past 52 weeks:
TVZ-PERF
Author: Robert Hauver,copyright 2014 DeMar Marketing, All Rights Reserved.
Disclosure: Author had no positions at the time of this writing.
Disclaimer: This article was written for informational purposes only. Author not responsible for any errors, omissions, or actions taken by third parties as a result of reading this article.

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

2 Dow Dividend Stocks With P/E’s At 5-Year Lows And High Option Yields

By Robert Hauver

If you’re wondering about which Dow dividend stocks are the best stocks to buy now for dependable dividends, consider this:  Exxon and AT&T are both very near their 5-year P/E lows. In addition, AT&T is cheap on a P/Book basis, whereas Exxon has traditionally commanded higher multiples than most its oil industry peers:

T-XOM-PE

Dividends: XOM upped its quarterly dividends in Q2 2011 to $.47/share from $.44, while T raised its dividend to $.43 in Q1 2011, from $.42. AT&T’s 5-year dividend growth rate exceeds its peers, and Exxon’s is slightly under its peers. However, Exxon has also traditionally split its shareholder “paybacks” between dividends and share buybacks.

You’ll find T listed in the Telecoms section of our High Dividend Stocks By Sector Tables.

T-XOM-DIVS

High Options Yields: The call and put options listed below for these Dow dividend stocks  expire in Jan. 2012 , and greatly exceed the quarterly dividends over this 4-month term.

In fact, Exxon’s call options pay almost 9 times what the dividends pay.

There are further details on this and several other high yielding covered call trades in our Covered Calls Table.

Covered Calls:

t-xom-calls

Cash Secured Puts: AT&T’s Jan. 2012 $27.50 puts achieve a break-even price that’s nearly 4% below its 52-week low. As with the call options, the put options have much higher payouts over this term than the quarterly dividend.

T-XOM-PUTS

You’ll find more details on this and many other high yield cash secured put trades in our Cash Secured Puts Table.

EPS Growth: Both T and XOM enjoyed very good earnings in their most recent fiscal years. AT&T’s iPhone deal with Apple was very positive for earnings, and Exxon benefited from strong crude prices.  T’s 12-month PEG is lower than XOM’s, thanks to very low growth forecasts for XOM.  Of course, nobody really knows if global demand and prices will rise enough during the near term for XOM to achieve stronger growth next fiscal year or not.  However, it’s a reasonably logical long term bet that Exxon will benefit from long term crude demand, and will also benefit also from natural gas demand, with its purchase of XTO Energy, the biggest natural gas firm in N. America. In fact, Exxon execs are predicting that natural gas will replace coal as the 2nd most used energy source by 2030. One other thing to note is that crude futures prices have been tending to rise with positive economic data, so, if the US economy continues to hold up, Exxon should probably benefit.

AT&T’s growth forecasts are somewhat tempered by the loss of its iPhone exclusivity, and also from increased competition and market saturation. However, AT&T may have an advantage with the Apple’s new iPhone lineup, since AT&T’s network can handle the faster speeds of the new phone. Apple will also give AT&T an exclusive for the 3GS iPhone that will be given away to customers who sign up for a 2-year contract. One uncertainty obscuring AT&T’s future is whether or not the T-Mobile deal will be approved.  The US Justice Dept. currently has a suit  to block the deal, due to fears of higher prices for consumers.

T-XOM-PEG

Financials: AT&T’s financial ratios are above industry avgs., excepting its operating margin, which is below its peers”s 16.04% avg.  Exxon’s ROE and ROI are better than its peers, but it falls below industry avgs. in the remaining categories.

T-XOM-ROE

Share Performance (through 10/6/11): XOM fell more than T in this past trading quarter’s correction, due to being in the Basic Materials sector, which was the 3rd worst performing sector during this time. However, both stocks have outperformed the S&P over the past month, year, and year-to-date:

T-XOM-PERF

Disclosure: Author is long shares of XOM and T.

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

© 2011 DeMar Marketing.  All rights reserved.

Dogs Of The Dow – Double Your Dividend With Options

By Robert Hauver

We checked the top 5 current Dogs of the Dow, (the current Dow component stocks with the highest dividend yields), to see how their dividends stack up vs. their covered calls and cash secured puts.  Selling covered calls can be an effective way to protect your portfolio in a down market.

The current Dow Dogs are:

DOW-DOGS-6-11-DIV-PERF

As is often the case, Telecoms have the highest dividend yields in the group, with AT&T and Verizon topping the list.  These 2 dividend paying stocks are in the Telecoms section of our High Dividend Stocks By Sector Tables.  Two Healthcare dividend stocks and Tech giant Intel round out the list.  Verizon has the most aggressive dividend payout ratio, and Intel the most conservative.  Performance-wise, only Pfizer has gained much year-to-date, while Intel and Merck have lagged the others over the past year, which, in Intel’s case, belies the strong EPS growth over the recent past:

DOWDOGS-PEG-6-11

All 5 firms posted sequential EPS gains in the most recent quarter, but Pfizer was the laggard.  Analysts don’t currently believe that Intel can improve a great deal next fiscal year, given the outstanding 160% EPS growth it had this past fiscal year, which gives INTC a high 12-month PEG.  AT&T has the lowest 12-month PEG, 1.25, and the two healthcare stocks look very over-valued, when taken on a PEG basis. Looking out further, only Intel has a 5-year PEG under 1. Intel’s 10.12 P/E is also way below the average 16.41 P/E for the semi-conductor industry.

Financial Ratios:

DOWDOGS-ROE-6-11

AT&T and Intel are the clear winners in Mgt. efficiency ratios and margin, while Intel is nearly debt-free.

So, how do the dividends for these stocks compare to their January 2012 options? These call options range up to 3 times the dividend amounts.  Selling a covered call from any of the trades listed below allows you to at least double your dividend, giving you a 10%-plus static yield, and the potential for additional assigned yield gains. You’ll also get some additional downside protection, via a lower break-even point, by selling covered calls.  The catch is that you’ll have limited participation in upside price gains, should any of these dogs start to run. You can find more info on these and other covered call trades in our Covered Call Table.

Covered Calls:

DowDogs-6-11-CALLS

Feeling not so bullish? Selling cash secured put options can give you an even lower break-even point than the calls listed above. The put premiums below range up to 6 times the dividend amounts for this period.  Your net cash outlay will be the cash reserve minus the put premium you receive. Ex.) For AT&T, you’d have a net outlay of $2,778.00, ($3000.00 less $222.00 received for selling one put. Each options contract corresponds to 100 shares of the underlying stock).  You can find more info on these and other covered call trades in our Cash Secured Puts Table.

Cash Secured Puts:

DOwDogs-6-11-PUTS

Disclosure: Author is long AT&T and Intel.

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

Top Dow Dividend Stocks – Dividends vs. Options

By Robert Hauver

The Dogs Of The Dow strategy focuses on the Dow dividend paying stocks with the highest dividend yields. Currently, the 3 highest dividend paying stocks in the Dow are AT&T, (T), Verizon, (VZ), and Merck, (MRK).  This week we’ll compare current covered calls and cash secured put options to the dividend payouts for these stocks, all of whom are listed in our High Dividend Stocks By Sector tables.

Here’s how these 3 stocks have performed:

T-VZ-MRK-Perf

Like most other Healthcare stocks, Merck has lagged the market over the last year.  In 2011 it has also lagged the Healthcare sector, which is up nearly 10%.  AT&T and Verizon have both surged over the past year, partially due to the smartphone revolution.  AT&T benefited greatly from its exclusive sales arrangement with Apple, (AAPL), for selling the IPhone, an exclusivity which was lost, when Apple also granted Verizon selling rights in 2011.

Selected Financial Metrics:

T-VZ-MRK-ROE

AT&T is the clear winner in terms of ROE. The 2 Telecoms also have much higher operating margins than MRK.

Valuations:

T-VZ-MRK-VALUE

Again, AT&T has outperformed these other 2 firms, in past EPS and present EPS growth, in addition to having the lowest Price/Book, and PEG ratio, which, at 1.63, isn’t that attractive. However, its PEG for next year, at 1.31, is closer to being undervalued.  Although all 3 stocks are currently far below their values on a Discounted Future Earnings basis, Merck is sporting a very high PEG ratio for the next year, thanks to its stratospheric current P/E.

Covered Calls vs. Dividends:

T-VZ-MRK-CALLS

Selling 6-month covered call options is one way you can increase your income on these stocks. Note how the call premiums are all higher than the dividends paid out during this term.  You’ll find more details on these and other covered calls  in our Covered Calls Table.

Cash Secured Puts:

T-VZ-MRK-PUTS

These cash secured puts will give you an entry point/break-even even further below those of the covered calls.   Our Cash Secured Puts Table has more details on these and other put options trades.

Disclosure: Author is long shares of AT&T, and short puts of AAPL.

Disclaimer: This article is written for informational purposes only and is not intended as investing advice.

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.

The Top 5 U.S. Dividend Paying Stocks for 2010

By Robert Hauver

Have you ever wondered which dividend paying stocks actually pay out the most money in cash dividends to their shareholders?  We posed this same question in 2009, in our article,           “The Top 5 Dividend Stocks for 2009”, a 3-part series, which identified the 5 firms who paid out the most cash to shareholders, and we explored various ways of investing in and profiting from these dividend stocks.

Four US firms made the top 5 list in 2009: AT&T, GE, Exxon, and Chevron.

In 2009, dividends were eliminated, or slashed by many venerable firms, due to the recession, particularly in the Financial  sector, which formerly accounted for over 20% of 2008 dividends paid out in the S&P, but shrank to paying out less than 10% of the total in 2009.

According to Standard & Poor’s, the average dividend yield in the Telecom Sector has taken the biggest jump so far in 2010, rising from 5.53% in 2009 to 6.29% this year, while the Financial sector has continued its yield decline, from a 2008 average yield of 4.44%, down to 1.22% in 2009, and down again to 1.14% in 2010.

The Telecom sector has many firms listed in our High Dividend Stocks by Sector tables.

Here’s how the Sectors average dividend yields and overall contributions to the overall S&P 500 ranked as of 5/26/10:

INDUSTRY SECTOR

SECTOR DIVIDEND CONTRIBUTION

SECTOR DIVIDEND YIELD

SECTOR DIVIDEND YIELD

5/26/2010

(As of 5/26/2010)

2009

Telecom Services

8.58%

6.29%

5.53%

Utilities

8.04%

4.75%

4.26%

Consumer Staples

17.57%

3.25%

2.96%

Health Care

13.29%

2.37%

2.03%

Energy

12.00%

2.35%

2.05%

Industrials

11.47%

2.28%

2.26%

Materials

3.42%

2.10%

1.76%

Consumer Discretionary

7.74%

1.53%

1.44%

Financials

8.82%

1.14%

1.22%

Information Technology

9.08%

1.02%

0.89%

S&P 500

100.00%

2.10%

1.95%

(SOURCE: Standard & Poor’s)

So, did any of the same top 2009 dividend paying stocks make it to the top 5 for 2010?

As it turns out, 3 out of 4 of these firms are poised to pay out even larger amounts of cash dividends in 2010.  As expected, GE, which cut its dividend in 2009 to $.10/quarter, from $.31/quarter, didn’t make the top 5 this year.

Here’s our list of the projected Top 5 U.S. Dividend Paying Stocks for 2010:

2010 Projected Payouts (in Billions$) Total Projected Annual Dividend/Share
AT &T  (T)

$9.92

$1.68

Exxon  (XOM)

$8.27

$1.76

Johnson & Johnson (JNJ)

$7.93

$2.11

Pfizer (PFE)

$5.81

$0.72

Chevron (CVX)

$5.79

$2.88

We’ve also compiled a list of projected upcoming ex-dividend dates and quarterly payouts/share for these Top 5 dividend stocks.

Projected Upcoming Dividend Dates Projected Quarterly Dividend/Share
AT &T  (T)

7/2/2010

$.42

Exxon  (XOM)

8/11/2010

$.44

Johnson & Johnson (JNJ)

8/27/2010

$.54

Pfizer (PFE)

8/5/2010

$0.18

Chevron (CVX)

8/17/2010

$.72

A looming issue for dividend investors is the status of the qualified dividends tax rate, which is currently at 15% until the end of 2010.  If Congress lets this tax rate simply expire, dividends could be taxed at the old 39.6% rate, which may very well inspire some dividend paying stocks to increase their payments in the fourth quarter, in order to still achieve the lower tax rate.

Disclosure: Author currently holds shares of XOM, T, and CVX.

Disclaimer: This article is written for informational purposes only.

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.

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