Hedging Your Way To Healthy Dividends – Part 2
by Phil - May 24th, 2009 7:46 am
Time to get a little more conservative…
In Part 1 of this post, we talked about the potential long-term value of taking a chance on companies that used to pay dividends but don’t at the moment. In addition to the 7 selections we had last Tuesday, I would urge members to keep on the lookout for additional prospects we can discuss as the long-term benefits of catching these stocks at the lows can be amazing! This was the same logic that led me to pound the table back in March on C, BAC, WFC, JPM and even the hated GS – stocks that have tripled or better in just 3 months.
We had a very easy time selecting those stocks as we were able to hedge our entries and our long-term logic was that, at those low prices, we could be fairly sure of producing a good option income even if they never restored the dividends but the kicker was the possiblility of owning, for example, C at $1.50 down the road when they go back to paying $1 per year dividends. Imagine having a year’s salary put away on stocks that pay you almost a year’s salary every year in dividends alone!
Don’t worry, you didn’t miss a once-in-a-lifetime opportunity, we just have to work a little harder at the moment. As I noted with our LYG example, there are still beaten-down financials that are worth a look and today we’ll look at 2 more of our 21 Tuesday selections (one now, one later) and go over the trading plans for those positions. Note that the LYG trade ties up just $1,035 in cash to make (hopefully) $1,465 in year 1 with a commitment of $3,535 if you end up owning all 1,000 shares on Jan 15th.
By making sure you are on top of these figures, a person making $30,000 a year who has $5,000 in an investment account count take a modest 6-month gamble like this. If this trade pays off, $5,000 becomes $6,465 and 500 LYG shares are secure (about $2,500 worth) or, at worst, you have 22% more cash for the next trade. The next trade secures another potential dividend payer and if every 6 months you can secure just another $2,500 worth of dividend paying stocks for under $2,000 then in just 10 years, investing just 10% of a $30,000 annual salary, you could, very conservatively, have $50,000 worth of…
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DiggHedging Your Way To Healthy Dividends – Part 1
by Phil - May 23rd, 2009 8:14 am
We had selected 21 top dividend payers for trade ideas in Member chat last Tuesday.
Today Vitaliy Katsenelson of Active Value Investing sent me an excellent power-point he will be presenting at the CFA Society of Miami next Tuesday on Value Investing In Range-Bound Markets. I don’t want to spoil it for you but let’s just say that he agrees with our premise that dividend-paying stocks are, by far, the best choice to ride out a choppy market like the one we have – one that may persist for quite some time.
Using options to hedge our dividend positions can make them even more rewarding as we protect ourselves against the occasional downturn (not to mention the little dips stocks may take as they go ex-dividend). Another benefit of using our Buy/Write Strategy to purchase didvidend paying stocks is that, by decreasing our net entry price on the position, we are effectively raising our dividend yield – that is what they call a real win-win! Of course, hedging a position doesn’t mitigate all possible damage but it’s sure better than not hedging. The main problem with any dividend paying stock is that, if they announce they are suspending the dividend, they tend to drop like a rock so it’s important to stay on top of the company and pay close attention to news that may adversely affect the dividends down the road.
Of course, this disadvantage has a flip side and 1/3 of the dividend selections we discussed on Tuesday were companies that no longer pay a dividend, have taken a big hit but may go back to paying it again down the road.
LYG was one of the seven. From 2002 through Aug 2008, Lloyd’s paid a nice $2+ annual dividend but the bank suspended their March dividend this year and may not make the August payment either. Suspension of the dividend was the last straw for the already struggling bank and Lloyds fell from it’s 2007 highs of $45 to $20 in October of 2009 all the way down to $2.22 in March. Most of Lloyd’s troubles came from good, old-fashioned lending impairments relating to the housing crisis rather than exotic trading gambles that went bad and, of course, the UK government has stepped in under the Government Asset Protection Scheme (I love that they call them "schemes" in England – that word would not go…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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