Ripe Dividend-Stock Picks: TIF, LVS, XEL, HNZ

NEW YORK ( TheStreet) -- If you take a look, you will find lots of companies worth owning with quarterly dividends. As you know, dividends can be a wonderful source of investor revenue. With each dividend payment received, investors are able to lower their risk in an investment.

With my portfolio, although much of the gains will come from dividends, the option decay will provide a big part of my gains. Option decay, or Theta, is the loss in time premium between two dates. This is especially true in lower-yielding stocks, since higher-yield options have lower-time premiums, all else being equal.

If you understand what you just read, advance to the next paragraph. If not, read this: Let's say I write an option today to you for $1 with an expiration in two months. After one month, you would expect the value to drop in half (not actually, but you get the idea). If I write a covered with 30 cents in time premium and the option buyer exercises the option in front of the ex-dividend date, I get to keep the time premium paid (because the buyer is exercising). Also, the longer I maintain a covered-call position (like two weeks with a front month option, for example) the lower the time premium is worth (all else being equal).

Xcel Energy (XEL)
Xcel, through its subsidiaries, engages in the generation, purchase, transmission, distribution and sale of electricity in the United States. The company was founded in 1909 and is headquartered in Minneapolis, MN.
Yield: 3.88%
Dividend Amount: 27 cents
Ex-Dividend Date: June 19, 2012
Beta: 0.37

Strategy: Buy Xcel stock and offer to sell the June $25 strike or lower call for 30 cents over the intrinsic value.

The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near 14 cents, plus dividend.

It is important to sell the call option hedge at or near the asking price for at least the minimum amount over intrinsic value. I don't want the option hedge unless the sale will provide at least the minimum 30 cents over intrinsic value.

My last step (completed before making a trade on the same day) is to check company announcements and news sources for possible price-moving events. This is especially critical during earnings season.

H.J. Heinz Company (HNZ)
Heinz manufactures and markets food products for consumers as well as food-service and institutional customers in North America, Europe, the Asia Pacific and other international markets. The company was founded in 1869 and is based in Pittsburgh, PA.
Yield: 3.85%
Dividend Amount: 52 cents
Ex-Dividend Date: June 20, 2012
Beta: 0.53

Strategy: Unlike the others, Heinz offers an even better strategy for trend followers than a dividend capture. The dividend influences the option price, allowing a low-risk method to catch the rising trend.

I like buying the June $50 strike call for 10-15 cents over the intrinsic value. With the June expiration date approaching, June will become the front month. Heinz has about three weeks to continue higher with a total time decay cost of about 10 cents before trading ex-dividend. If Heinz does fall or crash, the most at risk is about $3.60.

It's hard to make a case for buying the stock outright at this time, when an investor can capture most/all of any upside while limiting total losses to less than 10% of a stock movement by buying an option instead.

If you want the dividend, you can simply close out of the option position by either selling it (and buying shares), or an option exercise, whichever makes most financial sense the day before Heinz trades ex-dividend.

Tiffany & Co. (TIF)
Tiffany, through its subsidiaries, engages in the design, manufacture and retail of fine jewelry worldwide. The company was founded in 1837 and is headquartered in New York city.
Yield: 2.27%
Dividend Amount: 32 cents
Ex-Dividend Date: June 18, 2012
Beta: 1.82

Strategy: Buy Tiffany stock and offer to sell the June $52.50 strike or lower call for 52 cents over the intrinsic value. For a more aggressive approach, sell the June $55 strike for 85 cents over intrinsic value.

I like Tiffany for several reasons. Tiffany just came off a tough quarter; however, most of the negative news was already priced in it. The stock gapped lower, essentially putting Tiffany on sale. Sales in China are strong and lower commodity prices (think gold and other metals) result in lower cost inputs for products sold. Also, lower energy prices increases disposable income, which should increasingly have a bullish impact with both top and bottom lines, moving forward.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 52 cents. The most I can make is 84 cents, if I hold the covered call through option expiration day and the stock gets called away.

Las Vegas Sands (LVS)
Las Vegas Sands, together with its subsidiaries, owns, develops and operates various integrated resort properties primarily in the United States, Macau and Singapore. The company was founded in 1988 and is based in Las Vegas.
Yield: 2.09%
Dividend Amount: 25 cents
Ex-Dividend Date: June 18, 2012
Beta: 3.68

Strategy: Buy Las Vegas Sands stock and offer to sell the June $45 strike or lower call for 40 cents over the intrinsic value.

The gaming industry is one I follow closely. I make the trip to Vegas often to walk the floors and count heads (Aside from a little -- if any -- poker, I don't gamble). I have done the same in Macau as well.

The services industry is one of the best for smaller investors to perform due diligence. Most casinos are busy on a Saturday night, but knowing first hand which ones are filling the tables on a Tuesday night adds a lot of color to financial statements.

The Sands is one that should be looked at for either a long-term hold or a dividend capture.

My only real concern is Sheldon Adelson, the CEO, possibly stepping down. During the worst of the financial crisis, Adelson backstopped LVS with hundreds of millions of dollars to ensure the company stayed liquid.

Adelson knows how to make money, and his leadership with LVS creates a premium for the shares. While having a minimal impact on a dividend capture, a change of leadership is a risk factor to consider for longer-term holds.

It is important to sell the call option hedge at or near the asking price for at least the minimum amount over intrinsic value. I don't want the option hedge unless the sale will provide at least the minimum 40 cents over intrinsic value.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 40 cents. The most I can make is 65 cents, if I hold the covered call through option expiration day and the stock gets called away.

Note: When learning a new trading strategy, it is better to use a simulated trading account first. Stockpickr is a great tool to practice new strategies and learning about the market. I use Stockpickr and recommend it. It is easy to make mistakes when starting out on a new strategy and mistakes cost a lot less with a simulated account. After a level of confidence is built, then it may be time to move into a real money account.
At the time of publication, Weinstein held no positions in stocks mentioned.

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