High Dividend Stocks - Bottom Fishing - Part 4

In the first 3 parts of this series, we went fishing for high dividend stocks with strong balance sheets using the following screening criteria:
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1. High Dividend Yield - Above 5 %
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2. Moderate Dividend Payout Ratio - Below 50 %
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3. Less Than 40 % Above 52-Week Low *
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4. Options Available
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5. Current Ratio: Over 1.5
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6. Long Term Debt to Equity: Under .5
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In part 3, we adjusted screen # 3 to: Over 50% below 52-week high".
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This adjusted screen gave us Olin Corp., (OLN), a Basic Materials/Diversified Chemicals company, which has two divisions -chlor alkali specialty chemicals and ammunitions for sports and the military.
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Olin currently has a good dividend yield of approximately 6.2%, and their dividend payout ratio of less than 37% is very low for a high dividend stock. Olin's 33% Debt-To-Equity ratios are strong and identical for both long term and short term debt.
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Current Ratio: 1.9, meaning that their current assets are nearly twice as high as their liabilities.
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OLN is cheap by other metrics also:
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Growth: A low PEG ratio of only .57 (investors look for PEG's under 1)
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Price/Book (P/B): Only 1.40
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Price/Earnings (P/E): 6.17
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Return on Equity (ROE): over 22%
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Return On Investment (ROI): 12.24%
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Return On Assets (ROA): 9.67%
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Within their Diversified Chemicals peer group, they have the highest dividend yield and the lowest P/E ratio.
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So, what if you want to be conservative and build a position in OLN at a price lower than the current market?
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SELLING PUTS is a conservative high yield strategy which investors use to accumulate stocks at prices lower than the current market.
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Each put contract sold potentially obligates the seller to buy 100 shares of the underlying stock. Brokers vary in the amount of cash reserve they require a seller to post - some brokers want 100%, while others require less.
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This trade example will use a 100% cash reserve, and no commission fees.
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OLN is currently trading at $12.99.
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1. Compare the cash yields of selling Nov $12.50 puts to the dividend yield:
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If you were to buy OLN outright, at $12.99, you'd receive 2 remaining $.20/share in dividends prior to Nov. expiration, which equals $.40/share, a 6.2% annualized yield.
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OR
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If you sold Nov. $12.50 puts,(OLNWV), you'd receive $1.60/share, a 28.5% annualized yield. Clearly, the put sale offers a much higher yield.
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IMPORTANT CAVEAT: The put sale will be a short term gain, which is taxable at your personal tax rate, as opposed to the current 15% tax rate for qualified dividends.
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Your Breakeven Price on this put sale is $10.90 ($12.50 strike-$1.60 put premium).
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When the November expiration comes, there are 2 possible outcomes:
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1. OLN declines to near or under $10.90, (($12.50 strike price less $1.60 put premium), and you are sold, (assigned), 100 shares of OLN at $12.50/share, (the put strike price).
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However, your net cost would be $10.90, (the $12.50 strike - $1.60 put premium you received). This would put you approximately 21%+ over the OLN's 5-year low of $8.97. A pretty reasonable price to pay for such a strong company.
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2. If OLN doesn't decline to near or under $11.90, your broker will release your cash reserve, and you walk away with $160.00 for every put contract that you sold, which is a 28.5% annualized profit. (Either way, you keep your put premium $, whether you get assigned shares or not).
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Many investors have been worrying about being left behind by the current rally. Selling puts is a way that you can still profit from solid companies, even though their prices have risen.
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In the 5th and final part of this series, we'll discuss other ways to analyze selling calls and puts.
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Disclosure: Author is long OLN.
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Disclaimer: This article is written for informational purposes only. Author not responsible for errors, omissions, or acts taken by third parties as a result of reading this article.
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