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High-yielding dividend stocks with sustainable payouts are hard to come by. First you need a large cash-generating company with a low relative PE (otherwise they cannot pay the big yields compared to share price). You often expect a lower price to book ratio of a value company.

Other aspects you look for are increasing dividends, a history of some growth (you do not want a stock with declining fundamentals), and a lower downside risk of falling prices. But what do you do when there are few high yielding stocks that fit this category? You make your own by selling covered calls on stocks that fit the above description. They still classify as an income stock, since covered calls fall under this category, and they have many positive metrics that powerful dividend stocks have. But many dividend investors may have passed these over....well, because there are tiny, if any, dividends on these three stocks.

Now be careful when you do this…. The covered call premiums may seem like very high returns when compared to dividend yields. Do not be fooled into instantly assuming that the higher income from covered calls is always better. Dividend stocks have a mix of capital gains and dividend payouts for a combined increase in shareholder wealth. When you sell covered calls you are limiting your capital gains in exchange for income only (assuming at-the-money or in-the-money written calls).

Which filters might we set for a value stock to make our own income?

Scanning Filter

  • At least 300 million market cap, hopefully in the billions
  • Price to book less than 2
  • Beta less than 1
  • 5 Year historical EPS and revenue growth greater than 5%
  • Current and forward PE less than 20
  • EPS growth this year, QOQ, and next year all positive expectations
  • Price to FCF less than 20
  • Optionable

Stocks on the List

It is no surprise that two of the stocks making the list are dividend paying companies. These metrics generally call for a company to start paying its shareholders. Here is the quick list along with payable dividends. Note that the dividend dispersements are anything but high yielding.

  1. L-3 Communications Holdings Inc. (NYSE:LLL) – 2.25%
  2. Unitedhealth Group, Inc. (NYSE:UNH) – 1.18%
  3. ManTech International Corporation (NASDAQ:MANT) – 0%

Annual Static Covered Call plus Dividend Yields

Keep in mind that the net covered call premiums is the net amount you keep if share prices close at or above strike price. Gross premium - (difference between strike and share price when current price is below strike). This is because the call has intrinsic value which lowers your net cost per share, but is different that in your net options premium gain. If you want to know the gross call premiums used, look at the difference between share price and net cost per share.

Stock Share Price Calculation Net Cost Per Share Dividend Amount $ 1 Year CC Premiums Capital Gain Potential Static Return (based on net cost) Total Pot. Return incl. Cap Gains (based on net cost)
LLL 79.45 75.15 1.6 5.9 (80 strike) 0.55 10% 10.7%
UNH 41.76 36.56 0.50 3.44 (40 strike) 0 10.7% 10.7%
MANT 42.45 37.65 0 4.80 (45 strike) 2.55 12.7% 19.5%


*call premiums doubled for MANT since options only available 6 months away. The actual one year call premiums would be slightly higher for UNH and LLL since the amount includes more than 11 but less than 12 months of premiums(Jan 2012).

  • LLL has a beautifully high rolling EPS since 1998, and the PE has continually fallen over this same period of time. A nice, increasing fundamental value stock.
  • UNH has a spotty dividend history, but we are less concered with that using this strategy. Over the past decade, the overall EPS trend is nicely up, and since 2006 the PE has fallen creating a divergence that only boosts our value per share.
  • MANT has also greatly increased its annual EPS over the last 4 years, but PE ratios have fallen dramatically these past two years.

Your View on Generating Your Own Income?
As long as the metrics are right, do you approve of this strategy? Why or why not?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Very High-Yielding Income Stocks You May Not Know About