Chevron Corp (CVX) stock has an attractive 4.5% dividend yield after its recent dividend per share hike. This is attractive to value investors, who can also take advantage of this by selling short out-of-the-money put options for extra income.
CVX is at $151.96 in midday trading on Tuesday, March 4, down from a recent high of $161.47 on Jan. 17. However, based on its historical dividend yield, CVX could be worth $169 per share.
I discussed this in a Jan. 31 Barchart article, “Chevron's Dividend Hike Shows CVX Stock is Too Cheap.” In that article, I showed that Chevron's free cash flow could easily afford the recent 5% hike in the annual dividend per share (DPS) to $6.84.
As a result, the stock's dividend yield is attractive to value investors:
$6.84 DPS / $151.96 = 0.045 = 4.50% annual yield
Historical Dividend Value for CVX Stock
Moreover, Morningstar data shows that Chevron stock's average 5-year dividend yield has been lower at 4.22%. And Seeking Alpha shows that its average 4-year yield has been 4.04%.
So, on average investors can expect to see CVX trade with at least a 4.13% dividend yield. Here is how that works out:
$6.84 / 0.0413 = $165.62 per share
That is about 9% higher than today's price. Moreover, at the 4.04% average yield, CVX would be worth $169.31 per share (i.e., $6.84/0.0404), or +11.4% more.
Analysts tend to agree. For example, Yahoo! Finance reports that 25 analysts have an average price target of $176.80. Similarly, Barchart's survey shows a mean target of $176.91. The average of these two is $176.86, or +16% higher than today's price.
So, where does this leave investors? How can they play this and how long will it take for the stock to rise to this level? One play is to set a lower buy-in target price by selling short out-of-the-money (OTM) put options in nearby expiry periods.
Shorting OTM Puts
In my last article, I discussed shorting the $145 strike price (3.84% out-of-the-money (OTM)) put expiring Feb. 28. That provided an immediate 1.02% yield (i.e., $1.48/$145.00) for a 28-day yield play.
The puts expired worthless and the investor had no obligation to buy shares at $145.00. This play can be repeated today.
For example, the March 28 put option period shows that the $146.00 strike price put, 3.4% below today's trading price, has a midpoint premium of $1.93. That provides an immediate cash-secured short-put yield of 1.32% (i.e., $1.93/$146.00).
An investor who secures $14,600 in cash or buying power with their brokerage firm can enter an order to “Sell to Open” 1 put contract at $146.00 for March 28 expiry. The account will immediately receive $193.00 in their account.
Now, as long as the stock stays over $146.00 the investor's cash will not be used to buy 100 shares. However, even if that happens, the breakeven point is lower at $144.07 (i.e., $146-$1.93). That is 5.2% below today's price.
Moreover, at that buy-in price, the investor will make an annual yield of 4.75% (i.e., $6.84/$144.07). So, that makes it a good way to set a lower buy-in price.
No wonder value investors like CVX at the price it is trading at today.
