In the first 2 parts of this series, we used the following screening criteria:
1. High Dividend Yield - Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).
2. Moderate Dividend Payout Ratio - Below 50 % (The S&P's payout ratio is approximately 59 %).
3.Less Than 40 % Above 52-Week Low *
4. Options Available
5. Current Ratio: Over 1.5
6. Long Term Debt to Equity: Under .5
As the market keeps rallying, it's getting tougher to find good stocks still near their lows, so I adjusted screen # 3 to: Over 50% below 52-week high".
This adjusted screen identified Olin Corp., (OLN), a Basic Materials-Synthetics/Diversified Chemicals company, which has 2 divisions -chlor alkali specialty chemicals and ammunitions for sports and the military.
Olin currently has a good dividend yield of just under 6%, and their dividend payout ratio of less than 37% is very low for a high dividend stock. Olin's Debt-To-Equity ratios are strong and identical for both long term and short term debt: a mere 33%.
The Current Ratio is around 1.9, meaning that their current assets are nearly twice as high as their liabilities.
OLN is cheap by other metrics also:
Growth: Their PEG ratio is only .57, (anything less than 1 is considered a good value)
Price/Book (P/B): Only 1.40
Price/Earnings (P/E): 6.17
Their management metrics are solid:
Return on Equity (ROE): over 22%
Return On Investment (ROI): 12.24%
Return On Assets (ROA): 9.67%, not a very high figure, but still respectable.
Within their Diversified Chemicals peer group, they have the highest dividend yield and the lowest P/E ratio.
Since OLN is an optionable stock, you can further goose their high dividend yield by selling covered calls. Currently, the January $15 covered call bid is $1.10.
We've based the following trade example on buying 100 shares of OLN, since option contracts are tied to 100 shares of the underlying stock. (We annualized all of the yields in this article because options expire in under 12 months, and at different times. Annualizing gives a better basis for comparing investments).
Here are the current figures for this high yield, low risk trade:
1. Buy 100 shares at $13.38
2. Sell 1 Jan 2010 $15 call contract, (symbol YSOAC), at $1.10, for $110.00
3. Collect 2 dividend payouts, which are worth $.40/share, before option expiration, for $40.00
When the January 16, 2010 expiration date comes, there are 2 possible outcomes:
1. Assignment - If OLN rises to or past $16.10, your 100 shares will be sold/assigned at the $15.00 strike price, giving you an additional $1.62/share profit, ($15.00 - $13.38 cost/share)
OR
2. Static - If OLN doesn't rise to or past $16.10, you'll keep you 100 shares. Your new breakeven cost is $11.88, ($13.38 - $1.10 call premium - $.40 dividend).
The Annualized Yields on this trade are as follows:
Dividend Yield: 4.92% ($.40/share)
Call Yield: 13.52% ($1.10/share)
Total Static Yield: (Dividends + Call): 18.84%
Potential Assigned Yield: 19.9 % ($1.62/share)
Total Potential Yield: 38.74%
Breakeven Price: $11.88
Assignment "Trigger" Price: $16.10
The minimum income/Static Yield you'll make by buying OLN and doing this covered call trade is $150/100 shares, (18.84%).
The maximum income you'll make is $312/100 shares, (38.74%).
Your downside protection here is equal to your static yield of 18.84%.
In addition to dramatically increasing your income yields, selling covered calls also:
-Determines exactly what your minimum income will be on each trade
-Quantifies your potential maximum profit. Selling a call determines your exit strategy, since it obligates you to sell at that strike price, no matter how high the stock rises.
-Decreases the net amount of cash you have tied up in the trade.
-Increases your protection against price declines and dividend cuts, since your call yield is usually higher than the dividend yield.
So, now you've locked in over 18% in downside protection by doubling your dividend, improved your cash flow, and set yourself up for a potential 38%+ profit. Most fishermen would agree that these figures would make for a pretty good day's outing...
In Part 4 of this series, we'll feature another high yield/low risk approach to investing in OLN.
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Robert Hauver publishes The Double Dividend Stock Alert, an investment newsletter that features "high yield investing for low risk investors". If you're looking for "The place where Low Risk meets High Yield", visit: www.DoubleDividendStocks.com
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
or organization.
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