2 Large-Cap 5% Dividend Growth Stocks With Four 11% To 20% Trades - No K-1s

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Includes: IBM, STX
by: Double Dividend Stocks
Summary

These 2 dividend stocks yield 4.95% and 5.39%.

Their 5-year dividend growth rates are 11% and 13%.

4 tax deferred trades are detailed, yielding 11.9% to 21.5% annualized.

Looking for attractive dividend yields in the large cap space? Two tech stocks which deliver attractive yields and dividend growth are International Business Machines (IBM), and Seagate Technology (STX).

IBM has been trying to reinvent itself for years, via pushing its services segment, vs. its traditional hardware segment. It has fallen from a high of over $210 in 2013, to its current price in the $130-$131 area.

STX peaked at ~$66 in late 2014, before falling to the low $20's in 2016, and then recovering to the high $50's in 2018, and falling again to the mid $40's.

More recently, these 2 stocks have outperformed the market in 2019, and over the past week. STX has outperformed over the past month and quarter, while IBM has lagged.

Dividends:

Even with their ups and downs, both companies have grown their dividends over the past 5 years. STX has a 5-year dividend growth rate of 13.32%, and IBM's growth rate 11.01%.

IBM goes ex-dividend in a Feb/May/Aug/Nov. cycle, paying in the following months, while STX goes ex-dividend and also pays in a March/June/Sept/Dec. cycle.

At $130.91, IBM yields 4.95%, while STX yields 5.39%, at its 8/23/19 intraday price of $46.79. IBM has a lower dividend payout ratio of 46.54%, while STX's payout ratio is higher, at 52.50%:

Analysts' Targets:

At $130.91, IBM is already 9% above analysts lowest price target of $120.00, but 14.3% below analysts average $152.80 price target.

STX is far above its lowest price target, and is about even with the average price target of $46.64:

Options:

If you already own IBM or STX, and you want to lock in some profit, a short term solution would be to sell covered calls. Or, if you're considering buying them at these prices, this strategy would help you to hedge your bet.

You'll know the exact amount of your potential price gains, but you'll be limited to this amount, by whatever call strike price you choose.

IBM's January 2020 $140.00 call strike pays $4.55, well over 2X the dividend of $1.62 due to go ex-dividend in November. Your annualized static yield would be 11.86% for this ~5-month trade, with a breakeven of $124.74.

STX's January $50.00 call strike pays $2.64, 2X the $1.26 in dividends during this trade. The static yield would be ~21%:

Given the current market turbulence, you may want to consider selling cash secured puts below these 2 stocks' price/share.

Here are 2 "at the money" put trades, which both expire in January 2020. If you want to be more conservative, you could sell cash secured puts at lower strike prices, further below the stock price, but lower strike prices will pay you a lower premium - that's one of the issues that options sellers usually consider before making a trade.

IBM's $130.00 put strike pays $7.80, nearly 5X the $1.62 dividend, for an annualized yield of 15.1%. Your breakeven would be $122.20, which is ~15% above IBM's $105.94 52-week low:

STX's $45.00 January 2020 put strike pays $3.85, 3X the $1.26 in dividends during the term of this trade. Your breakeven would be $41.15, which is 16.3% above STX's 52-week low, but 11.77% below STX's average target price of $46.64.

Tax Deferral Feature:

All 4 of these trades also have a potential tax deferral advantage: Even though you receive the option premium money in 2019, if the trades aren't closed in 2019, you won't have to pay taxes on that income until mid-April 2021.

Valuations:

Both of these stocks are closer to the lower end of their 5-year P/E ranges, with IBM actually below its 5-year averages. They're also far below the Tech sector average of 21.25. IBM has traded in a much tighter P/E range than STX.

Both stocks are also cheaper than sector averages on a Price/Sales and EV/EBITDA basis, which isn't too surprising, with trade war/economic slowdown concerns weighing upon both stocks, in addition to other more specific issues.

STX has long faced criticism about its reliance on traditional hard disk drive, HDD, sales, vs. the newer flash memory, SSD units. HDD sales were 93% of revenue in its fiscal 4th quarter, (which ended on 6/28/19), with SSD and Enterprise Data solutions contributing the remaining 7%.

IBM was late to the cloud, but management feels that the recent acquisition of Red Hat will give IBM a leg up in the hybrid cloud business.

Financials:

STX wins the race by far for ROA and ROE, while both companies have similar operating margins. Both also have higher Debt/Equity ratios than sector averages, whereas STX has a lower Net Debt/EBITDA ratio.

All tables furnished by 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.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IBM over the next 72 hours. 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: Our DoubleDividendStocks.com service is where we focus on options selling.

It's a separate service from our Seeking Alpha Hidden Dividend Stocks Plus service.