How To Earn A 10%-Plus Yield On Dividend Aristocrats

Includes: DOV, PPG
by: Double Dividend Stocks

Looking for dependable dividend paying stocks? This week we'll focus on Dover Corp. (NYSE:DOV) and PPG Industries (NYSE:PPG); both are members of the S&P Dividend Aristocrats, a group of firms which have increased their dividends every year for at least the past consecutive 25 years.

Dover just increased its quarterly cash dividend to $0.315 /share, from the previous $0.275/share, an increase of 14.5%. The increased dividend will be paid on September 15, 2011 to shareholders of record as of August 31, 2011. This marks Dover's 56th year of consecutive yearly dividend increases.


Selling Covered Calls:

This month's turmoil has done 2 things that can help increase yields on dividend stocks: prices have been pushed down, and volatility has surged higher. You can take advantage of this volatility by selling covered calls and selling cash secured puts for these stocks.This strategy gives you 2 income streams: dividends and call options premiums, which, as you'll see below, offer much higher payouts than dividends.

For Dover, you'd collect $.945 in dividends and $5.90 in call option premiums, for a total of $684.50 for each 100 shares of DOV you buy and each option contract you sell, and earn a 12.5% nominal yield over a 7-month period. (One options contract corresponds to 100 shares of the underlying stock). In this trade, you turn a stock with 2.92% annualized dividend yield into a 21.18% yield, thanks to the high call options yield).


PPG also currently has a high call option yield that's approx. 6 times the dividend yield. In this trade, you'd collect a total of $804.00 in dividends and call option premium $, for each 100 shares of PPG you buy and each option contract you sell. You'd earn a 10.73% nominal yield in a 6 month-plus period.

You can find more details on these and other current covered calls trades in our Covered Calls Table.

Selling Cash Secured Puts:

Selling cash secured put options is another way to goose the yield from a stock. Recent surging volatility has pumped up put options prices, allowing put sellers to capture higher premiums in a shorter amount of time. Although put sellers don't receive dividends, they do collect put premium funds within 3 days of selling put options. (The same is true for call options). So, instead of waiting for a quarterly dividend, you get paid right away.

When you sell a put option contract, you're obligating yourself to potentially have the shares sold/put to you by a future date. A cash secured put means that your broker will hold a cash reserve of the value of the strike price times the amount of shares you may have to buy. In the DOV example, your cash reserve is $5000.00, 100 shares times the $50 strike price. (Each put option contract = 100 shares of the underlying stock.)

The put sales below take two different approaches: The DOV trade is "out of the money", meaning that the put strike price is below the current share price. This more conservative approach gives you a lower options yield, but a much lower breakeven price which is below the current share price.

The PPG put trade is more aggressive, where you'd sell a put option at a strike price that's "in the money", above the current share price. This gives you a higher options yield, but your breakeven is higher than the first approach, although it's still over 10% below the current share price.

You can find more details on these and other current cash secured puts trades in our Cash Secured Puts Table.


Financial Metrics:



Both firms had strong second quarter reports, and Dover increased its earnings guidance for the full year.


Company Profiles:

Dover Corp. is a global producer of equipment, specialty systems and value-added services. The firm operates in four segments: industrial products, fluid management, engineered systems and electronic technology markets.

PPG is a leading coatings and specialty products and services company, serving customers in construction, consumer products, industrial and transportation markets and aftermarkets. PPG has manufacturing facilities and equity affiliates in more than 60 countries.

Disclosure: No positions at this time

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