With all of the recent market volatility and dividend cuts in Energy-related dividend stocks, income investors are looking to other sectors for income stability.
(We maintain High Dividend Stocks By Sectors Tables which feature many high yielding stocks for each sector.)
Although it’s not known for having any high dividend stocks, you may want to consider the Housing industry for some income plays and potential price appreciation.
We’ve found 3 homebuilder stocks which have been beating the S&P 500 over the past week, month and quarter. Two of these three stocks have also outperformed the market over the past year:
Strong Growth Ahead in Housing: Economists are predicting a big rise in household formations in 2015, a key figure for Housing. IHS predicts that 2015 will see the addition of 1.08 million new households, with economic growth driving up the rate of new formation. Single family housing production is expected to rise 26% in 2015. DR Horton Inc (NYSE:DHI) and PulteGroup Inc (NYSE:PHM) both get a large part of their revenue from sales in warmer states, where home sales growth is expected to continue to outpace national growth, at a pace of 24%. Toll Brothers Inc (NYSE:TOL) caters more to the upscale market, and has good exposure to the high end areas of New York City and Washington, DC.
Dividends: PHM cut its quarterly dividend from 2009 through 2012, and reinstated in August 2013 at $.05. It maintained it at $.05 until December 2014, when it raised it by 60%, to $.08. TOL doesn’t pay a dividend yet, but, as you’ll see further below, it does have attractive options yields.
Covered Calls Options: You can greatly improve upon these quarterly dividends by selling options. These 3 trades all have call premiums which pay much more than PHM’s or DHI’s next quarterly dividends. In fact, the DHI call option pays over 15 times DHI’s next 2 quarterly dividend payouts.
Since its $26.00 call strike is $.86 above DHI’s $25.14 price per share, this trade also offers you some potential price gains. Here are the income and gains yields for the 3 main scenarios in this trade:
Cash Secured Put Options: In addition to giving you immediate income, selling cash secured put options below a stock’s price can also give you a lower breakeven for a stock. However, you won’t receive any dividends, as you would when selling covered call options. As with selling calls, your account will usually be credited for the option premiums the same day, vs. waiting for the quarterly dividends.
Valuations: All 3 stocks have strong earnings growth forecasts for their coming fiscal year. Given their low forward PEG values, PHM and TOL look more undervalued than DHI on a PEG basis.
Earnings Dates: DHI and PHM should be reporting later in January. TOL has the best record for earnings beats over the past 4 quarters.
Financials: It’s a mixed bag here, with DHI leading for Return On Equity, but PHM leading by far on ROI.
Disclaimer: This article was written for informational purposes only. Author not responsible for any errors or omissions.
Disclosure: Author is short put options on DHI, PHM, and TOL. Copyright: 2015 Demar Marketing All rights reserved