S&P 500 Dividend Aristocrats

Dividend paying blue chip stocks have been one of the soundest and least volatile of the equity investments this year. As of this date the S&P 500 Dividend Aristocrats are up 6.4% YTD.  If you add the current yield of 3.27% to that, you get an annualized return of almost 10%.  Very few hedge funds will surpass that this year.   In fact 44% of the total return of the S&P 500 over the last 80 years has been from dividends.  In many cases, the dividends paid by the common stock exceed the yield on the corporate debt of the issuer.  This is pretty unique and I don’t recall this ever  happening before in any sustained period.  It’s a sign of the fear and loathing that’s gripping the market.  This is a link to Standard and Poor’s S&P 500 dividend aristocrats.  These are companies that have increased their cash payment dividends for 25 consecutive years.  The latest list can be downloaded here.  There is also an ETF, The SPDR^® S&P^® Dividend ETF  that before expenses seeks to closely match the returns and characteristics of the S&P High Yield Dividend Aristocrats^TM Index (ticker: SDY).

An interesting way to enhance the return of the SDY is to sell put options on the ETF.  For example the January 2012 50 can be sold for $.70.  At today’s price of $53.73, the ETF would have to drop in price 7.46 % before the third Friday in January to get put the security.  Considering this ETF has a beta of .90, the overall market would have to drop even more, nearly 8.28% for this to happen most likely.  Assuming you could do this 12 months a year (probably impossible) the annualized yield on this strategy would be 16.8%, a far cry from the 3.27% current yield the ETF has.  Selling put options is not for everyone.  It requires a lot of capital.  It also requires a sound commitment to the strategy.  Never sell puts on stocks or ETFs you would not be willing to buy.  This is really not an appropriate income strategy.  It’s a way of creating ownership at below market prices.  After all if you were put the ETF or stock 8.86% ($3.70 below where its trading plus the $.70 for the option ) where its currently trading, you should be happy right?