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Finding Safe Dividends And Increasing Your Yields Posted on May 11, 2009 by want2trade Author: Robert Hauver

Finding Safe Dividends And Increasing Your Yields

Posted on May 11, 2009 by want2trade

Author: Robert Hauver

Article:
Looking back at S&P 500 returns from 1926 - 2004, it’s estimated
that dividends comprised 35% of total market price
appreciation
. Pretty substantial right? Wait, the case
supporting dividends gets even stronger when you add in the
impact of dividend reinvestment and compounding, which shows
that dividends outstripped price appreciation by over 25
times
. Flash forward to 2009, and we see here that Standard
& Poors is predicting that this year will witness the biggest
drop in dividends since 1942
. With all of these accidentally
high dividend stocks, it is not surprising that many companies
are slashing their dividend payouts to conserve cash.

With this recent rash of dividend cuts by historically
dependable dividend-paying companies, income investors are
finding it increasingly challenging to find safe high
dividend yields
.

One important metric in assessing the safety of a company’s
dividend is free cash flow, or how much cash is left over
after paying expenses and dividends.

A related figure is the dividend payout ratio, which
usually gives investors a good idea of how much of a cash
cushion a company has after paying out dividends. With the
exception of MLP’s, LP’s, and REIT’s, beware of firms that pay
out very high percentages of their earnings in dividends, or,
even worse, borrow money to maintain dividends. (This doesn’t
apply the same way for MLP’s, LP’s, and REIT’s, because they are
obligated by law to pay out up to 90-95% of their income to
shareholders, instead of paying income taxes). An important
figure to monitor here is FFO, or Funds from Operations, which
should at least be steady, if not always increasing.

A good example of a stock with a low dividend payout ratio is
Olin Corp., (NYSE:OLN), which, at a price of $14.65, is
currently yielding an attractive 5.46%, and has a dividend
payout ratio of just 39%.

One way you could gain even more yield out of this stock would
be to sell covered calls options against it. As an
example, using this strategy, you would buy a minimum of 100
shares at $14.65, and then sell the Jan. 2010 $15 calls against
it for $2.30/share, which would give you an additional 15.7%
yield
.

Your total yield, (and downside protection), would then become
21.16%, for this 10-month investment term. This equates
to an annualized yield of approximately 25.39%.

© 2009 DeMar Marketing. All Rights Reserved (This article was
written for informational purposes only. Readers should not make
any investment decisions based solely on the information in this
article).

About the author:
Robert Hauver publishes The Double Dividend Stock Alert,
a monthly investment newsletter with high-yield, risk-reducing
strategies for value and income investors. For more information
on the strategy in this article, visit his website:
www.DoubleDividendStoc...