By Robert Hauver

We checked the top 5 current Dogs of the Dow, (the current Dow component stocks with the highest dividend yields), to see how their dividends stack up vs. their covered calls and cash secured puts.  Selling covered calls can be an effective way to protect your portfolio in a down market.

The current Dow Dogs are:

As is often the case, Telecoms have the highest dividend yields in the group, with AT&T and Verizon topping the list.  These 2 dividend paying stocks are in the Telecoms section of our High Dividend Stocks By Sector Tables .  Two Healthcare dividend stocks and Tech giant Intel round out the list.  Verizon has the most aggressive dividend payout ratio, and Intel the most conservative.  Performance-wise, only Pfizer has gained much year-to-date, while Intel and Merck have lagged the others over the past year, which, in Intels case, belies the strong EPS growth over the recent past:

All 5 firms posted sequential EPS gains in the most recent quarter, but Pfizer was the laggard.  Analysts dont currently believe that Intel can improve a great deal next fiscal year, given the outstanding 160% EPS growth it had this past fiscal year, which gives INTC a high 12-month PEG.  AT&T has the lowest 12-month PEG, 1.25, and the two healthcare stocks look very over-valued, when taken on a PEG basis. Looking out further, only Intel has a 5-year PEG under 1. Intels 10.12 P/E is also way below the average 16.41 P/E for the semi-conductor industry.

Financial Ratios:

AT&T and Intel are the clear winners in Mgt. efficiency ratios and margin, while Intel is nearly debt-free.

So, how do the dividends for these stocks compare to their January 2012 options? These call options range up to 3 times the dividend amounts .  Selling a covered call from any of the trades listed below allows you to at least double your dividend, giving you a 10%-plus static yield, and the potential for additional assigned yield gains. Youll also get some additional downside protection, via a lower break-even point, by selling covered calls.  The catch is that youll have limited participation in upside price gains, should any of these dogs start to run. You can find more info on these and other covered call trades in our Covered Call Table.

Covered Calls:

Feeling not so bullish? Selling cash secured put options can give you an even lower break-even point than the calls listed above. The put premiums below range up to 6 times the dividend amounts for this period.  Your net cash outlay will be the cash reserve minus the put premium you receive. Ex.) For AT&T, youd have a net outlay of $2,778.00, ($3000.00 less $222.00 received for selling one put. Each options contract corresponds to 100 shares of the underlying stock).  You can find more info on these and other covered call trades in our Cash Secured Puts Table .

Cash Secured Puts:

Disclosure: Author is long AT&T and Intel.

Disclaimer: This article is written for informational purposes only and isnt intended as investment advice.

By Robert Hauver

Unless dividend increases keep pace with the price/share of dividend paying stocks, their dividend yield will decrease.  Conversely, if the price/share falls, the dividend yield will increase.  This week we looked at the top 5 Dow dividend stocks, (2 of which are in our High Dividend Stocks By Sectors Tables ), and compared each stocks dividend yield to a year ago, to see how they fared:

As you can see, its a mixed bag: AT&Ts  and Pfizers dividend yield % increased, Mercks is flat, while Verizons and Krafts have decreased, as their price/share has risen quite a bit. Verizon raised its quarterly dividend from $.475 to $.488/share, but this wasnt enough to keep pace with their 18% price rise. Kraft didnt increase its $.29/share quarterly dividend.  AT&T raised its dividend from $.42 to $.43, plus AT&Ts price/share has fallen over 3% in 2011, which also accounts for the higher yield.  Pfizer raised its quarterly dividend from $.18 to $.20/share in 2011.

With the top 5 Dow dividend stocks yielding from a low of 3.68% up to 6.13%, income investors might look elsewhere for higher yields.  However, you can easily double the dividend yields of these blue chip stocks. by selling covered calls and cash secured puts.  Heres a comparison of the annualized dividend yields vs. 6-7 month covered call and cash secured put trades for these 5 Dogs Of The Dow:

With the Covered Call strategy, you collect the dividends AND the call option premium, which is often twice the amount or more of the dividend payout prior to the option expiration date.  The Cash Secured Put Strategy only gets you the put premiums, but these are also often much higher than the dividend payouts, and your break-even price for owning the stock is lower than the current price/share.

Covered Calls Comparison:

In addition to the dividend and call option income, covered call sellers also have the potential for assigned price gains the difference between their cost/underlying share and the call strike price.

For example, AT&Ts share price in this example is $28.04, and the strike price is $29, so the potential price gain is an additional $.96, which would raise the total yield to 18.57%, 3 times that of AT&Ts 6.13% dividend yield. (There are further details for these call options trades in our Covered Calls Table .)

Cash Secured Puts Comparison:

Even without the benefit of collecting dividends, selling the put options in these trades would achieve yields of 2 to 3 times that of these stocks dividend yields. (There are further details for these put options trades in our Cash Secured Puts Table .)

Note: Selling cash secured puts normally requires your broker to hold a 100% cash reserve in your account, during the term of the trade. For example, if you sold one $28.00 AT&T put, your broker would hold $2800.00 of the funds in your account in reserve.

Disclosure: Author is long shares of and short puts of T, and short puts of VZ.

Disclaimer: This article is written for informational purposes only and isnt intended as investment advice.

By Robert Hauver

Looking for well-known high dividend stocks?  The Dogs of the Dow strategy advocates buying the 10 Dow dividend paying stocks with the highest dividend yield.  This week we narrowed this group down to 5 stocks with the highest dividend yields and the highest option yields.  As usual, there are mixed metrics among the group:

Verizons ROE, (Return On Equity), of just 1.08, looks particularly flea-bitten, when compared to the rest of the pack.

Valuation metrics:

While the long-term PEG ratios for these stocks arent very compelling, the next year PEGs for 2 of them, Merck and Kraft, look attractive, as theyre below 1.  This plays into the idea of a shorter term strategy, such as selling Covered Calls or Cash Secured Puts, with Feb. April expiration dates.

The basic Covered Call option yields for these dividend stocks are listed below.  Weve listed the complete info for these trades, including expiration dates, and the additional potential price gains, in our Covered Calls table .

The Cash Secured Put options for these stocks also currently offer high options yields:

Weve added these trades this week to our Cash Secured Puts Table. where youll find more details.

Disclosure: Author is short T calls and puts, and long T shares.

Disclaimer: This article is written for informational purposes only.

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