We had selected 21 top dividend payers for trade ideas in Member chat last Tuesday.
Today Vitaliy Katsenelson of Active Value Investing sent me an excellent power-point he will be presenting at the CFA Society of Miami next Tuesday on Value Investing In Range-Bound Markets. I don’t want to spoil it for you but let’s just say that he agrees with our premise that dividend-paying stocks are, by far, the best choice to ride out a choppy market like the one we have – one that may persist for quite some time.
Using options to hedge our dividend positions can make them even more rewarding as we protect ourselves against the occasional downturn (not to mention the little dips stocks may take as they go ex-dividend). Another benefit of using our Buy/Write Strategy to purchase didvidend paying stocks is that, by decreasing our net entry price on the position, we are effectively raising our dividend yield – that is what they call a real win-win! Of course, hedging a position doesn’t mitigate all possible damage but it’s sure better than not hedging. The main problem with any dividend paying stock is that, if they announce they are suspending the dividend, they tend to drop like a rock so it’s important to stay on top of the company and pay close attention to news that may adversely affect the dividends down the road.
Of course, this disadvantage has a flip side and 1/3 of the dividend selections we discussed on Tuesday were companies that no longer pay a dividend, have taken a big hit but may go back to paying it again down the road.
LYG was one of the seven. From 2002 through Aug 2008, Lloyd’s paid a nice $2+ annual dividend but the bank suspended their March dividend this year and may not make the August payment either. Suspension of the dividend was the last straw for the already struggling bank and Lloyds fell from it’s 2007 highs of $45 to $20 in October of 2009 all the way down to $2.22 in March. Most of Lloyd’s troubles came from good, old-fashioned lending impairments relating to the housing crisis rather than exotic trading gambles that went bad and, of course, the UK government has stepped in under the Government Asset Protection Scheme (I love that they call them “schemes” in England – that word would not go over well in the US but would be a much…
