Dogs of the Dow: Dividends vs. Options

 |  Includes: INTC, MRK, PFE, T, VZ
by: Double Dividend Stocks

We checked the top 5 current Dogs of the Dow (the current Dow component stocks with the highest dividend yields) to see how their dividends stack up vs. their covered calls and cash secured puts. Selling covered calls can be an effective way to protect your portfolio in a down market.

The current Dow Dogs are (click to enlarge images):

DOW-DOGS-6-11-DIV-PERFClick to enlarge

As is often the case, telecoms have the highest dividend yields in the group, with AT&T (NYSE:T) and Verizon (NYSE:VZ) topping the list. These two dividend paying stocks are in the telecoms section of our High Dividend Stocks By Sector Tables. Two healthcare dividend stocks and tech giant Intel (NASDAQ:INTC) round out the list. Verizon has the most aggressive dividend payout ratio, and Intel the most conservative. Performance-wise, only Pfizer (NYSE:PFE) has gained much year-to-date, while Intel and Merck (NYSE:MRK) have lagged the others over the past year, which, in Intel's case, belies the strong EPS growth over the recent past:

DOWDOGS-PEG-6-11Click to enlarge

All 5 firms posted sequential EPS gains in the most recent quarter, but Pfizer was the laggard. Analysts don't currently believe that Intel can improve a great deal next fiscal year, over the outstanding 160% EPS growth they had this past fiscal year, which gives INTC a high 12-month PEG. AT&T has the lowest 12-month PEG, 1.25, and the two healthcare stocks look very over-valued, when taken on a PEG basis. Looking out further, only Intel has a 5-year PEG under 1. Intel's 10.12 P/E is also way below the average 16.41 P/E for the semi-conductor industry.

Financial Ratios:


AT&T and Intel are the clear winners in management efficiency ratios and margin, while Intel is nearly debt-free.

Covered Calls:

So, how do the dividends for these stocks compare to their January 2012 options? The call options listed below range up to 3 times the dividend amounts. Selling a covered call from any of the trades listed below allows you to at least double your dividend, giving you a 10%-plus static yield, and the potential for additional assigned yield gains. You'll also get some additional downside protection, via a lower break-even point, by selling covered calls. The catch is that you'll have limited participation in upside price gains, should any of these dogs start to run. You can find more info on these and other covered call trades in our Covered Call Table.

DowDogs-6-11-CALLSClick to enlarge

Cash Secured Puts:

Feeling not so bullish? Selling cash secured put options can give you an even lower break-even point than the calls listed above. The put premiums below range up to 6 times the dividend amounts for this period. Your net cash outlay will be the cash reserve minus the put premium you receive. Ex.) For AT&T, you'd have a net outlay of $2,778.00, ($3000.00 less $222.00 received for selling one put). Each options contract corresponds to 100 shares of the underlying stock). You can find more info on these and other covered call trades in our Cash Secured Puts Table.

DOwDogs-6-11-PUTSClick to enlarge

Disclosure: I am long T, INTC.

Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.