3 High Yielding Dividend Aristocrats to Buy Now but With Protection

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  • This isn’t an easy time to buy stocks for the long haul. Even names that have historically paid dividends may be in jeopardy of having to cut them if they run low on cash, need a bailout and so on. Dividend Aristocrats are S&P 500 companies that have paid and increased their dividend for 25 consecutive years. That would seem to be a strong track record to count on, but we are in uncharted territory.

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  • As investors weigh whether the market will test new lows or whether we will begin to stabilize, it presents a quandary of whether a better price, and thus a better yield can be had by waiting. Unfortunately, many people who sat on their hands in 2019 were remiss to not have taken advantage of prices in November 2008 through February 2009. So how do you balance the desire to generate return through capital gains and dividends, while at the same time protecting yourself, the answer really isn’t all that complicated.

    Utilizing options, investors can try to strike the balance of upside potential, income and insurance against significant losses. The strategy is called a covered stock or married put strategy. The idea is to buy 100 shares of the underlying along with a put. The put provides the owner to sell the stock at a set price for a period of time. You can weigh the cost of the put against the upside in the stock and the yield you’re going to get by buying today. You may find that the yields are high enough right now to pay for a significant portion of the put premiums after a couple dividend payments.

    Let’s review the list and how to protect yourself.

    Married Put #1: AT&T Inc (T)

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  • AT&T currently pays a 7.22% dividend yield. That sounds great until you consider how a company like T gets to the point of paying that kind of yield in the first place. In a news report on Tuesday, it discussed JP Morgan analyst Philip Cusick’s concern, not over the dividend, over the profitability of the company’s sprawling business. They have amassed a lot of debt building the empire but is it more vulnerable now to further price declines.

    If you are attracted to the dividend, but concerned about the downside price risk, a covered stock trade may be your best bet. The 17 JUL 20 $26 call can be bought for around $1.88 a share. Add that to the price of the stock at $28.76 and you have an all-in cost of $30.64 a share. This leaves the total risk of the trade at the all-in cost of $30.64 minus the strike price of $26, which equals $4.64. That protection will cover you for the next 106 days. If things normalize, the 7% yield plus the near-term upside potential may be worth the risk.

    Married Put #2: Exxon Mobile Corp (XOM)

    XOM currently pays around an 8.6% dividend yield. Their shares rallied 7.65% on Thursday following President Trump’s tweet that he expects Saudi Arabia and Russia to cut production. I’m not sure how reliable those countries are when it comes to agreements, but the news is near-term positive for the energy sector and oil prices have responded in kind.

    The 17 JUL 20 $35 put can be bought for around $2.51 per share. With the stock price closing at $40.40, the married put can be put on for around $42.91. That price isn’t too far above Thursday’s high. This gives a total risk of $7.91 a share for the next 106 days, but with close to $20 to $30 of upside, if correct.

    Married Put #3: AbbVie Inc (ABBV)

    As a drug company, it doesn’t exactly place this company in the crosshairs of COVID-19, but the price did recently test its 2019 low and pays a 6.28% yield. Also, the company was recently in the news for donating $35 million to the COVID-19 relief effort.

    The 21 August $67.50 put can be bought for $5.25 a share. With the price closing at $75.13, the married put can be bought for $80.38. That’s a total risk of about $12.88 a share for the next 141 days, but with upside to $100 or $120 over the intermediate term, it makes it a good reward-to-risk play even without the dividend.

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