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The Dogs of the Dow strategy focuses on Dow dividend paying stocks with the highest dividend yields. Currently, the 3 highest dividend paying stocks in the Dow are AT&T (T), Verizon (VZ), and Merck (MRK). This week we'll compare current covered calls and cash secured put options to the dividend payouts for these stocks, all of whom are listed in our "High Dividend Stocks by Sector" tables.

Here's how these 3 stocks have performed:

Like most other Healthcare stocks, Merck has lagged the market over the last year. In 2011 it has also lagged the Healthcare sector, which is up nearly 10%. AT&T and Verizon have both surged over the past year, partially due to the smartphone revolution. AT&T benefited greatly from its exclusive sales arrangement with Apple, (AAPL), for selling the IPhone, an exclusivity which was lost, when Apple also granted Verizon selling rights in 2011.

Selected Financial Metrics:

AT&T is the clear winner in terms of ROE. The 2 Telecoms also have much higher operating margins than MRK.

Valuations:

Again, AT&T has outperformed these other 2 firms, in past EPS and present EPS growth, in addition to having the lowest Price/Book, and PEG ratio, which, at 1.63, isn't that attractive. However, its PEG for next year, at 1.31, is closer to being undervalued. Although all 3 stocks are currently far below their values on a Discounted Future Earnings basis, Merck is sporting a very high PEG ratio for the next year, thanks to its stratospheric current P/E.

Covered Calls vs. Dividends:

Selling 6-month covered call options is one way you can increase your income on these stocks. Note how the call premiums are all higher than the dividends paid out during this term. You'll find more details on these and other covered calls in our Covered Calls Table.

Cash Secured Puts:

These cash secured puts will give you an entry point/break-even even further below those of the covered calls. Our Cash Secured Puts Table has more details on these and other put options trades.

Source: Top Dow Dividend Stocks: Dividends vs. Options