How To Generate 11% Yield On These Blue Chip Names

Includes: ABT, JNJ, MCD, PEP, WM
by: Bear Fight

The market sell-off has been swift and strong since peaking in April. From a short-term perspective, the market recently breached the 200 day moving average, which could put continued pressure on prices. From a medium-term perspective, I believe that the economy and world markets will continue to be hamstrung by significant debt loads that took decades to build. While 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.

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.

Equity Screener:

  1. Price to Earnings ratios of less than 20.0x - focused on equities with modest valuations.
  2. Market Capitalization of greater than $1 billion - large capitalization equities typically have better access to capital markets.
  3. Dividend Yields of greater than 3.0% - focused on equities that provide strong current income.
  4. Equity betas of less than 1.0x - focused on equities that are less volatile than the overall market.

Johnson & Johnson (NYSE:JNJ) - Healthcare

Price to Earnings: 16.9x

Market Capitalization: $169.6 billion

Dividend Yield: 3.9%

Beta: 0.53x

Pepsico, Inc. (NYSE:PEP) - Consumer / Beverage

Price to Earnings: 16.7x

Market Capitalization: $105.5 billion

Dividend Yield: 3.2%

Beta: 0.50x

Waste Management, Inc. (NYSE:WM) - Waste Management Services

Price to Earnings: 15.9x

Market Capitalization: $14.8 billion

Dividend Yield: 4.4%

Beta: 0.54x

Abbott Laboratories (NYSE:ABT) - Healthcare

Price to Earnings: 18.7x

Market Capitalization: $95.2 billion

Dividend Yield: 3.4%

Beta: 0.31

McDonald's Corp. (NYSE:MCD) - Consumer / Food

Price to Earnings: 16.2x

Market Capitalization: $88.1 billion

Dividend Yield: 3.2%

Beta: 0.42

Covered Call Strategy

Investors can generate greater than 11% 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. As the market shows signs of near-term stress through the summer, selling covered calls might prove to be lucrative.

Disclosure: I am long (ABT), (WM), (JNJ), (PEP)