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Con Ed: The Loneliest High Dividend Aristocrat Stock

|Includes: Consolidated Edison Inc. (ED)

 We value investors are always scraping around the bottom of the barrel, looking for overlooked, undervalued stocks.  Add in the lure of a high dividend yield, and the search becomes even more interesting.

Where better to look for an undervalued high dividend stock that in the famed S&P Dividend Aristocrats group?

I screened for stocks with a dividend yield over 5%, that were less than 20% above their 52-week lows.  While there are many Dividend Aristocrat stocks with dividend yields over 5%, there's only 1 that's less than 20% above its 52-week low: Con Edison, (NYSE:ED), the NYC area's local utility company.

ED is currently trading at around $37.79, which puts it approximately 16% above its 52-week low of $32.56.  In fact, thanks to a relatively narrow trading range, this stock is over 18% below its 52-week high of $46.39.

Con Edison pays a quarterly dividend of $.59/share, ($2.36 annually), which equals a 6.25% yield currently.

If you're looking for an even higher yield on this stock, you might try to buy its       D - series Preferred stock, (CEDNM), which pays $4.65/share, (a 7.90% yield), and last traded at $58.83 on June 19th.  But, as you can see, like many preferred shares, it's thinly traded.  It's listed on the Pink Sheets.

Another way to pump up the yield power on this utility stock is to sell covered calls against the common shares, (ED).  You could sell the January $40 call, (EDAH), currently for $.95, which would add an additional 2.5% to your yield. 

Here's a summary of this trade, using a model of buying 100 shares, since one option contract corresponds to 100 shares of the underlying stock:

Share Price:   $37.79  ($3779.00 for 100 shares)   

Call Strike:      $40.00

Call Premium: $   .95/share  $95.00  (2.5%)

Dividends until option expiration: $1.18/share   $118.00  (3.12%)

Total Static Yield: $2.13  $213.00  5.62% Nominal Yield

Potential Assigned Yield: $2.21/share  $221.00 ($40 strike price - $37.79 share price)  5.85% Nominal Yield

Potential Total Assigned Nominal Yield: 11.47% 

Static Yield refers to the scenario in which the stock doesn't rise to or past the combination of the strike price, $40, and the call premium, $.95, $40.95 in this case.  In this scenario, you'd keep your 100 shares, and, as usual, pocket the dividend and call money.  

Your revised cost would then be lowered to $35.66, which is also your breakeven on this trade.

Assigned Yield refers to the alternative scenario, in which the stock's price DOES rise above or to the $40.95 price level around expiration time.  In this case, your shares would be sold/assigned at the $40 strike price, giving you an additional $2.21/share, or $221.00 profit.

If the Static Yield of 5.62% sounds insignificant, remember that this yield is achieved in 178 days, just under 6 months.  This equates to a 11.52% annualized yield.

Likewise the total Potential Assigned Nominal Yield of 11.47% is actually 23.52% annualized.  Not bad for scraping the bottom of the barrel. 

Stay tuned for more Dividend Aristocrat updates.

Disclosure: This author is not currently long ED shares.

This article is written for informational purposes only and author will not be held responsible for any errors, omissions or acts by a third party as a result of reading this article.