StockTrading2021

3 Safe Dividend Stocks

I’ve got 3 safe dividend stocks that caught my eye. I’ll tell you more about them below. But first…

I have read several articles predicting the economic and stock market outlook for 2012. Needless to say they have been all over the map. One day we’re reading about a new recession. The next day we’re reading about new statistics indicating there will be no recession. At the same time the market has been rising and falling with each headline. The market drops 1.5% because of imminent Euro collapse and rumors of banks and hedge funds being over exposed and over leveraged on European debt. Then the stock market rallies 2% the next day because of an agreement that will stave of the global financial catastrophe. I don’t pay attention to these day-to-day movements, nor do I spend too much time thinking about the headlines.

December seasonality usually means that the market is positive for the month. This doesn’t mean too much for me since I’m not a short-term investor. Recent economic news indicates the EU participants have a plan to get out of their crisis, the University of Michigan Surveys of Consumers posted its best reading since June, initial jobless claims were reported at 381,000 (which is the lowest reading since February), mortgage refinancings rose, home purchases jumped, and retail sales stronger than expected. Despite all this positive news the stock market was unable to penetrate the 200-day moving average, which continues to be a ceiling for the stock market. I am convinced that high frequency trading and hedge fund managers will push the stock market through, and keep it above, the 200-day moving average the moment that the quant algorithms detect a meaningful change in economic outlook.

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Until then, I continue to sit on the sidelines. The fact that the professionals haven’t pushed the markets higher tells me that they do not believe the market should be priced higher.

A lot of MF Global customers lost money. Not just because they made speculative investments. They lost money because MF Global stole their money. This post by Peter Brandt explains it very well. The lesson I learned from this event is that not only should we worry about a loss of investment capital due to market risk or a company’s event risk. In today’s environment we must also be concerned about the possibility that our money will be taken from us by the investment companies we are trusting to execute our trades or invest our money. Do not put too much trust in the government stepping in to make you whole – that only will help if you are a large bank. Small investors must fend for themselves. The only way to protect yourself is by diversifying: Diversify your stock positions AND diversify your holdings among more than one unrelated broker or mutual fund.

It is very hard in this environment to find a safe investment with a worthwhile yield. The average savings account yield is 0.16%, the 6-month CD average yield is 0.21%, the 1-year CD average yield is 0.33%, and the 5-year CD average yield is 1.19%. The Dow Industrials are yielding 2.63% and the S&P; 500 yield is 2.15%.

I’m not among you, but for those dividend investors who don’t care about the market technical signals there are 3 safe dividend stocks that I find interesting because they beat the yields I mentioned in the previous paragraph. These are the only 3 safe dividend stocks that I would buy if I weren’t so concerned about the risks in the current environment. Their 3% yield drew my attention. There are many stocks that yield more than 3% but these are the only three stocks that possess the traits that historically result in superb performance among dividend stocks, and these stocks have a history of being able to raise their dividend, even through .

The first is Chevron (CVX). CVX has increased its dividend for 24 years and is currently yielding 3.15%. It has a low payout ratio (24%) which means the company can continue to increase dividends. Payout ratio has one of the biggest impacts on dividend stock performance (lower is better). It a low debt rate, solid cash flow, solid book value, good profit growth potential. Best of all, an 8% dividend growth rate that is in line with it’s earnings growth. I think you would agree with me that Chevron’s product mix will not become obsolete for quite a while.

The second company is Intel (INTC). INTC has managed to increase its dividend for the past 8 years and increasing its dividend by about 14% each year, which is consistent with its 13% earnings growth rate. The stock’s dividend yield is currently sitting at 3.37%. It’s payout ratio is still at a low 36% despite the aggressive dividend growth. The company possesses outstanding PEG (P/E to Growth), Price-to-Book, and Price-to-Sales ratios. The company has low debt and lots of cash (2.24 current ratio) and substantial cash flow.

The third company is Microsoft (MSFT). MSFT has increased its dividend for 7 years now and has a dividend yield of 3.13%. The stock’s payout ratio sits at 29% even though company has averaged an 11% dividend growth rate. Like the other two stocks the dividend is sustainable and able to grow because the dividend yield is in line with its earnings growth and the low current payout ratio. The company has low debt which means it has good debt interest coverage, a ton of cash (2.95 current ratio), and outstanding cash flow.

Even though I am interested in these 3 safe dividend stocks, I would only hold equity positions if I were fully hedged because of the current stock market environment. If I were to buy 100 shares in each of the stocks mentioned above, would need to buy 5 SPY contracts to completely hedge my $15,000 position (I calculated this using my spreadsheet). Let’s say that I used March expiration options. I can hedge my position by establishing a bear put spread, buying the SPY 126 (currently at-the-money) contracts while selling the SPY 112 for a $4.22 debit. I could then offset this cost by establishing a bear call spread, selling the SPY 127 call and buying the SPY 137 call for a $4.09 credit. The overall cost of this modified collar is $0.13 (or $65 for 5 contracts). The three stocks will provide a total $1.22 per share in dividends in March, so you’ll still be ahead by $0.57 per share. This position will protect the positions if the market falls. There is risk if the market climbs above the 200-day moving average since the bear put spread and the bear call spread will both lose money as the three stocks climb in value.

You can read more about how I have successfully hedged my portfolio here.

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