A Contrarian Income Play That Offers Value Now

Income investors are a shy bunch. If a company looks like it’s not going to provide investors with the same (or a growing) level of income, they’ll leave. When that happens, a price drop occurs, sometimes creating a value opportunity.

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  • While investors may not want to stay in a company that’s cut their dividend, sometimes buying a company after it cuts its dividend makes sense.

    The lower price paid may offset a decline in yield. That looks to be the case with Dominion Energy (D), a utility that recently shed its payout by about one-third. That led to a drop in shares, which now makes the price look attractive. And, with a 3.4 percent dividend yield, investors who buy after the drop are likely to see steady gains, and possible raised dividends in the future as the company’s earnings warrant.

    Action to take: For defensive investors, utility stocks are a solid buy, which often keeps the prices high and yields somewhat low. 3.4 percent is a good starting rate for a utility, and with shares off nearly 20 percent from their highs, investors could beat the utility sector as a whole with Dominion going forward.

    For traders, the post-dividend cut selloff will likely lead to a partial recovery in shares. The April 2021 $75 calls are just $0.50 out-of-the-money. Trading at a price of $3.60, traders can likely nab mid-double-digit gains—a great return for an options trade on a utility stock in the span of a few months.

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