2 Financial Stocks That Have 4%+ Yields and More

Mark Hake

Including covered call option income, you can make over twice that amount

This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

Financial stocks have recently taken a hit. These 2 stocks now have dividend yields of over 4.0%. They are also cheap with low valuation metrics like low price/earnings multiples and price/book value ratios. We also look at several options plays that can create additional income that could produce over 9% annually, including dividends, for the covered call investor.

Here is one more benefit of buying both of these stocks. They have prices below $30, so you can buy 100 shares of both for a total of less than $4,500 to create covered call income.

Invesco Ltd (IVZ) $16.39 — June 15, so 100 Shares = $1,639

This investment firm has a dividend yield of 4.71% and its earnings more than cover the dividend, giving it a payout ratio of less than 31%. The company produces fees from assets under management, rather than from interest rate spreads like at banks.

Moreover, IVZ stock now is cheap at just 6.5x 2022 earnings per share (EPS) and 5.9x 2023 EPS. In addition, its payout ratio is less than 31% (i.e., $0.75 dividend /$2.49 EPS = 0.301). In addition, analysts still forecast that earnings will grow 11.1% in 2023 over 2022.

Investors who want to make extra income on at least 100 shares can sell out-of-the-money call options. One reasonable play here is the Oct. 21 $21.00 strike price calls, which trade for $0.30 per call contract at the midpoint.

This means that after buying 100 shares at $16.39 for $1,639, investors can sell for $30 the right to buy the 100 shares of stock to someone else at $21.00 on or before Oct. 21., up to 128 days away. That extra $30 income represents an immediate return of $1.89% on the $1,639. If held to the end of the 128 days and the stock doesn’t rise over $21.00 (i.e., rise by 28% over today’s price), the investor keeps all of the $30 income.

That works out to an annualized return of 5.67% if the covered call option seller can repeat this 3 times per year (i.e., 1.89% earned every 128 days). As a result, over a year, the investor in IVZ collects 4.71% in dividends and 5.67% in covered call income, for a total yield of over 10% (10.38%). That provides good protection to the investor’s investment in IVZ stock.

Jefferies Financial Group (JEF)- $27.87, So 100 Shares Cost $2,787

Jefferies Financial Group is an NYC investment bank that yields 4.306%, trades below its book value, and is on a cheap forward P/E multiple of just 7.85x for 2022 and 6.82x for 2023.

In addition, the stock has a tangible book value per share (TBVPS) of $35.79, according to Seeking Alpha. So at $27.87, its P/TBVPS is just 0.78x.

Moreover, given that analysts’ forecast of $3.48 EPS for 2022 this more than covers the annual dividend payment of $1.20. So JEF stock has a payout ratio of just 34.5%. That is because the ratio of $1.20 in dividends to the $3.48 EPS is 0.345.

In other words, even if the earnings of the company were to fall by 50% to $1.74 in the ongoing recession Jefferies can still keep paying its dividend. This makes the dividend and the stock fairly secure at these levels. It also means that covered call sales for out-of-the-money call options will be lucrative.

For example, the Sept. 16, $35 call options trade for 30 cents at the midpoint. That means that you could sell 1 call option contract today (assuming you have 100 shares of JEF that cost $2,787) and collect $30.00.

This works out to a yield of 1.076% if the calls are held short for the next 93 days. That works out to an annualized return of about 4.30% (i.e. ($30 x4)/$2,787) assuming this play could be replicated 4 times a year. So, in total, the out-of-the-money short sell would make a total return of 8.306% (including the 4.306% dividend yield).

So, these two stocks, of which 100 shares each would cost less than $4,426 will produce 10.38% and 8.60% respectively in total income for the investor.

The weighted average return (assuming the stocks are not exercised) could be around 9.26% annually. That is a good return for most value investors.

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Mark R. Hake, CFA writes articles at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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