Seeking Alpha Rates 4 Dow Stocks Dividend Safety A+, 3 A, 3 B+, 4 C+, 2 C, 2 C- 3 D, 5 D-; 3 Don't Pay Dividends

Summary

• Covered calls traders seek to up income, prefer safe dividend stocks.
• Many are fine with C grades and better.
• McDonalds gets D- from SA; BBB+ from S&P Credit Rating.
• Dividend growth rates, payout ratios also count.

By Donald E. L. Johnson

Speculator

SeekingAlpha.com recently released a Dividend Safety metric that puts some of the Dow Jones Industrials 30 stocks in a new light. They're ranked by dividend safety in this table.

McDonald's (MCD), for example, gets a Dividend Safety grade of D- from SA. FastGraphs.com shows that MDC gets a BBB+ rating from S&P Credit Rating. And it shows MCD's long term debt is 113% of its market cap.

Morningstar.com's Financial Health Grades, according to this table from StockRover.com, gives 12 of the Dow stocks "A" grades. Two get "C" and two get "D". McDonald's is one of the stocks graded "A". This just proves there are a lot of ways to look at the data.

At the same, StockRover.com shows that McDonald's is expected to grow its dividend about 0.8% in the next year. It grew its dividend 3.2% in the last year and an average of 8.5% in the last three years. The covid pandemic may be affecting its dividend growth rate for awhile.

The DJI 30 pay an average 2% dividend with an average payout ratio of 50.8%. Forward dividend growth, according to StockRover.com numbers, is expected to be an average of 2.8%. This will be down from a 3.8% average over the last three years and 8.1% over the last five years.

Earnings yields for Dow stocks average 3.4% and buy back yields are 0.9%.

The average Dow Stock is trading for 23.4 times its free cash flow.

Momentum speculators trade the high P/FCF stocks like Nike (57.1), Visa (44.4) and Salesforce.com (39.7). 

Covered calls traders are mostly interested in generating premium income. They are more likely to do their trades with low P/FCF stocks like Goldman Sachs (4.6), Travelers (5.7) and IBM (8.3).

In the five days ended May 28, the exchange traded fund that tracks the Dow Industrials Index, DIA, rose 1.05% to $345.65 per share. In May it rose 2.15% bringing its six-months gain to 15.51% and its year-to-date gain to 13.03%.

Covered Calls and Puts

Speculators who are bullish on DIA could buy 100 shares for $345.65. If they wanted to earn a short term premium over the next 29 days, they could sell one DIA June 30 $350 strike covered calls for about $2.78 a share. If they did that kind of trade every 29 days over the next 365 days, their "annualized" return before commissions and ETF fees would be about 9.5%, give or take. With the option's delta at .35, there is about a 35% probability that the stock would be called. Selling covered calls caps potential gains at the strike price.

Bullish speculators might also sell puts at the same time they sell covered calls or only sell puts, which is a bullish trade.

For example, a trader might try to get about a 10% discount by selling one cash secured $310 strike puts options contract for 100 shares that expires July 16. They would sell the 45-day puts option for about $1.07 per share. That would give them an annualized return on risk of 2.4%. If the trader wanted a higher annualized RoR, he would sell puts at a higher strike.