I recently wrote an article on the advantages of a covered call strategy with high quality dividend paying stocks. The opportunities are not limited to the stocks I previously listed. There are a number of high quality, popular individual investor names that the strategy works with.
The markets are showing signs of fatigue after a very robust start to 2012. I recently advised investors to take notes from the 2010 and 2011 markets and brace for a summer pullback. I believe that the economy and world markets will continue to be hamstrung by significant debt loads that took decades to build. While the markets remain relatively inexpensive, there are significant headwinds that will temper enthusiasm.
The de-leveraging process that started in 2008 is proving to be long and painful. Central bankers all over the globe are doing their part to ease debt loads by keeping interest rates low. These low rates are hurting savers and retirees by forcing them into risk assets, including stocks and high yield bonds.
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Retirees and investors seeking yield should build diversified portfolios with equities that will provide yield, but also perform during an uncertain, low growth period. Given the debt loads of the developed economies, world markets will likely experience more frequent recessions.
But the news is not all dire, investors can find attractive long-term investment in equities that provide strong current yield. To augment my current income, I look for opportunities to sell covered calls against these positions. The annualized yields for this strategy can be quite attractive for investors willing to hold onto these names.
- Price to Earnings ratios of less than 20.0x - focused on equities with modest valuations.
- Market Capitalization of greater than $1 billion - large capitalization equities typically have better access to capital markets.
- Dividend Yields of greater than 2.5% - focused on equities that provide strong current income.
- Equity betas of less than 1.0x - focused on equities that are less volatile than the overall market.
Wal-Mart Stores Inc. (WMT) - Consumer / Retail
Price to Earnings: 13.2x
Market Capitalization: $203.5 billion
Dividend Yield: 2.7%
Procter & Gamble Co. (PG) - consumer / staples
Price to Earnings: 19.4x
Market Capitalization: $181.4 billion
Dividend Yield: 3.2%
Merck & Co. Inc. (MRK) - pharma
Price to Earnings: 18.7x
Market Capitalization: $114.9 billion
Dividend Yield: 4.4%
Philip Morris International, Inc. (PM) - tobacco
Price to Earnings: 18.1x
Market Capitalization: $150.4 billion
Dividend Yield: 3.5%
The Coca-Cola Company (KO) - consumer / beverage
Price to Earnings: 19.5x
Market Capitalization: $162.9 billion
Dividend Yield: 2.8%
Covered Call Strategy
Investors can generate greater than 8% annual yields by selling at-the-money covered calls on these large capitalization, high quality stocks. Investors looking for more gains out of these names can collect less in premium and sell out of the money call options.