I'm always on the look-out for cheap, dividend paying stocks to write put options on. There are 3 main criteria I look for before writing puts on a particular company:
- Stability of the dividend
- Trading range that is bounded
- Strong stock support level
I will list 3 stocks in the consumer goods sector that I think are worthwhile to take a look at for put selling. I will use the 3 criteria listed above to analyze each company and provide the possible entry level. I particularly like the consumer goods sector because the products they sell gets consumed by the customer, who then must go back and buy more products. This means that companies in this sector won't suddenly "disappear" in the next 6 to 12 months (because if they do, we'd be in a lot of trouble).
Procter & Gamble
Everyone should be familiar with Procter & Gamble (NYSE:PG). If you look around your home you will surely find some items made by this company. The below description from Yahoo Finance summarizes the company very well:
The Procter & Gamble Company provides consumer packaged goods in the United States and internationally. The company offers beauty products, such as cosmetics, female antiperspirant and deodorant, female personal cleansing, female shave care, hair care, hair color, hair styling, pharmacy channel, prestige products, salon professional, and skin care products under the Head & Shoulders, Olay, Pantene, and Wella brands; and grooming products, including electronic hair removal devices, home small appliances, male blades and razors, and male personal care products under the Braun, Fusion, Gillette, and Mach3 brands.
So PG pretty much sells everything you need to attend to your personal hygiene. As the middle class in developing nations become more affluent, there will be a steady increase in personal care spending (people want to look and feel nice).
- Stability of the dividend: PG has been raising its dividends for the past 56 years and has dividend growth rate of 10.9% for the last 10 years. It is currently yielding 3.54%.
- Trading range that is bounded: PG has a trading range of 57.56 - 67.95 for the past 52 weeks (a difference of 10.39, or 18% from the low). It is currently trading at 63.52 which is around the midpoint of the 52 week range.
- Strong stock support level: The 200 day EMA is sitting around 63.63, with a strong support level at 60 for the past 2 years.
Sell the July 12 62.50 put for 1.46 or better for a 13.3% annualized return. Your break even point is 61.04 which is between the 200 day EMA support and the 2-year support level.
Kellogg Company (NYSE:K) is most famously known for their presence at the breakfast table. As kids, you probably grew up eating their breakfast cereals and maybe you still do. Below is the description from wikipedia:
The Kellogg Company (often referred to as Kellogg or Kellogg's in its corporate logo, or even more formally as Kellogg's of Battle Creek), is a producer of cereal and convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles, and vegetarian foods. The company's brands include Corn Flakes, Keebler, Pop-Tarts, Eggo, Yogo Bits, Cheez-It, Nutri-Grain, Rice Krispies, Bear Naked, Morningstar Farms, Famous Amos, Special K, All-Bran, Frosted Mini-Wheats, Club Crackers and Kashi. Kellogg products are manufactured in 18 countries and marketed in more than 180 countries around the world.
I go through my Kellogg's cereals pretty quickly, and I'm always buying more. I'm sure this is the case for many families out there as well, and I don't expect this trend to change much in the near future. After all, a bowl of cereal (plus milk!) is cheaper and more nutritious than buying breakfast outside.
- Stability of the dividend: K has been raising its dividends for the past 8 years (dividend was held steady between 2001-2004), and has increased an average of 6.5% for the last 8 years. It is currently yielding 3.41%.
- Trading range that is bounded: K has a trading range of 48.10 - 57.45 for the past 52 weeks (a difference of 9.35, or 19% from the low). It is currently trading at 50.37 which is closer to the 52 week low.
- Strong stock support level: The 200 day EMA is sitting around 51.24, with a strong support level at 48 for the past 2 years.
Sell the September 12 50.00 put for 2.05 or better for a 12% annualized return. Your break even point is 47.95, which is well below the 2-year support level.
When you think cleaning supplies, you think bleach. When you think bleach, you think Clorox (NYSE:CLX). The name Clorox is almost synonymous with cleanliness, but they do more than that. Heck, the water I drink is made pure by Clorox (through their Brita water filters). Below is the company's description from Google Finance:
The Clorox Company (Clorox) is a manufacturer and marketer of consumer and institutional products. Clorox sells its products primarily through mass merchandisers, grocery stores and other retail outlets. The Company markets some of brand names, including its namesake bleach and cleaning products, Green Works natural cleaning and laundry products, Poett and Mistolin cleaning products, Fresh Step and Scoop Away cat litter, Kingsford charcoal, Hidden Valley and K C Masterpiece dressings and sauces, Brita water-filtration systems, Glad bags, wraps and containers, and Burt's Bees natural personal care products. The Company's products are manufactured in more than two dozen countries and marketed in more than 100 countries. Clorox operates through four segments: Cleaning, Lifestyle, Household and International.
I can't imagine what my life would be like without my handy Clorox wipes to clean up after the mess I make cooking dinner. In any case, I don't think they are going away any time soon.
- Stability of the dividend: CLX has been raising its dividends for the past 34 years, and has increased an average of 10.6% for the last 10 years. It is currently yielding 3.78%.
- Trading range that is bounded: CLX has a trading range of 63.06 - 75.44 for the past 52 weeks (a difference of 12.38, or 19.6% from the low). It is currently trading at 67.64 which is a little closer to the lower 52 week trading range.
- Strong stock support level: The 200 day EMA is sitting around 66.47, with a strong support level at 60 for the past 2 years.
Sell the July 12 65.00 put for 1.10 or better for a 12% annualized return. The option is currently trading for 0.90-0.95 so CLX needs to drop a bit more before initiating. Your break would be 63.90, which is between the 200 day EMA support and the 2-year support level.
For investors who have plenty of cash sitting in their account and who aren't afraid of picking up a few good companies during a panic sell-off should consider selling put options in the companies mentioned above.