Bottom Fishing For High Dividend Paying Stocks - Part 5
We screened for 6 parameters so far in this series:
1. High Dividend Yield - Above 5 % (The S&P 500 average dividend yield is around 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
These conservative screens yielded two solid high dividend stocks.
We then detailed the impressive yields that you could earn by either, buying these stocks outright and selling covered calls, OR, by just selling puts against them.
Since both of these strategies afford high yields, which is the best way to go?
As with most investing decisions, much of the answer to this question lies with your outlook for the market and for the particular stock, given your own individual investing goals. We've found it useful to have a checklist or "decision table" when deciding which way to invest in a well-researched stock that you believe in.
1. Market Outlook: Based on current trends, and upcoming events, where do you think the market is headed?
- Bullish: Sell Covered Calls
- Less Bullish: Sell Puts
2. Compare Annualized Yields: Since different strategies have different time horizons, the only way to truly compare them is by annualizing their yields.
Here's a simple formula you can use for this:
(Yield % divided by number of days till expiration) times (365)
OR, you can get a quick and rough estimate by using months:
(Yield % divided by number of months till expiration) times (12 months)
You may have a long-term trade that pays you MORE money than a shorter term trade, but because your principal is tied up for longer, the annualized yield may actually be lower.
3. Cash Yield Timing: Since these 2 strategies require more cash than buying options, try to determine if you need all the cash right away vs. having it spread out in time.
- Staggered Payout: Sell Covered Calls
- Payout Now: Sell Puts
4. 52-week Low/High: Is the stock at a 52-week high, or is it still near its 52-week lows?
Selling puts that place your net cost basis near a stock's 52-week lows has been a very successful strategy over the past 9 months for many value investors.
Likewise, selling covered calls also hedges your risk, and offers a high yield.
5. Dividend Payout/Timing vs. Option Payout/Expiration: Many financial websites have option chains that tell you how much dividend $ you'll earn before expiration. Compare this to what you'd earn from selling puts during this same period.
6. Dividend Reinvesting: This is a powerful tool for accumulating wealth. If you're able to reinvest your dividends, then, of course, selling covered calls is the way to go.
(These articles are written for informational purposes only and author will not be held responsible for any errors or omissions herein or any actions taken by third parties after reading these articles).
Robert Hauver publishes The Double Dividend Stock Alert. a monthly newsletter that features "high yield investing for low risk investors". If you're looking for "the place where low risk meets high yield", visit: www.DoubleDividendStocks.com
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