In a recent article ("8 High Dividend Stock Picks from Billionaire Ray Diallo"), Seeking Alpha contributor Insider Monkey compiled a list of 8 large cap names yielding more than 4% that were held by Diallo's Bridgewater Associates. In this post, we'll look at the hedging costs and VectorVest Dividend Safety scores for those 6 stocks. With respect to Dividend Safety, VectorVest defines it as,
An indicator of the assurance that regular cash dividends will be declared and paid at current or at higher rates for the foreseeable future.
VectorVest ranks Dividend Safety on a scale of 0-99, where 0 is the worst possible score and 99 is the best (scores of 75 and over are considered excellent). To see the VectorVest's Dividend Safety analysis for any dividend-paying stock, you can enter its symbol and your email address on VectorVest's homepage, and they will email you their analysis of the stock.
It turned out that six of the eight Diallo holdings had a Dividend Safety scores in the "good" category -- the exceptions were Altria Group, Inc. (MO) and Verizon Communications (VZ), which had Dividend Safety scores in the "poor" category. I've included the updated yields and Dividend Safety scores for all 8 names in the table below, along with the current costs of hedging them against greater-than-20% declines over the next several months, using optimal puts.
For comparison purposes, I've added the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). First, a reminder about what optimal puts are, and a note about why I've used 20% as a decline threshold. Then, a screen capture showing the optimal puts to hedge one of the Diallo holdings listed below, Entergy Corp (ETR).
About Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
In this context, "threshold" refers to the maximum decline you are willing to risk in the value of your position in a security. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). I have used 20% thresholds for each of the securities below. Essentially, 20% is a large enough threshold that it reduces the cost of hedging, but not so large that it precludes a recovery.
The Optimal Puts for ETR
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of ETR against a greater-than-20% drop between now and June 15, 2012. A note about these optimal put options and their cost: to be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice, an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask (this is true of the names listed in the table below as well).
Hedging Costs as of Wednesday's Close
The hedging data in the table below is as of Wednesday's close, and is presented as a percentage of position value. The yields and Dividend Safety ratings are as of Wednesday's close as well. Bear in mind that the yields below are annualized, but the hedging costs below are not.
Div. Yield |
|LQD||iShares iBoxx $||4.65%||58||1.98%*|
|MRK||Merck & Co. Inc.||4.49%||55||2.38%**|
|LLY||Eli Lilly & Co.||4.75%||62||2.06%**|
|MO||Altria Group, Inc.||5.52%||46||1.92%*|
|SPY||SPDR S&P 500||2.47%||58||2.49%*|
*Based on optimal puts expiring in June, 2012
**Based on optimal puts expiring in July, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.