As income investors know, unless dividend increases keep pace with the rising 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:
As you can see, it's a mixed bag: AT&T's (NYSE:T) and Pfizer's (NYSE:PFE) dividend yield % increased, Merck's (NYSE:MRK) is flat, while Verizon's (NYSE:VZ) and Kraft's (KFT) 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 its 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:
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.
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:
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.
Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.
Disclosure: I am long T, VZ. I am short puts of T and short puts of VZ.