MorningWord 4/7/15: Waiting For Super Yield

by Dan April 6, 2015 9:28 am • Commentary

This past weekend Barron’s ran the following story 10 Stocks With Reliable Yields Up to 5.7%The uniting factor here is that not only do the companies have healthy dividend yields but also the potential for growth.   Barron’s points out that that there are “about 60 companies in the S&P 500 with yields of 3.5%” or higher, excluding energy stocks, as most are “borrowing money this year to maintain their 2015 payout”.  Here was there list of “High Income Stocks in a Low-Income World:


Yield is yield, especially in what has been a low growth environment over the last year where the yield on the 10 year Treasury was above 2.6% last April and now hovers around 1.9%.

It is important to note that most of the yields on the stocks listed above have risen over the last year despite the S&P 500 gaining about 10% in the last 12 months.  Only four on the list of ten stock’s above are up over that time period (DOW, DUK, GM & VZ with an average gain of about 4.5%), while six on the list declined (T, PM, STX, GE, MCD & CAT have declined on average about 7%).  As for growth for this list excluding a few outliers, both up (GM) and down (CAT ) in most of the cases the average dividend yield is in line with the average expected growth.

For the most part, the stocks listed above (excluding STX) are about as blue as it gets when it comes to bluechips, but there some distinctions, DUK, T & VZ get nearly all of their sales here in the U.S. and have little exposure to the strong dollar, while most of the others are very exposed.

So here’s my take-away. If you own stocks like ones listed above, hoping the dividend yield can help bide time while the companies re-position for growth, it could make sense to sell calls, or strangles against long stock to further juice yield.  For instance, T, which sports a 5.67% dividend yield, has seen its options prices tick up with the stock’s recent decline, with 30 day at the money implied volatility about 17.5% at the upper end of the one year band:

From Bloomberg
From Bloomberg

With the stock around $33, if you owned it here (expecting one 47 cent payout this week) you could sell the June 35 call at 33 cents, collecting an additional 1% yield in a little more than two months if the stock is below $35 on June expiration.  Annualize that with a quarterly call roll (against long stock) and you could quickly see a 10% yield. This strategy takes a little work, and could cap gains in the event of sharp rally, but it’s is important to remember you can always buyback the short call if the stock threatens that strike on the upside.

We’ll detail specific examples of these types of trade in widely held stocks from time to time.