When looking for the best stocks, always keep an eye on the dividend. Long gone are the tech bubble days, when dividends were thought to be unimportant compared to the meteoric price appreciation of dot.com stocks.
In fact, CNN recently reported that many tech companies have begun paying dividends:
Since 2003, there have been more than 100 dividend increases and initiations among tech firms, vs. four cuts. That helps explain how these companies restored investor confidence soon after the Internet bubble burst. - (CNNMoney.com, July 22, 2009)
Sorting through high dividend stocks, on the endless "best stocks to buy" quest, inevitably involves a visit to the exclusive world of the S&P Dividend Aristocrats, an elite group of dividend paying stocks who have increased their dividends for the past consecutive 25 years.
With its Embarq purchase, this rural provider is now the 4th largest traditional telecom in the country, serving 33 states. CTL just reported 2Q 2009 earnings that, although declining from same period 2008, handily beat analysts' estimates by $.03/share, ($.83 vs. consensus $.80).
Following an industry trend, CTL experienced declines in land-based revenue, but increases in wireless and Internet services. More importantly, they reaffirmed their full-year 2009 earnings guidance of $3.20-$3.30/share, versus analysts' more modest estimates of just $3.05/share, as the company now expects almost 20% higher cost savings from the Embarq purchase.
|Current Price:$31.21||CTL||Industry Avg.|
|Price/Free Cash Flow||4.80||17.31|
|Return on Assets||4.29||1.46|
|Return on Equity||10.79||7.56|
|Return on Investment||47.90||3.62|
In addition, CTL's 5-year dividend growth rate is 58.02%, compared to a negative industry growth rate, (-0.87%).
Admittedly, there are money basket cases within the telecom industry that skew these industry averages in a negative way, but, CTL also compares favorably with industry giants, such as Verizon (NYSE:VZ) and AT&T (NYSE:T).
In addition to just buying this dividend stock and holding it, here are 2 other short-term ways you can profit from CTL:
1. Selling Puts:
The January 15, 2010 $30.00 puts, (CTLMF), are currently worth a $2.25 bid, a 7.5% nominal yield, or nearly 17% annualized.
2. Selling Covered Calls:
At its current $31.21 price level, CTL's January 15, 2010 $35.00 calls, (CTLAG), are only worth a $.60 bid, but the potential assigned yield is attractive: 12.14%, or 27.38% annualized.
The 3 income flows from this 5-month-plus trade are:
|$/Share||Nominal Yield||Annualized Yield|
|Potential Assigned Profit||$3.79||12.14%||27.38%|
|Total Potential Profit||$5.79||18.61%||41.89%|
In this covered call trade, you'd keep the call premium and dividend money, and you'd have the potential to earn an assigned profit, if CTL rises to or above $35.60, (the strike price plus the call premium).
Summary: 3 ways to profit from the highest dividend stock in the Dividend Aristocrats:
- If you're a bullish long-term investor, you'd just buy and hold CTL, and collect the dividends.
- Or, if you want a little extra downside protection, in the form of quick call premium money, you'd sell covered calls, although the call yield isn't nearly as attractive as the high yields available on many other high dividend stocks.
- Or, if you're skeptical about CTL's current price, you'd sell puts, and possibly end up owning it at $27.75, 11% lower than where it is today. You'd collect $2.25 in put money, vs. $1.40 in dividends, during the 5 month term.
Disclosure: Author is long CTL shares.