Bottom Fishing For High Dividend Yields - Part 1

Given the 30%-plus rise in the S&P 500 sincecontract controls 100 shares of the underlying
March 9th, 2009, income investors might bestock.)
hard-pressed to find high dividend stocks whoseScenario A (BULLISH): Covered Call/Buy-Write
prices haven't gotten ahead of themselves.approach:
On a recent bottom fishing expedition, I screened1. Buy 100 shares of CALM at $22.58, (its 5/28
for 3 preliminary parameters:09 opening price).
1. High Dividend Yield - Above 5 % (The S&P2. Sell 1 November $25 call contract for $1.75
500 average dividend yield is approximatelyshare. (A 7.75% yield)
3.42%).3. Collect $.86/share in dividends before expiration.
2. Moderate Dividend Payout Ratio - Below 50 %(A 3.81% yield)
(The S&P's current payout ratio isWhen the November 21, 2009 expiration date
approximately 59 %).comes, you'll either:
3. Less Than 40 % Above 52-Week Low1. Collect an additional $2.42/share in capital gains,
4. Options Availabledue to the stock rising to or above $26.75, (the
This preliminary screen yielded several companies,$25 strike price plus the $1.75 call money).
from 4 different sectors: Consumer Goods,OR
Industrials, Basic Materials, and Financials.2. You'll get to keep your shares, if the stock
I then added the following 2 balance sheetdoesn't rise to the resale trigger price of $26.75.
screening ratios, in order to find the mostYour new basis would be $19.97, (your original
well-funded companies:cost of $22.58 less the dividend and call money
1. Current Ratio: Over 1.5you collected).
2. Long Term Debt to Equity: Under .5At this point, you could repeat this strategy, if
These additional screens yielded just 5 companies,you wanted to hold CALM for an additional period.
one of whom I've been following for awhile -SInce your cost basis would now be $19.97, you
Cal-Maine Foods, (CALM).could research selling new calls at $22.50, or even
You may have often heard the advice, "Investat $20.00, if you weren't feeling as bullish in
only in what you understand". Cal-Maine FoodsNovember.
just happens to be one of thoseThe annualized yields on this 6-month trade,
easy-to-understand companies - they're the($22.58 cost basis), are as follows:
biggest distributor of eggs in the US.1. Call Yield: $1.75/share = 15.98%
Eggs are a basic food staple, something that2. Dividend Yield: $.86/share = 7.85%
consumers aren't going to do without, even in aThis $2.61/share in income equals a 23.83%
recession. In fact, during a recession, consumersannualized static yield.
tend to eat at home more often, which plays toNotice how the call yield is over twice the dividend
Cal-Maine's strength as a major distributor toyield? This gives you added protection, in the
supermarket chains.event of an unforeseen dividend cut or other
CALM compares favorably within its peer group,negative event.
Packaged Foods: Poultry & Meats, sporting3. Assigned Yield: $2.42/share = 22.1% (As noted
the 2nd highest dividend yield, (7.5%), and the 2ndabove, if CALM rises to or above $26.75, your
lowest beta, (.40).shares will be sold at the $25 strike price)
In line with the S&P 500's rally gain, CALM isYour breakeven in this trade in $19.97/share, or
currently 34% above its 52-week low of $17.01,11.56% for 6 months.
and approximately 53% off its high of $48.80.Your maximum profit is $5.03/share, or 22.28%
What's the best way to invest in CALM? Thatfor 6 months, which equals an annualized yield of
depends upon your risk profile, and your45.9%.
assessment of the market. If you're an incomeThat's a pretty good day's fishing.
investor, looking to maximize your yields, thereIn Part 2 of this series, I'll detail a less bullish, more
are 2 different approaches that may suit yourdefensive strategy with this stock, which gives an
needs, each based on different outlooks:investor an equally impressive yield.
(For simplicity's sake, we'll illustrate this tradeDisclosure: Author is long on CALM.
example by buying 100 shares, since 1 option