Golden Dividends

By Dave Zaegel - July 15, 2012 | Tickers: HAS, LMT, MAT, MCD | 0 Comments

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To keep your sanity, you can invest in companies that have been around and been successful for a long-time.  In fact, some of these companies are giving you an opportunity to produce solid and consistent returns using their large dividend yields.

Since pictures are worth a thousand words (and who really wants to read a thousand words anyway?), the charts presented herein will provide a simple look at how their current dividend yields compare to their historical yields and performance.

McDonald's

Let's start with the golden arches of McDonald's (NYSE: MCD).  The stock has sold off from the $100s and closed on Friday at $92.30.  As a result of this sell-off, its dividend yield is up to 3.10%.

The chart above shows the comparison of McDonald's average dividend yield to McDonald's average P/E.  The P/E ratio climbed up through 2008, fell in 2009 when the whole market declined and has been on the rise ever since.  At the same time, its dividend yield spiked in 2009, but has been on the decline ever since.  However, the takeaway from this chart: with a current dividend yield of 3.1% and a P/E of 17.2 after the recent sell-off, McDonald's is almost as cheap as it was on average back in 2010 based solely upon those metrics.

Mattel and Hasbro

We highlighted these toys companies two weeks ago.  Mattel (NASDAQ: MAT) has a dividend yield of 3.9% and a P/E of 14.4.  Hasbro (NASDAQ: HAS) has a dividend yield of 4.3% and a P/E of 12.0.  Let's start with Mattel.

This first chart shows Mattel's average dividend compared to the average adjusted stock price since 1990.  The adjusted stock value has generally been on the rise because of the return provided by dividends.  It had a big sell-off at the end of the century, but has since risen back up toward its all-time highs.  During much of their decade-long rise, Mattel has generated consistently high dividends.  The chart below shows their dividend yields over the past nine years as compared to its P/E.

This shows that Mattel is slightly expensive compared to recent history, but is still at a fair price and offers a solid and consistent dividend yield.

Now let's look at Hasbro.

Parts of this chart look very familiar to Mattel.  We see a big sell off around the turn of the century and then a climb back to its all-time highs.  It has sold off slightly since, but that has caused its dividend yield to rise.

The chart above shows an even better picture of Hasbro being on sale relative to its history.  Its P/E is down to its 2009 levels and its dividend yield is the highest that it has ever been!  They don't have quite the same history of consistency that Mattel does, but if you are willing to take more risk, then Hasbro could offer some additional return relative to Mattel.

Lockheed Martin

Lastly, let's look at Lockheed Martin (NYSE: LMT).  We highlighted this stock two weeks ago as well.  It has a dividend yield of 4.6% and a P/E of 10.4.

This first chart shows Lockheed Martin's P/E steadily decreasing and making the stock cheaper, while at the same time its dividend yield has risen.

This last chart might be the best one yet!  It shows Lockheed Martin's dividend yield as compared to its close prices. 

As you can see, when the stock sold off at the turn of the century, its dividend yield shot-up and the stock price rose after that.  The stock sold off again in 2008 along with the rest of the market and the dividend yield again shot up.  However, the stock has yet to rise significantly and therefore has retained its extra high dividend yield.

There are certainly extra risks associated with owning Lockheed Martin, as we outlined in our previous post.  However, if you can stomach the risk, you may be rewarded in the longer term.

The Bottom Line

All four of these stocks offer great opportunity to capitalize on high dividend payouts.  Using a covered call strategy, you can generate consistent returns even if the stock goes nowhere.  A covered call involves purchasing shares of a company's stock and then selling someone else an option to purchase that stock at a specified price on or before a specific date.  Let's look at a McDonald's example.  Here are the specifics of the trade:

• Buy 100 shares of MCD at $92.30
• Sell 1 September 2012 $95 option at $1.25 per share
• Receive $0.72 dividend in late August

An option (almost always) gives the buyer the opportunity to buy 100 shares.  Therefore, you get paid $125 of option premium immediately in cash.  You are giving the option buyer the right to buy your stock at $95 on or before Sept. 21.

Also, you will get $72 of dividend payments in late August.  You paid $9,230 of capital to get those payments.  That provides you with a 2.2% return in just over two months.  That's an annualized return of 8.8%.  That's nothing amazing, but can provide a steady stream of income if done repeatedly. 

Also, that 2.2% return assumes that the stock goes nowhere.  If the stock goes down, then the 2.2% of return in cash will offset those loses.  On the flip side, if the stock rises above $95, then your option buyer will purchase the stock from you at $95 and you will then also get that $2.70 gain.  That $270 would increase your return to 5.05%, with a much nicer annualized rate of 20.2%.

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