High Dividend Stocks - Protecting Yields and Lowering Risk

With the recent rash of dividend cuts by historically dependable dividend-paying companies, income investors are finding it increasingly challenging to find safe high dividend yields. Indeed, Standard & Poor's expects 2009 to have the biggest drop in dividend payouts since 1942. The market decline has created many accidentally high dividend stocks, as companies who've maintained their dividend payouts in spite of share price declines suddenly find themselves paying out record high dividend yields. The other edge to this sword is that many companies are slashing their dividend payouts to conserve cash, reasoning that their lower payouts still offer a strong yield, given their lower share price.

In addition, the increased volatility associated with the market's decline has devalued investors' principal, leaving them with less capital to invest, if they choose to re-balance their portfolios.

A useful, conservative strategy that actually capitalizes on the market's volatility to lock in high dividend yields is the Covered Call Selling or Buy/Write technique. The increased market volatility has increased call option premiums, giving investors the opportunity to sell high yield covered calls on many stocks, in effect giving them a one-time "double dividend", reducing their initial investment cash outlay, and also offering them some downside protection. Since no company can cut the premium on their call options, these instruments are tantamount to an "ironclad" dividend. Indeed, the current call premiums are often giving investors higher yields than the underlying stock dividends. So, even if the company does cut its dividend, the investor will still retain the premium from his covered call sale. In addition, a call seller receives the call premium money back into his account upon settlement, (usually trade date plus 3 days).

Covered call writing also gives you the potential for capital gains, in addition to the high yields that you get from the call premium/dividend yield, should the stock be assigned, (sold), at expiration. Investors often sell covered calls that are approximately 5-20% above the stock's current price, giving themselves the potential to realize an additional 5-20% profit, should these stocks rise past the covered call thresholds by the end of the investment term. Given the historic lows that many companies' share prices have fallen to, many traditional value investors feel that they are buying these stocks at undervalued prices, and reason that there's a very good chance of them rising in the future.

To illustrate this technique, let's take a look at the prices for NYSE/Euronext (NYX), as of March 4, 2009 market close:

STOCK COST/ SHARE:$16.36 ANNUAL DIVIDEND:$1.20/SHARE DIVIDEND YIELD:7.33%

CALL STRIKE PRICE:$17.50 CALL PREMIUM:$3.25 STATIC CALL YIELD: 19.86%

CALL EXPIRATION DATE: JAN. 15, 2010 TOTAL STATIC YIELD: 27.19%

TOTAL POTENTIAL ASSIGNED YIELD: 34.16%

As you can see from the yields in this example, this stock's 19.86% call selling yield is 2.7 times its dividend yield of 7.33%. So, even if they were to cut their dividend, the investor in this example would still have nearly 20% downside protection.

If the dividend remains intact, the total downside protection in this trade is 27.19%, equivalent to the total static yield, (the combination of the dividend and call yields). In addition, by selling a call at the $17.50 strike price, approximately 7% above the $16.36 cost/share, this investor also has the potential to for a total assigned yield of 34.16%, making a very compelling case for this strategy.

Trade Summary for this Example:

Breakeven: $11.91

Maximum Share Reselling Price: $17.50

Static Yield: $435.00

Potential Assigned Yield: $559.00

Static Call Yield: The yield realized when the underlying shares are NOT assigned/(sold) at or before expiration. In a "static" scenario, the stock's share price doesn't rise above or close enough to the combination price of the strike price, plus the call premium, to make it worthwhile for the shares to be bought by the call buyer on the other side of the trade. In the above example, the share price would have to rise above or near $20.75, ($17.50 strike price plus the $3.25 call premium), to make it worthwhile for the call buyer to exercise his option to buy your shares.

Total Static Yield:The combination of the dividend yield and the static call yield.

Assigned Call Yield: The yield realized when the underlying shares ARE assigned/(sold) at or before expiration. This normally occurs when the stock's share price rises to or above the combination price of the strike price, plus the call premium, causing the shares to be assigned, (sold), at the strike price, which in the above example is $17.50.

Risks and Limits: As with any investment, there are risks. Obviously, this strategy can't guarantee that these stocks won't decline further in value once you've bought them. However, this value-based, "double dividend" covered call strategy will at the very least give you more downside protection than if you had only bought the stocks outright, and the call premium lowers your cost basis.

Upside Risk: Since this strategy quantifies the upper limit of your profit potential, you should be aware that, even if the stock appreciates far past your strike price and call premium, you'll still be obligated to sell it at your covered call strike price, which places a limit on your profit potential. It's usually wise to research the call's theoretical value in an options pricing model, such as Black-Sholes, before placing the trade, to ascertain the chances of the call ending up in the money at expiration. You should always analyze your static and assigned gains, and breakeven point before placing any Covered call, (Buy/Write), strategy. Many of the online brokers have automated options pricing calculators that simplify this process.

Downside Risk: The biggest risk factor in selling covered calls is that you are putting much more money at risk here than by merely buying a call option. However, research has shown that the odds tend to favor option sellers over buyers.

You should make sure you research any stock thoroughly before executing this or any other strategy.

However, as noted before, if the stock declines past your breakeven, you should be able to offset some of the loss by "buying back in" your sold calls at a profit, and perhaps rolling into a lower strike price call, if you want to maintain your underlying position.

Robert Hauver publishes The Double Dividend Stock Alert, a monthly newsletter featuring high yield strategies for value and income investors. Website: http://www.DoubleDividendStocks.com copyright 2009 DeMar Marketing. All Rights Reserved Worldwide. This article was written for informational purposes only. Readers should not make any investment decisions based solely on the information in this article. Article Source: http://EzineArticles.com/?expert=Robert_Hauver

High Dividend Stocks Overview

There was a recent article in the FT that discusses some of the important concepts with respect to high dividend stocks. Here is a snapshot from the article

Dividend Reinvestment Plans (Drips) are a convenient way of using a company’s dividends to buy more shares in the same firm, so generating more dividends down the line. More than half of FTSE-100 companies offer these plans, as do a range of investment trusts, often as part of their regular savings schemes. Similar facilities are also common with unit trusts.

I encourage you to read the rest of the article if you are looking for more information on high dividend stocks.

High Dividend Stocks Takes Diligence

Investing in high dividend stocks is not something that should be jumped into quickly and without research and education. There is an article from the Motley Fool that discusses the importance of ensuring the future of the dividend will continue to be in tact:

The problem is that not all high-yielding stocks are good investments. Sometimes, a stock's price falls because investors think the company will reduce or discontinue dividend payments. If those fears prove true, those who bought in hopes of collecting a fat dividend often suffer the double hit of losing their dividend as well as a continuing drop in the stock price. Shareholders of Fannie Mae (NYSE: FNM) found that out yesterday, as the company slashed its dividend by 30%.

Finding high dividend stocks is an important first step, but it is important to make sure that the dividend can be sustained in the future.

Searching for High Dividend Stocks

There are certain mutual funds out there that emphasis high dividend stocks. One such fund, as written about at Forbes.com , is the Ivy Dividend Income fund. In this article, the manager of the fund talks about his approach to looking for dividend growth companies as opposed to just high dividend stocks.

I focus on dividend growth, which is more important than the current dividend yield. Dividends are a long-term commitment from management. Companies that increase dividends every year are showing me that they have confidence in their business plan.

He also makes some interesting comments about the payout ratios for high dividend stocks. Be sure to have a look at the article.

High Dividend Stock Investing - 3 Reasons Investors Love Them So Much

Though some consider it boring, high dividend stocks investing can still offer great potential return as well. In fact, it is not about getting dividend that matters, but it shows how strong the company is financially.

Effective Management Team

High dividend yield stocks are strong companies which had survived few market crashes. They are so effective that even in matured industries, the companies are still able to grow rapidly. They are the leader in the industries and continuously keep themselves ahead of other competitors.

Besides, most dividend paying stocks are enjoying huge economies of scale in their business operation. Through their visionary leaders and committed management team, they are able to convert every single asset that they own into profits and cash. Else, they won't be able to pay any dividend to shareholders.

Creative and Innovative

In an ever changing world nowadays, companies have no other choice than having productive R&D programs. And high dividend yield stocks ability to catch up with the change in demand and being the first to introduce "new effective things" can be huge advantage.

Other than having in house R&D programs, they can leverage on universities' students for creative and innovative inventions as well. For examples, Samsung sponsors many students projects which then they commercialise it to mass market.

Preferred by Fund Managers

Not all fund managers dare to take extra risk for the additional gain. The reason is simply because if they lose money, their customer will most probably change to other companies. If this happens, they lose their business too. Therefore, they prefer to have strong companies, and being able to pay dividends is a great indication of the good financial health.

As these stocks are popular among fund managers, it provides enough liquidity for you to buy or sell them. Besides, these stocks are visible to the market, which make stock research easier for investors. Since the fund managers are professional in their investment decision, invest in the same stocks as they do is not a bad idea too.

Find out exactly how you can make money in high dividend stocks and become financially free eventually; even if you have full time job at http://www.Stock-Investment-Made-Easy.com/easy-stock-tips.html a step-by-step guide to stock investing for beginners community.

Article Source: http://EzineArticles.com/?expert=Zainul_Anuar

High Dividend Stocks Videos from Dividend.com

I was searching through YouTube.com th other day, looking specifically for videos that covered high dividend stocks. There was not a lot to choose from, but there is a regular video series from Dividend.com that provides a market recap with an emphasis on topics related to dividend stocks. Here is that video:



Overall, not specifically related to high dividend stocks, but interesting none-the-less. Take a look at youtube.com to see what else you can find.

A High Dividend Stocks Screen

There is a high dividend stocks stock screen that has appeared in an article The Globe and Mail. The screen comes from Sherry Cooper, who has been chief economist at investment dealer BMO Nesbitt Burns since 1983. In the article, she states:

“Blue-chip dividend-paying stocks should be considered in a long-term investment portfolio, including during retirement,” she writes. “The most favourable are those stocks with an attractive yield, a history of steady dividend growth above the rate of inflation, a low payout ratio, and an improving position in the marketplace.” Such stocks are arguably safer than corporate bonds, she says.

In her book, she presents a dividend screen that weeds out the junk and comes up with a list of high dividend stocks that investors can then do additional analysis on. Click this link to see the results from the screen.