LORILLARD – 1760 – Consumer Goods

BANK OF NY – 1784 – Bank



CIGNA – 1792 – Insurance



WASHINGTON TRUST – 1800 – Community Bank



DUPONT – 1802 – Industrial Diversified
 Chemicals

COLGATE-PALMOLIVE – 1806 – Consumer Goods



VALSPAR – 1806 – Industrial



JOHN WILEY & SONS – 1807 – Publishing



HARTFORD GROUP – 1810 – Insurance



CITIGROUP – 1812 – Bank



YORK WATER – 1816 – Utility


First, let’s look at America’s oldest dividend paying company, Lorillard, (LO).  Many key metrics look attractive for this 249-year old firm, which has a very strong balance sheet:

Today’s opening price: $67.04

Dividend Yield: 5.49%   ($3.68/share)

EPS next year: $5.82/share

Dividend Payout Ratio: 63.2%

Debt/Equity: 0

Long Term Debt/Equity: 0

Quick Ratio: 1.23

Current Ratio: 1.44

Management efficiency measurements look good also:

Return on Assets (ROA): 32.8%

Return on Equity (ROE): 114.49%

Return on Investment: 75.35%

In terms of price, LO is over 32% above its 52-week low of $50.97, and only 8.61% below its 52-week high of $74.02, so, more conservative investors may want to wait for a price pullback here.

Alternatively, you could purchase LO and sell covered calls. The Jan. 2010 $70.00 call option, (LOAN), is currently worth a $3.90 bid.

Here are the data for this trade:

Share Price: $67.04

Call Bid Price: $3.90 (5.82%)

Dividends collected during term: $.92/share, ( 1.37%)

Static Yield, if shares don’t get assigned, (sold away from you): $4.82/share, 7.19%, over this 186-day period, (14.1% annualized).

Assigned Yield, if shares rise to or above $73.90, ($70 strike price plus $3.90/share call bid premium): 4.4%  An additional $2.96/share, ($70.00 strike – $67.04 cost)

Total Potential Assigned Yield: $7.78/share, 11.06%, or 22.77% annualized).

Beakeven: $62.22, ($67.04 – $3.90 call premium – $.92 in dividends).

Our 2nd profile is for Valspar, (VAL), an industrial goods company in the General Building Materails sub-industry.  Here are some key figures for Valspar, which is a bit more leveraged firm than Lorillard, but still pretty solid:

Today’s opening price: $22.2

Dividend Yield: 2.70%   ($.60/share)

EPS next year: $1.82/share

Forward Dividend Payout Ratio: 33

Debt/Equity: .67

Long Term Debt/Equity: .48

Quick Ratio: .8

Current Ratio: 1.17

Management efficiency measurements are fair, not dazzling:

Return on Assets (ROA): 3.78%

Return on Equity (ROE):  8.33%

Return on Investment:    5.03%

VAL has run up over 58% form its 52-week low of $14.14, and currently sits at only 9.43% off its 52-week high of $24.74.

Unfortunately, the put premiums aren’t very rich for VAL. Selling puts into Jan. 2010 would only yield 6.75%, ($1.35 for a $20.00 put).

VAL’s covered calls are a bit richer:

The Jan. 2010 $22.50 call, (VALAX), is currently at $2.05 bid, which yields 9.2% for approximately 6 months, or 18% annualized.

In addition, you’d collect $.60/share in dividends during this term, for another 2.7%.

Your total static yield: $2.65/share, 11.9% for around 6 months, or 23.35% annualized.

Breakeven: $19.62 ($22.27 – $2.65/call premium + dividends)

Potential Assigned Yield: $.23/share, ($22.50 strike price – $22.27 cost). This would give you an additional 1%, if VAL rises to or above $24.55, ($22.50 strike plus $2.05 call premium).

These 2 old companies appear to be good candidates for a best stocks watch list for income investors.

In part 4 of this series, we’ll profile 2 more of America’s oldest companies.

Author: Robert Hauver © 2009 DeMar Marketing All Rights Reserved

Disclaimer: This article is written for informational purposes only, and author will not be held responsible for omissions or errors, or for acts taken by third parties as a result of reading this article.

1. High Dividend Yield – Above 5 %

2. Moderate Dividend Payout Ratio – Below 50 %

3. Less Than 40 % Above 52-Week Low *

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

In part 3, we adjusted screen # 3 to: Over 50% below 52-week high”.

This adjusted screen gave us Olin Corp., (OLN), a Basic Materials-Synthetics/Diversified Chemicals company, which has 2 divisions -chlor alkali specialty chemicals and ammunitions for sports and the military.

Olin currently has a good dividend yield of approximately 6.2%, and their dividend payout ratio of less than 37% is very low for a high dividend stock. Olin’s 33% Debt-To-Equity ratios are strong and identical for both long term and short term debt.

Current Ratio: 1.9, meaning that their current assets are nearly twice as high as their liabilities.

OLN is cheap by other metrics also:

Growth: A low PEG ratio of only .57 (investors look for PEG’s under 1

Price/Book (P/B): Only 1.40

Price/Earnings (P/E): 6.17

Return on Equity (ROE): over 22%

Return On Investment (ROI): 12.24%

Return On Assets (ROA): 9.67%

Within their Diversified Chemicals peer group, they have the highest dividend yield and the lowest P/E ratio.

So, what if you want to be conservative and build a position in OLN at a price lower than the current market?

SELLING PUTS is a conservative high yield strategy which investors use to accumulate stocks at prices lower than the current market.

Each put contract sold potentially obligates the seller to buy 100 shares of the underlying stock.  Brokers vary in the amount of cash reserve they require a seller to post – some brokers want 100%, while others require less.

In this trade example, we’ll use a 100% cash reserve, and no commission fees.

OLN is currently trading at $12.99.

1. Compare the cash yields of selling Nov $12.50 puts to the dividend yield:

If you bought OLN outright, at $12.99, you’d receive 2 remaining $.20/share dividends prior to Nov. expiration, which equals $.40/share, a 6.2% annualized yield.

OR

If you sold Nov. $12.50 puts,(OLNWV), you’d receive $1.60/share, a 28.5% annualized yield.  Clearly, the put sale offers a much higher yield.

IMPORTANT CAVEAT: The put sale will be a short term gain, which is taxable at your personal tax rate, as opposed to the current 15% tax rate for qualified dividends.

Your Breakeven Price on this put sale is $10.90 ($12.50 strike-$1.60 put premium).

When the November expiration comes, there are 2 possible outcomes:

1.  OLN declines to near or under $10.90, (($12.50 strike price less $1.60 put premium), and you are sold, (assigned), 100 shares of OLN at $12.50/share, (the put strike price).

However, your net cost would be $10.90, (the $12.50 strike – $1.60 put premium you received).  This would put you approximately 21%+ over the OLN’s 5-year low of $8.97.  Not a bad price to pay for such a strong company.

2.  If OLN doesn’t decline to near or under $11.90, your broker will release your cash reserve, and you walk away with $160.00 for every put contract you sold, a 28.5% annualized profit.  (Either way, you keep your put premium $, whether you get assigned shares or not).

Many investors have been worrying about being left behind by the current rally.  Selling puts is a way that you can still profit from solid companies, even though their prices have risen.

In the 5th and final part of this series, we’ll discuss other ways to analyze selling calls and puts.

Disclosure: Author is long OLN.

Author: Robert Hauver Ó 2009 DeMar Marketing.  Al Rights Reserved

Disclaimer: This article is written for informational purposes only.  Author not responsible for errors, omissions, or acts taken by third parties as a result of reading this article.

1. High Dividend Yield – Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).

2. Moderate Dividend Payout Ratio – Below 50 % (The S&P’s payout ratio is approximately 59 %).

3.Less Than 40 % Above 52-Week Low *

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

As the market keeps rallying, it’s getting tougher to find good stocks still near their lows, so I adjusted screen # 3 to: Over 50% below 52-week high”.

This adjusted screen yielded Olin Corp., (OLN), a Basic Materials-Synthetics/Diversified Chemicals company, which has 2 divisions -chlor alkali specialty chemicals and ammunitions for sports and the military.

Olin currently has a good dividend yield of just under 6%, and their dividend payout ratio of less than 37% is very low for a high dividend stock. Olin’s Debt-To-Equity ratios are strong and identical for both long term and short term debt: a mere 33%.

The Current Ratio is approximately 1.9, meaning that their current assets are nearly twice as high as their liabilities.

OLN is cheap by other metrics also:

Growth: Their PEG ratio is only .57, (anything less than 1 is considered a good value)

Price/Book (P/B): Only 1.40

Price/Earnings (P/E): 6.17

Their management metrics are solid:

Return on Equity (ROE): over 22%

Return On Investment (ROI): 12.24%

Return On Assets (ROA): 9.67%, not a very high figure, but still respectable

Within their Diversified Chemicals peer group, they have the highest dividend yield and the lowest P/E ratio.

Since OLN is an optionable stock, you can further goose their high dividend yield by selling covered calls.  Currently, the January $15 covered call bid is $1.10.

We’ve based the following trade example on buying 100 shares of OLN, since option contracts are tied to 100 shares of the underlying stock.  (We annualized all of the yields in this article because options expire in under 12 months, and at different times.  Annualizing gives a better basis for comparing investments).

Here are the current figures for this high yield, low risk trade:

1. Buy 100 shares at $13.38

2. Sell 1 Jan 2010 $15 call contract, (symbol YSOAC), at $1.10, for $110.00

3. Collect 2 dividend payouts, worth a total of $.40/share, before option expiration,      for $40.00

When the January 16, 2010 expiration date comes, there are 2 possible outcomes:

1. Assignment – If OLN rises to or past $16.10, your 100 shares will be sold/assigned at the $15.00 strike price, giving you an additional $1.62/share profit, ($15.00 – $13.38 cost/share)

OR

2. Static – If OLN doesn’t rise to or past $16.10, you’ll keep you 100 shares.  Your new breakeven cost is $11.88, ($13.38 – $1.10 call premium – $.40 dividend).

The Annualized Yields on this trade are as follows:

Dividend Yield: 4.92%  ($.40/share)

Call Yield: 13.52%   ($1.10/share)

Total Static Yield: (Dividends + Call): 18.84%

Potential Assigned Yield: 19.9 % ($1.62/share)

Total Potential Yield: 38.74%

Breakeven Price: $11.88

Assignment “Trigger” Price: $16.10

The minimum income/Static Yield you’ll make by buying OLN and doing this covered call trade is $150/100 shares, (18.84%).

The maximum income you’ll make is $312/100 shares, (38.74%).

Your downside protection here is equal to your static yield of 18.84%.

In addition to dramatically increasing your income yields, selling covered calls also:

-Determines exactly what your minimum income will be on each trade

-Quantifies your potential maximum profit.  Selling a call determines your exit strategy,  since it obligates you to sell at that strike price, no matter how high the stock rises.

-Decreases the net amount of cash you have tied up in the trade

-Increases your protection against price declines and dividend cuts, since your call yield is usually higher than the dividend yield.

So now you’ve locked in 18%+ downside protection, improved your cash flow, and set yourself up for a potential 38%+ profit.  Most fishermen would agree that these figures would make for a pretty good day’s outing…

In Part 4 of this series, we’ll feature another high yield/low risk approach to investing in OLN.

7/9/09 UPDATE:

In parts 1 & 2 of this series, we used the following screening criteria:

1. High Dividend Yield – Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).

2. Moderate Dividend Payout Ratio – Below 50 % (The S&P’s payout ratio is approximately 59 %).

3. Less Than 40 % Above 52-Week Low *

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

As the market keeps rallying, it’s getting tougher to find good stocks still near their lows, so I adjusted screen # 3 to: Over 50% below 52-week high”.

This adjusted screen yielded Olin Corp., (OLN), a Basic Materials-Synthetics/Diversified Chemicals company, which has 2 divisions -chlor alkali specialty chemicals and ammunitions for sports and the military.

Olin currently has a good dividend yield of just over 7%, and their dividend payout ratio of less than 37% is very low for a high dividend stock. Olin’s Debt-To-Equity ratios are strong and identical for both long term and short term debt: a mere 33%.

The Current Ratio is approximately 1.9, meaning that their current assets are nearly twice as high as their liabilities.

OLN is cheap by other metrics also:

Growth: Their PEG ratio is only .57, (anything less than 1 is considered a good value)

Price/Book (P/B): Only 1.40

Price/Earnings (P/E): 6.17

Their management metrics are solid:

Return on Equity (ROE): over 22%

Return On Investment (ROI): 12.24%

Return On Assets (ROA): 9.67%, not a very high figure, but still respectable.

Within their Diversified Chemicals peer group, they have the highest dividend yield and the lowest P/E ratio.

Since OLN is an optionable stock, you can further goose their high dividend yield by selling covered calls.  Currently, the January $12.50 covered call bid is $1.05.

We’ve based the following trade example on buying 100 shares of OLN, since option contracts are tied to 100 shares of the underlying stock.  (We annualized all of the yields in this article because options expire in under 12 months, and at different times.  Annualizing gives a better basis for comparing investments).

Here are the current figures for this high yield, low risk trade:

1. Buy 100 shares at $11.32

2. Sell 1 Jan 2010 $15 call contract, (symbol OLNAV), at $1.05, for $105.00

3. Collect 2 dividend payouts, worth a total of $.40/share, before option expiration,  for $40.00

When the January 16, 2010 expiration date comes, there are 2 possible outcomes:

1. Assignment – If OLN rises to or past $13.55, your 100 shares will be sold/assigned at the $12.50 strike price, giving you an additional $1.18/share profit, ($12.50 – $11.32 cost/share)

OR

2. Static – If OLN doesn’t rise to or past $13.55, you’ll keep your 100 shares.  Your new breakeven cost is $9.87, ($11.32 – $1.05 call premium – $.40 dividend).

The Annualized Yields on this trade are as follows:

Dividend Yield: 6.8 %  ($.40/share)

Call Yield: 17.8 %   ($1.05/share)

Total Static Yield: (Dividends + Call): 24.6 %

Potential Assigned Yield: 20 % ($1.18/share)

Total Potential Yield: 44.6 %

Breakeven Price: $9.87

Assignment “Trigger” Price: $13.55

The minimum income/Static Yield you’ll make by buying OLN and doing this covered call trade is $145/100 shares, (24.6%).

The maximum income you’ll make is $263/100 shares, (44.6 %).

Your downside protection here is equal to your static yield of 24.6 %.

In addition to dramatically increasing your income yields, selling covered calls also:

-Determines exactly what your minimum income will be on each trade

-Quantifies your potential maximum profit.  Selling a call determines your exit strategy,  since it obligates you to sell at that strike price, no matter how high the stock rises.

-Decreases the net amount of cash you have tied up in the trade.

-Increases your protection against price declines and dividend cuts, since your call yield is usually higher than the dividend yield.

So now you’ve locked in 24%+ downside protection, improved your cash flow, and set yourself up for a potential 44%+ profit.  Most fishermen would agree that these figures would make for a pretty good day’s outing…

In Part 4 of this series, we’ll feature another high yield/low risk approach to investing in OLN.

LORILLARD – 1760 – Consumer Goods

BANK OF NY – 1784 – Bank



CIGNA – 1792 – Insurance



WASHINGTON TRUST – 1800 – Community Bank



DUPONT – 1802 – Industrial Diversified
 Chemicals

COLGATE-PALMOLIVE – 1806 – Consumer Goods


VALSPAR – 1806 – Industrial



JOHN WILEY & SONS – 1807 – Publishing


HARTFORD GROUP – 1810 – Insurance



CITIGROUP – 1812 – Bank



YORK WATER – 1816 – Utility



So, which of these companies has the safest dividend?  This is a question with many answers.

As we noted in the 1st article, York Water, (YORW), holds the record for consecutive dividends, having paid 553 consecutive dividends during the 193 years since it was founded in 1816. Their record is certainly impressive and offers some safety.  Here’s how they fare in their peers in the broad utility group:

Quick Ratio: .72 puts them in the top rung

Debt-to-Equity: Their 1.35 is the approximate median for this metric

Price-to-Book: At 2.4, their P/B is one of the highest in their group

Dividend Payout Ratio: 84%.  Almost in the middle, but this figure ranges from 60 % to 236 % for this group.

Dividend Yield: 3.4%  This is near the bottom for Utilities as a whole, as this broad group ranges from 3 % up to 8% +.  However, looking at the narrower, water utility group shows a much narrower range, of 3 to 5%, with most companies being around 3%.

All told, YORW is a steady dividend payer that could add stability to your portfolio, particularly if the dividends are reinvested.

Dupont Nemours, (DD), has certainly had a wild ride in the past year, ranging from a high of $46.03 to $15.81.  It’s currently at $24.60 and yields over 6.7%. Here’s a look at some other metrics:

Dividend Payout Ratio: 114%.  Payout ratios this high are usually a warning signal, but, looking further, we see that DuPont’s EPS forecast for 2010 is $2.05, which, if correct, would bring their payout ratio back down to 80%, which is still higher than the bottom third of the diversified chemical group, but much better than the top third.

Quick Ratio: 1.26 is the second highest in their peer group.

Current Ratio: 1.87 is approximately in the middle of their group.

Dupont’s Price/Cash and Price/Book are currently both a bit on the high side, so, you may want to either wait for a pullback, or, try selling puts to get a cheaper price.

October $22.50 puts, (DDVT), are currently bid at $1.25, which equals a 20%-plus annualized yield, and a breakeven of $21.25.

Alternately, you could hedge your bet by buying shares and then selling $25.00 January 2010 calls, (DDAE), which currently have a $2.30 bid, which equals an 18% annualized yield.

In addition, you’d receive $.82/share in dividends during this period, as there are 2 ex-dividend dates before the call option expires.

Adding in this dividend payout brings this covered call trade’s “static” yield to 24.4% annualized, and gives you a $21.48 breakeven.

Since your basis is $24.60, and the call strike price is $25.00, you’ll have one other potential profit on this covered call:  If the stock’s price rises to or past $27.30 at or near the Jan. expiration date, your shares will be assigned, (sold), at $25.00, the strike price, giving you an additional $.40/share in profit.

This potential assigned profit brings your total potential profit up to $3.52/share for this 6-month + trade, (over 27.5 % annualized).

In part 3 of this series, we’ll look at more of America’s oldest dividend paying stocks, and try to ferret out some more possible trades.

Author: Robert Hauver © 2009 DeMar Marketing All Rights Reserved

Disclaimer: This article is written for informational purposes only, and author will not be held responsible for omissions or errors, or for acts taken by third parties as a result of reading this article.

www.DoubleDividendStocks.com

This “Old Timer’s Club” has a mixed membership, in more ways than one:



3 banks, 3 industrial giants, 2 insurance companies, 1 consumer goods manufacturer, 1 publisher, and 1 water utility.



There may be additional old companies that are still around, but here are the ones I came up with, the years they were founded, and their industries:



LORILLARD – 1760 – Consumer Goods

BANK OF NY – 1784 – Bank



CIGNA – 1792 – Insurance



WASHINGTON TRUST – 1800 – Bank



DUPONT – 1802 – Industrial Diversified


COLGATE-PALMOLIVE – 1806 – Consumer Goods



VALSPAR – 1806 – Industrial



JOHN WILEY & SONS – 1807 – Publishing



HARTFORD GROUP – 1810 – Insurance



CITIGROUP – 1812 – Bank



YORK WATER – 1816 – Utility



OLDEST COMPANY: Lorillard (LO) Founded in 1760, by entrepreneur Pierre Lorillard in New York City. America’s oldest tobacco company, now known as Lorillard Inc., is the oldest continuously operating tobacco company in the United States. As of July 2, 2009, it yields 5.42%.



OLDEST INSURANCE COMPANY: Cigna CP (CI) Initially formed in 1792 as the Insurance Company of North America (INA), it was the first marine insurance firm in the U.S., and remains this country’s oldest shareholder-owned insurer.



They issued their first life insurance policy in 1794, insuring a sea captain against death during a voyage, AND, this policy even had a clause promising benefits if he got captured by Barbary Coast pirates…Aargh Matey! Cigna pays a measly dividend of $.04/share, and has been struggling with losses for some time.



OLDEST DIVIDEND: Citigroup (C) Aargh, indeed. This current basket case financial company actually paid its first dividend in 1813. So much for being older and wiser. It opened for business in New York in 1812, starting with paid-in capital of $800,000.

They initially serviced a group of New York merchants in the old days, and eventually were acquired by First National City Corp., and then merged with the Travelers Group in 1998. This ward of the state is only allowed to pay $.04/share in dividends, a paltry 1.39%. Makes you wonder how much they paid back in 1813…


OLDEST BANK: Founded in 1784, the Bank of New York  is the oldest bank in the U.S.  Alexander Hamilton wrote the new bank’s constitution, and became its chief organizer, guiding it through its early stages. The bank opened for business at the Walton House in lower Manhattan shortly after British troops left American soil. Its opening capitalization was $500,000.

The Bank merged with Mellon Corp. in 2007, and is now known as The Bank of New York Mellon, (BK).  It currently trades at $27.57 and yields 1.3%.  Like many U.S. banks, its had a load of troubles in the past year.  However, it was the first bank to pay back the TARP money.


OLDEST COMMUNITY BANK: Founded in Rhode Island in 1800, Washington Trust (WASH), is the oldest community bank in the nation. It’s a subsidiary of Washington Trust Bancorp, Inc., a $2.9 billion corporation headquartered in Westerly, Rhode Island. It’s currently at $17.60, and has a 4.77% dividend yield.



OLDEST CONSECUTIVE DIVIDEND: Even though CitiGroup paid its first dividend 4 years earlier, in 1812, the prize for for consecutive dividends paid goes to York Water, the oldest investor-owned utility company in America. York has paid 553 consecutive dividends during the 193 years since it was founded in 1816. it’s now at $14.57, with a 3.43% yield, and is a stock that I’ve written about before, due to its strong position within the steadily consolidating water utility industry.



MOST CONSECUTIVE DIVIDEND INCREASES: Our group’s winner in this category is Colgate-Palmolive, (CL), a well-known Dividend Aristocrat which has increased its dividends for 46 consecutive years.



Colgate was founded in 1806 by William Colgate as a starch, soap and candle business on Dutch Street in New York City, and has paid uninterrupted dividends since 1895. It’s currently at $72.08 and yields 2.44%, which is not as high as other historic Consumer Goods companies.



I’d beware of Bank of New York Mellon, Citigroup, Hartford Group, and Cigna at present, but in Part 2 of this series, I’ll investigate some of the other more promising stocks on this list, plus some other historic American stocks that might interest my fellow American dividend investors.

(There’s some controversy over when JP Morgan Chase began, which is why it’s not on this list.  More to come…)

Author: Robert Hauver

Copyright 2009 DeMar Marketing All Rights Reserved

This article is for informational purposes only and author will not be held responsible for any errors or omissions, or actions taken by third parties as a result of reading this article.

1. High Dividend Yield – Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).

2. Moderate Dividend Payout Ratio – Below 50 % (The S&P’s payout ratio is approximately 59 %).

3. Less Than 40 % Above 52-Week Low *

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

As the market keeps rallying, it’s getting tougher to find good stocks still near their lows, so I adjusted screen # 3 to: Over 50% below 52-week high”.

This adjusted screen yielded Olin Corp., (OLN), a Basic Materials-Synthetics/Diversified Chemicals company, which has 2 divisions -chlor alkali specialty chemicals and ammunitions for sports and the military.

Olin currently has a good dividend yield of just over 7%, and their dividend payout ratio of less than 37% is very low for a high dividend stock. Olin’s Debt-To-Equity ratios are strong and identical for both long term and short term debt: a mere 33%.

The Current Ratio is approximately 1.9, meaning that their current assets are nearly twice as high as their liabilities.

OLN is cheap by other metrics also:

Growth: Their PEG ratio is only .57, (anything less than 1 is considered a good value)

Price/Book (P/B): Only 1.40

Price/Earnings (P/E): 6.17

Their management metrics are solid:

Return on Equity (ROE): over 22%

Return On Investment (ROI): 12.24%

Return On Assets (ROA): 9.67%, not a very high figure, but still respectable.

Within their Diversified Chemicals peer group, they have the highest dividend yield and the lowest P/E ratio.

Since OLN is an optionable stock, you can further goose their high dividend yield by selling covered calls.  Currently, the January $12.50 covered call bid is $1.05.

We’ve based the following trade example on buying 100 shares of OLN, since option contracts are tied to 100 shares of the underlying stock.  (We annualized all of the yields in this article because options expire in under 12 months, and at different times.  Annualizing gives a better basis for comparing investments).

Here are the current figures for this high yield, low risk trade:

1. Buy 100 shares at $11.32

2. Sell 1 Jan 2010 $15 call contract, (symbol OLNAV), at $1.05, for $105.00

3. Collect 2 dividend payouts, worth a total of $.40/share, before option expiration,  for $40.00

When the January 16, 2010 expiration date comes, there are 2 possible outcomes:

1. Assignment – If OLN rises to or past $13.55, your 100 shares will be sold/assigned at the $12.50 strike price, giving you an additional $1.18/share profit, ($12.50 – $11.32 cost/share)

OR

2. Static – If OLN doesn’t rise to or past $13.55, you’ll keep your 100 shares.  Your new breakeven cost is $9.87, ($11.32 – $1.05 call premium – $.40 dividend).

The Annualized Yields on this trade are as follows:

Dividend Yield: 6.8 %  ($.40/share)

Call Yield: 17.8 %   ($1.05/share)

Total Static Yield: (Dividends + Call): 24.6 %

Potential Assigned Yield: 20 % ($1.18/share)

Total Potential Yield: 44.6 %

Breakeven Price: $9.87

Assignment “Trigger” Price: $13.55

The minimum income/Static Yield you’ll make by buying OLN and doing this covered call trade is $145/100 shares, (24.6%).

The maximum income you’ll make is $263/100 shares, (44.6 %).

Your downside protection here is equal to your static yield of 24.6 %.

In addition to dramatically increasing your income yields, selling covered calls also:

-Determines exactly what your minimum income will be on each trade

-Quantifies your potential maximum profit.  Selling a call determines your exit strategy,  since it obligates you to sell at that strike price, no matter how high the stock rises.

-Decreases the net amount of cash you have tied up in the trade.

-Increases your protection against price declines and dividend cuts, since your call yield is usually higher than the dividend yield.

So now you’ve locked in 24%+ downside protection, improved your cash flow, and set yourself up for a potential 44%+ profit.  Most fishermen would agree that these figures would make for a pretty good day’s outing…

In Part 4 of this series, we’ll feature another high yield/low risk approach to investing in OLN.

1. High Dividend Yield – Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).

2. Moderate Dividend Payout Ratio – Below 50 % (The S&P’s payout ratio is approximately 59%).

3. Less Than 40 % Above 52-Week Low

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

We then used the conservative bullish approach of selling covered calls to increase Cal-Maine’s already high dividend even further.

But, what approach can you take if you’re not so bullish on the market, which has gained over 35% since March 9, 2009, or, if you want to accumulate CALM at a lower entry price?

Instead of buying CALM at $24.93, (its June 1, 2009 opening price), a more conservative approach would be to sell covered puts on it, at a lower price.  Selling a put on a stock means that you are selling someone the option to sell, or “put” the stock to you by a future date.  Each put contract corresponds to 100 shares of the underlying stock.

Normally, most options aren’t exercised until near or on the expiration date, so the timing of possibly having the stock sold to you will depend upon what expiration month you choose.  Due to the time value of money, if 2 options are at the same strike price, the one that’s further out in time usually commands a higher price.  However, you should compare them on an annualized basis, in order to get a clear comparison of their returns.

How would this work?  First, you’d want to get an idea of this stock’s 52-week price range, which is $17.01-$48.80.

Due to the market’s decline before the current rally, and higher volatility, it has been possible in the last 8 months to profit by selling puts at or near a stock’s 52-week low.  This is a rather conservative approach, which allows investors to  “nibble around the edges”, instead of jumping in at a current higher price.

Looking at the option chain for CALM, and using the strategy of trying to sell a put as close to the $17.01, 52-week low as possible, we see that the August $20 put, (QKMTD), is currently priced at a $.75 bid, which equals 16.7% on an annualized basis.

There are 2 possible outcomes to this trade:

1. The stock declines to or past your $19.25 breakeven point, ($20 strike price less $.75 put premium).  You would then be sold 100 shares for every put contract you sold.  The sale price would be $20.00, but your true net cost would be $19.25, (the $20 strike price less the $.75 put premium).

Owning CALM at $19.25 would place you just 13.2% above the 52-week low for this stock.

In addition, your $19.25 cost is 22.8% lower than the current price of $24.93.

ALSO, the $1.73/share dividend would equal an 8.98% dividend yield at this level, as opposed to the current 6.9% dividend yield level.

2.  The stock doesn’t decline to or past your breakeven point.  In this case, you’d simply walk away with your $.75/contract, 16.7% annualized profit.

Cash Reserve requirements:  Brokers will vary on how much cash reserve they make you put up for selling puts.  Currently, Schwab mandates a cash reserve equal to 100% of the value of the strike price times the shares you’d end up having put to you.  In our example, if you sold one $20 contract, which corresponds to 100 shares, you’d have to put up $2000.00 cash reserve.

Other brokerages, such as Options Xpress, require less cash reserve, which would increase your leverage and your margins.  However, if the stock does start to decline closer to your strike price, the broker may ask you to put up additional cash in reserve

So, if you like a stock, but you think the market’s gotten ahead of itself, selling puts is another way to profit.

Disclosure: Author is long CALM

Author: Robert Hauver copyright 2009 DeMar Marketing. All Rights Reserved.

Disclaimer: This article is written for informational purposes only.  Author not responsible for errors, omissions, or acts taken by third parties as a result of reading this article.

Robert Hauver, MBA, publishes The Double Dividend Stock Alert a monthly investment newsletter featuring “High yield Investing For Low Risk Investors”.
To find the place where “High Yields Meet Low Risk”,
visit: www.DoubleDividendStocks.com

Personal dividend income will continue to increase in importance, generating even greater demand for income-producing stocks in the coming years, fueled by the increased numbers of investors owning equities, and by the coming surge in boomer retirees.

Unfortunately for us dividend yield seekers, our hunt for dividend income has become harder than ever in 2009, as record numbers of companies eliminate or drastically reduce their payouts in order to conserve cash, and sectors we once depended upon for income have imploded. It seems as though, just when we need dividend income the most, the rules of the game have changed.

The financial sector used to account for more than 30% of the dividend payouts on the S&P, but now account for only 9.6%. All told, financials account for 31 of the 51 reductions and suspensions this year, and not one financial company remains in the S&P list of the top 25 dividend payers in 2009.

In fact, the ranks of dividend paying stocks have thinned out so dramatically that the top 28 dividend-paying stocks account for more than half of the dividends paid out in 2009.

Which are the top 5 dividend paying stocks, ranked by total cash paid to shareholders? It turns out that 3 of them are energy companies, 1 is a telecom, and 1 is a conglomerate:



1. Royal Dutch Shell (RDS-A, RDS-B) – Pays out $9.8 billion/ year and currently yields 6.77%.

2. AT&T (T) – Is sporting a current dividend yield of 6.44%. Its $1.64/share annual dividend equals $9.6 billion a year paid to shareholders.

3. General Electric (GE) –Even though GE cut its 3rd and 4th quarter dividend payouts from $.31 to $.10/share, it will still pay out $8.6 billion in 2009. GE’s $.82/share annual payout currently equals a 5.87% yield. GE’s shares have risen over 100% during the current rally.

4. Exxon Mobil (XOM) pays out $8.1 billion a year. The company’s annual dividend rate is $1.60 a share, for a 2.43% current yield.

5. Chevron Corp. (CVX), has an annual dividend/share of $2.60, which equals a total annual payout of $5.3 billion. The stock’s dividend yield is 3.82% at the current price.

The theme here is one of dominant industry players, with long dividend paying histories. Obviously, GE has had its problems with its lending arm during the downturn, so you’d have to decide if you think their mix of businesses can ride out these problems.

The 3 oil companies might cause some investors to debate whether oil is headed down further or back up, when the economy turns around. Given this week’s market action, with oil prices moving up as “less than bad” economic news continues to come in, investors seem to be betting that oil will be going back up when things turn around.

So, what if you want the yields on some of these dividend stocks, but you’re afraid of another market pullback, or, you think the prices are too high?

                            There are 2 ways you can attack these problems, both of which I’ll discuss in Part 2 of this series.

Robert Hauver, MBA, publishes The Double Dividend Stock Alert a monthly investment newsletter which features a select few of the elite stocks in this article, and shows investors how to protect and increase their yields on them. If you’re looking for “the place where High Yields meet Low Risk”,  visit:      www.DoubleDividendStocks.com

On a recent bottom fishing expedition, we screened for 4 preliminary parameters:


1. High Dividend Yield – Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).

2. Moderate Dividend Payout Ratio – Below 50 % (The S&P’s payout ratio is approximately 59 %).

3. Less Than 40 % Above 52-Week Low

4. Options Available

This preliminary screen yielded several companies, from 4 different sectors: Consumer Goods, Industrials, Basic Materials, and Financials.

I then added the following 2 balance sheet screening ratios, in order to find the most well-funded companies:

1. Current Ratio: Over 1.5

2. Long Term Debt to Equity: Under .5

These additional screens yielded just 5 companies, one of whom I’ve been following for awhile – Cal-Maine Foods, (CALM).

You may have often heard the advice, “Invest only in what you understand”. Cal-Maine Foods just happens to be one of those easy-to-understand companies – they’re the largest seller of eggs in the US.

Eggs are a basic food staple, something that consumers aren’t going to do without, even in a recession. In fact, during a recession, consumers tend to eat at home more often, which plays to Cal-Maine’s strength as a major distributor to supermarket chains.

CALM compares favorably within its peer group, Packaged Foods: Poultry & Meats, sporting the 2nd highest dividend yield, (7.5%), and the 2nd lowest beta, (.40).

Right in line with the S&P 500′s rally gain, CALM is currently 34% above its 52-week low of $17.01, and approximately 53% off its high of $48.80.

What’s the best way to invest in CALM? That depends upon your risk profile, and your assessment of the market.

If you’re an income investor, looking to maximize your yields, there are 2 different approaches that may suit your needs, each based on different outlooks:

(For simplicity’s sake, we’ll illustrate this trade example by buying 100 shares, since 1 option contract controls 100 shares of the underlying stock.)

Scenario A (BULLISH): Covered Call/Buy-Write approach:

1. Buy 100 shares of CALM at $22.58, (its 5/28/09 opening price).

2. Sell 1 November $25 call contract for $1.75/share. (A 7.75% yield)

3. Collect $.86/share in dividends before expiration. (A 3.81% yield)

When the November 21, 2009 expiration date comes, you’ll either:

1. Collect an additional $2.42/share in capital gains, due to the stock rising to or above $26.75, (the $25 strike price plus the $1.75 call money).

OR


1. You’ll get to keep your shares, if the stock doesn’t rise to the resale trigger price of $26.75. Your new basis would be $19.97, (your original cost of $22.58 less the dividend and call money you collected).

At this point, you could choose to repeat this process, if you wanted to hold CALM for an additional period. SInce your cost basis would now be $19.97, you could research selling new calls at $22.50, or even at $20.00, if you weren’t feeling as bullish in November.

The annualized yields on this 6-month trade, ($22.58 cost basis), are as follows:

1. Call Yield: $1.75/share = 15.98%

2. Dividend Yield: $.86/share = 7.85%

This $2.61/share in income equals a 23.83% annualized static yield.

Notice how the call yield is over twice the dividend yield? This gives you added protection, in the event of an unforeseen dividend cut or other negative event.

1. Assigned Yield: $2.42/share = 22.1% (As noted above, if CALM rises to or above $26.75, your shares will be sold at the $25 strike price).

Your breakeven in this trade in $19.97/share, or 11.56% for 6 months.

Your maximum profit is $5.03/share, or 22.28% for 6 months, which equals an annualized yield of 45.9%.



That’s a pretty good day’s fishing.



In Part 2 of this series, I’ll detail a less bullish, more defensive strategy with this stock, which gives an investor an equally impressive yield.



Disclosure: Author is long on CALM.

Author: Robert Hauver  copyright 2009 Demar Marketing All Rights Reserved

This article is written for informational purposes only and author will not be held responsible for errors or omissions or losses sustained by third parties as a result of acting upon information herein.

Robert Hauver publishes The Double Dividend Stock Alert newsletter,

which features “High Yield Investing For Low Risk Investors”.

If you’re looking for “the place where High Yields meet Low Risk”,

visit:   http://www.DoubleDividendStocks.com