Most dividend investors require consistency from their stock positions. As a result companies which are able to generate rising dividend income over time are viewed more favorably in comparison to companies such as Pfizer (GE) or General Electric (GE), which have followed an inconsistent dividend policy over the past two years.
Just last week General Electric (GE) forecasted that there is a high chance for a dividend increase in 2011, coupled with a resumption of the company’s stock buyback plan and retirement of the company’s preferred stock. General Electric (GE) has had a pretty terrible timing of its share buyback plan over the past decade. The company spent billions between 2005 and 2007 repurchasing 513 million shares when prices were high. By 2009 the company had issued 517 million shares at much lower prices, in order to obtain liquidity in the wake of the global financial crisis. If the company does start increasing dividends in 2011 however, this could be a bullish sign. It would take at least a decade of consistent dividend raises however in order for the dividend to reach its previous levels of 31 cents/share.
Compare this to the consistency of PepsiCo, Inc. (PEP), which manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. Last week the company announced a 7% increase in its quarterly dividend to 48 cents/share. This is the thirty-eight consecutive annual dividend increase for this dividend aristocrat. The company's Board of Directors also authorized the repurchase of up to $15 billion of PepsiCo common stock through June 2013. The stock currently yields 2.90%. Check my analysis of the stock. Dividend author Dave Van Knapp has included the company in his most recent book "The Top 40 Dividend Stocks for 2010". The company is also one of the Best Dividends Stocks for the Long Run.
PepsiCo (PEP) is a reliable dividend stock, which is attractively priced at the moment despite its forward yield of 2.90% being a tad lower than my entry requirement of 3%. My ideal entry price at PepsiCo would be $64, for those investors waiting for better prices. Investors have to weigh in the risks of waiting for a better price, versus the risk of missing out completely on any upside action if the company doesn’t go below $64/share.
Full Disclosure: Long PEP
Relevant Articles:
- Dividend Aristocrats List for 2010
- The right time to buy dividend stocks
- Dividends versus Share Buybacks/Stock repurchases
- PepsiCo (PEP) Dividend Stock Analysis
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Hi there- good post.
ReplyDeleteOne thing to consider is that investors don't necessarily have to decide between buying now or waiting. A lot of long-term investors ignore the use of options, but long-term income investors can gain a lot by using them.
For example, right now, PEP is at $66.31/share. You can sell July 10th calls for $204 which obligates you to buy 100 shares at $65 if the stock price dips below $65 during the timeframe. This means that you get 204/6500 = over 3% of your investment back in premiums, and then you'll be obligated to buy at $65 if the buyer decides.
Or you can sell July 10th calls at a strike price of $62.50, but receive a premium of only $131 (2% of your investment).
The point is, if you want to own the stock but want it at a little lower price, you can sell an option to make income on your money and then either own the stock in the future at the price you wanted, or if the options expire, you can sell more options.
Matt I don't get why anyone would want to do that, perhaps you can explain what I am missing?
ReplyDeleteIf I bought 100 shares at $66.31 today my total cost would be $6,631.00
If I bought the option for $204 and then purchased 100 shares at $65, my total cost would be $6500 + $204 = $6704.00
So even though we paid less per share, we are paying more overall?
And if the price does not go down you just lose that option money right?
Anonymous,
ReplyDeleteI said sell the option, not buy the option. Sell the option to receive the premium, so you get paid a significant return just for waiting for a better entry price. You can either look at it as income or as a reduction of the cost basis.
I only recommend it with stocks you are actually interested in owning for the long term, though, due to careful analysis of the fundamentals.
You are selling the options, therefore you will GET the 204 Dollar for the Options.
ReplyDelete