5 Dividend Stocks With Good Covered Calls Returns In A Bear Market
Pick good under valued dividend stocks with active and liquid stock options that can be used to generate weekly and monthly income by selling covered calls and puts options.
By Donald E. L. Johnson
Cautious speculator
Bearish investors can stay in cash, sell puts for income or buy relatively high yielding dividend stocks and sell covered calls on them.
The strategy can provide a nice hedge against a bear market.
Risks include suffering paper losses on the stocks during the bear market while collecting dividends and covered calls premiums.
Dividend stocks fall in bear markets.
Collecting dividends and covered calls premiums can cushion potential losses in a bear market.
Here are five good dividend payers that are defensive, low beta equities. They all have active and liquid stock options that can be traded to achieve high annualized returns or more modest gains when traders don’t want their stocks to be called. I have written about selling covered calls here. More links are at the end of this blog.
I own and/or have covered calls and cash secured puts positions in all of these ideas but XLE, the energy ETF. Please click on the images and zoom in for closer views.
ABBV $175.53. Sell ABBV 5.20.22 (39 days) $175 strike (delta .42) calls, RoR 21%. Dividend yield 3.3%.
GILD $62.41. Sell GILD 5.20.22 $65 strike (delta .32) calls, RoR 16.5%. Dividend 4.68%.
KMI $19.415. Sell KMI 5.20.22. $20 strike (delta .33) calls, RoR 14.4%. Dividend 5.58%.
WBA $45.85. Sell WBA 5.20.22 $47.50 strike (delta .35) calls, RoR 17.8%. Dividend 4.16%.
XLE $77.85. Sell XLE 5.20.22 $79 strike (delta .46) calls, RoR 38%. Dividend 3.6%.
The four stocks in this watch list are trading at an average price to free cash flow (P/FCF) ratio of 10.5. They are an average of about 7% below their estimated fair values and 5.4% below mean target prices posted by brokerage firms’ sell side analysts. They are trading at prices that are about 18% below the highest target prices published by analysts. And their average beta is a defensive .82.
Traders who do these covered calls options trades will be hoping that the prices of the stocks rally above the strike prices. If that happens, they will capture nice annualized covered calls returns plus small capital gains. Unless the trades are done in IRAs or other tax sheltered accounts, the premium income and capital gains will be taxed. That is like paying income taxes on any other business. We want to make money and we’re happy to pay the taxes.
The risk of this strategy is that the stocks will drop in a bear market. They almost certainly will as dividend stocks usually do in bear markets.
But by collecting nice dividends and premiums that annualize 10% to 20%, the speculator will have a pretty good cushion, or hedge against a 15% to 20% drop in the markets. The markets’ technicals are weak and no one knows how low prices will go or how long a bear market will last if there is one.
This strategy assumes that the goal is to generate dividend and premium income regardless of what happens to stock prices.
The assumption is that sooner or later, the bear market will end and stocks will rally. Over the long term, while using this strategy dividends plus premiums plus captured small capital gains will make watching the prices decline worth while.
Speculators who can’t stand to hold depressed stocks should stay in cash if they are bearish.
Bullish investors might look at stocks that have lower dividend yields and better potential gains in a bull market instead of the stocks in this watch list.
LINKs:
Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.
XYLD is holding up better than SPY.
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12 DJI 30 Stocks Are Winners Year to Date; Good Covered Calls, Options Trades Ideas.
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A video on how to place options trades on Think or Swim.
Beware
Like all investing, trading stocks and options is risky. If you can’t sleep with market risks, you might want to let someone else do your trading. Consider an option trading ETF like XYLD, which I own. I also trade its calls and puts. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I own and have options positions on some of the securities mentioned. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content or for any links.
@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter where I tweet about stocks, options trades and other topics.