Anticipating a Dividend: Stalking Cash Rich Companies by Selling Puts

by: Parsimony Investment Research

Investors love stocks that pay dividends ... and rightly so. Dividends have accounted for over 40% of the total annual return of the S&P 500 since 1926, and more than 100% of the returns over the past 10 years (the infamous "lost decade").

Despite the popularity of dividends among investors, there are several cash rich companies out there that are being stingy with shareholders (see list below).

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In general, dividend stocks have held up better than non-dividend paying stocks, despite the recent weakness in the equity market. This is because investors are desperately seeking yield in these uncertain times. Below is a recent return comparison of the six companies listed above and six widely held dividend stocks. As you can see, the dividend stocks have significantly outperformed these cash rich companies since the S&P peaked on May 2 (0.3% gain vs -8.7% loss). Note: The S&P 500 is down 6.3% over this time period.

Investors would be wise to follow these cash rich companies very closely. We think that these companies will eventually start distributing cash to shareholders as the economy stagnates in an effort to boost share price. A dividend announcement (quarterly or one-time) would likely lead to a significant rise in share price as investors chase the yield.

In fact, we believe these companies are great put selling candidates (see table below). On average, investors can earn a 7-month yield of 6.2% with a margin of safety of 18.4%. This is a great way to generate income while keeping an eye on these cash rich stocks.

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For more information on put selling strategies read Income Without the Dividend: A Strategy for Generating Income in a Down Market

Disclosure: I am long ABT, MO.