6 Dividend 'Monsters' Yielding 10% Or More: A Look At Their Dividend Safety And Hedging Costs

by: David Pinsen

In a recent article ("7 Dividend Monsters Yielding 10% or More"), Seeking Alpha contributor Dividendinvestr analyzed a handful of high yielding names which included one closed-end fund, Eaton Vance Tax-Managed Global Diversified Equity Income Fund (NYSE:EXG). EXG didn't have any options traded on it, but the other five names did. In this post, we'll look at the VectorVest Dividend Safety scores for all six names, and the hedging costs for the five that have options traded on them. 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 it will email you the analysis of the stock.

It turned out that EXG was the only one of these names that had a Dividend Safety ranking higher than 50 (The lowest rank, which is considered good). Two others had the lowest-possible Dividend Safety score of zero, and one of those two, Frontier Communications Company (NYSE:FTR), also had the highest hedging costs of this group. Recall that we've observed examples where high optimal hedging costs presaged poor performance. I've included the updated yields and Dividend Safety scores for all six names in the table below, along with the current costs of hedging five of them against greater-than-20% declines over the next several months, using optimal puts.

A Comparison

For comparison purposes, I've added the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) to the table below. First, a reminder about what optimal puts are, and an explanation about decline thresholds; then, a screen capture showing the optimal puts to hedge the comparison ETF, SPY.

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.

Decline Thresholds

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've used 20% thresholds for the names below that had options traded on them.

The Optimal Puts for SPY

Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of SPY against a greater-than-20% drop between now and June 15. 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 (the same is true for the rest of the names below).

Hedging Costs as of Friday's Close

The hedging data in the table below is as of Friday's close, and is presented as percentages of position values. The yields and Dividend Safety ratings are as of Friday's close as well. Bear in mind that the yields below are annualized, but the hedging costs below aren't.



Div. Yield Div. Safety

Hedging Cost

(NASDAQ:AGNC) American Capital Agency Corp. 19.3% 33 1.69%*
(EXG) Eaton Vance Tax-Managed 13.0% 58 No options traded on it
(FTR) Frontier Communications 15.4% 0 17.45%***
(NYSE:HTS) Hatteras Financial Corp. 13.1% 34 3.47%***
(NYSE:NLY) Annaly Capital Management, Inc. 13.8% 38 2.54%**
(NRGY) Inergy, L.P. 12.5% 0 7.12%**
(SPY) SPDR S&P 500 2.34% 58 1.25%*

*Based on optimal puts expiring in June

**Based on optimal puts expiring in July

***Based on optimal puts expiring in August

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.