These three Dogs of the Dow have the highest dividend yields in the Dow, ranging from ~4.5% to 5.9%. We've found some high-yield options-selling trades that work in tandem with upcoming quarterly dividends, greatly enhancing their yields, in addition to three other trades. These trades are listed at the end of this article.
The three Dow dividend stocks are Dow, (DOW), International Business Machines, (IBM), and Exxon Mobil, (XOM). Dow was spun off in 2019, and only began trading on 3/20/19. It focuses on various materials science solutions for consumer care, infrastructure, and packaging markets worldwide.
So far, the market hasn't taken much of a shine to Dow, sending it down -9.86% since its March debut. IBM has performed the best of the trio, gaining 23.58% year to date, while XOM is up 13.67%.
The P/sales and P/book valuations for Dow are on a forward basis. In a perfect world, all of the estimates would come true, and Dow could be seen as undervalued, when compared to broad industry averages. You might say, however, that the market isn't a believer yet, based on the much higher 5.89% yield it's demanding from Dow, vs. the 1.35% industry average yield.
IBM - Excepting its much higher price/book, IBM looks cheaper than broad industry averages. Its trailing 10.31 P/E is closer to the low end of its five-year range, and its 4.61% dividend yield is much higher than its industry's average of 1.57%. The Tech industry certainly isn't known for generous yields.
XOM, on the other hand, looks more expensive than industry averages on a P/book, P/sales and P/E basis, and its 4.49% dividend yield is below the industry average of 6.62%:
There aren't any ROA or ROE figures for Dow yet due to its recent operating startup, and there isn't much data backing up its operating margin. Its debt/equity ratio, though, looks much higher than its industry's average.
IBM's ROA, ROE and operating margin all look much better than industry averages, but it's carrying a lot more debt, with a debt/equity ratio of 3.03, vs. its industry average of just .55.
XOM's ROA and ROE look better than its industry's average, while its operating margin is in line, and its debt leverage is much lower.
Dow has the widest spread, 27.49%, below its average price target, while IBM has the lowest spread, 4.80%, and XOM is in the middle, with a 9.77% spread. All three companies should report earnings again in the next few weeks.
Although Dow has received mostly upward estimate revisions from analysts in the past month, the actual overall average EPS dollar estimates have only gone up for full-year 2019.
Dow leads the pack with a hefty 5.89% dividend yield, followed by IBM, at 4.61%, and XOM, at 4.49%. These are approximate ex-dividend dates and pay dates.
IBM has the highest five-year dividend growth rate, of 11.35%, vs. 5.63% for XOM. IBM's dividend payout ratio is also lower, at 45.66%, vs. 64.99% for XOM:
Covered Calls: You can see more details on our Covered Calls Table for these trades and more than 35 others, all of which are updated throughout each trading day.
We looked at a January 2020 Covered Call trade for IBM. The January $145.00 call strike pays $5.40, vs. IBM's current quarterly dividend of $1.62.
The $5.40 option premium is ~1.5X IBM's next two quarterly dividends.
Static - If IBM doesn't rise to or above $145.00, your potential profit would be $8.44, the combo of the $3.24 in dividends, and the $5.20 call option premium. Your nominal yield would be 6.01% during this six-month trade, or 11.67% annualized.
Assigned before first ex-dividend date - Your nominal profit in this scenario would be 6.93%, a total of $9.73, from the $5.20 option premium and the $4.53 spread between the $145.00 strike price and IBM's $140.47 price/share.
Assigned after both ex-dividend dates - Your profit in this scenario would be $12.97, with a nominal 9.23% yield, or 17.93% annualized:
XOM's January 2020 $80.00 call strike pays $2.40, which is ~1.4X times the $1.74/share payout for XOM's next two quarterly dividends. The static yield in this trade is 10.37% annualized:
Cash Secured Puts: Our Cash Secured Puts Table can give you more details for these put option trades, and over 40 others, all of which are updated throughout each trading day.
Even though Dow has the biggest price target spread, 27.5%, between its price target and price/share, given the fact that the new spun-off entity has only reported one quarter of earnings thus far, you may want to consider nibbling at the edges, via selling cash secured put options.
Dow's January $45.00 put strike pays $2.65, for an 11.43% annualized yield, and a breakeven of $42.35, which is 9.4% below Dow s 52-week low of $46.75.
The option premium is nearly 2X IBM's next two dividends, with a breakeven of $128.60, which is ~12.6% below its $147.21 average price target:
XOM's January $75.00 put strike pays $3.20, for a breakeven of $71.80, ~11% above its 52-week low.
All of the January 2020 trades detailed in this article also have a potential tax deferral advantage: If they aren't closed in 2019, you won't owe taxes on the option money you receive until tax time in April 2021.
All tables by www.DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
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Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclosure: Our legacy site, DoubleDividendStocks.com, has focused on combining option-selling with high dividend stocks for over 10 years