I am waking up this morning with a big smile as Team Canada just won the Gold Medal for both Men and Women! Congrats to them! YOU ROCK!!!!

As we do every month, here is the TSX 60 dividend yield and ex-dividend date for March:

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After a bad month of January, it is now time to look at what happened with the TSX 60 dividend yield. Since most stocks went down during the last month, we can find great opportunities with high paying Canadian dividend stocks.

Dividends issued by Canadian Banks should be used to cover the inflation, most bank stocks offer a much interesting dividend yield than inflation! We have CIBC (CM: 5.45%) and BMO (BMO: 5.38%) offering over 5% and National Bank (NA: 4.39%) and Scotia Bank (BNS: 4.37%) offering more than 4%. Those picks would be great if you are trying to build a dividend portfolio .

Even after a dividend cut in late 2009, Manulife still offers a 2.66% dividend yield. I wish they can pick up in 2010 so it can help me with my 2010 best stock picks contest .

So here is the chart of the TSX 60 dividend yield and ex-dividend date:

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Last week, I did a brief introduction to an options strategy that can be used to get additional returns with little downside risk. Today, I will take the time to look at another very popular strategy, the protective put. As discussed in the introduction to options, these derivative instruments can be used in most portfolios if they are used in a smart and disciplined way. Like almost any product, if options are used without a clear and disciplined plan, things can go awry.

What is a protective put?

This strategy involves holding shares of a specific company, index or basket of stocks and also holding a put option on the underlying position. This put option will make money if the stock(s) lose value and becomes a ‘hedge’, that will be able to offset a loss on the holding. It is in fact a type of insurance in case of a declrease in value for your position.

When can it be used?

It can be used in many circumstances. The general reasoning is that the investor wants to keep his stock and is concerned about a possible decline in the stock. There could be a few reasons behind this situation. Here are some examples:

• Belief that the market will rise but that there is a smaller probability of a major decline from which he wants to be protected
• The investor believes there is a good chance that the stock will decline but does not want to sell them because it will create capital gain and thus important tax implication.
• The investor wants to keep the income flow from dividends without assuming too much risk if the stock price declines
• An investor holds some stock that he believes in but he determines a maximum amount he can afford or is willing to lose given a decline.
• An investor wants to protect against downside risk without selling his entire portfolio of stock (thus incurring major transaction costs)

In all of these cases, the protective put would be a very good strategy for the investor involved.

How do I determine what put to buy?

If you want to implement this strategy on a specific stock or portfolio, then you can simply buy a put option with that underlying stock. However, if you hold many stocks in your portfolio, it might be more effective (although imperfect) to hedge through one or two puts. For example, if your portfolio is heavily invested in financials as well as in the general stock market, you could buy put options on XLF (financials) and SPY (S&P500).  This would give you protection on these broader indices.

Positive impacts

Depending on the reason behind your trade, the protective put can give you upside potential if your stocks climb and a limited loss if the stocks decline.

Negative impacts & risk involved

Like any other insurance, there is a cost associated to this strategy. The cost of course is the premium that you are paying when buying this insurance.

Earlier, I also discussed how you could hedge your entire portfolio with one or two put options. The risk involved is mainly if something “exceptional” happens to one of those stocks in your portfolio. If the company was involved in a fraud or had negative earnings while the industry in generally was still performing, the ‘protective put’ would not be of much help.

Conclusion

I believe that as a portfolio grows, the potential use of a protective put becomes greater as there are many different uses for it. There are many different aspects to consider before entering into this strategy but it can be a very effective and cost efficient way of hedging downside risk for a limited period of time.

Please feel free to ask any questions regarding this strategy or options in general:)

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Equity options are products that are used increasingly because they add more flexibility to a portfolio. We gave a brief crash course for options and one of the discussed strategies is covered calls. For many investors, this can add a few percentage points to your net return on an annual basis. The most important thing to remember is to remain disciplined (as most trading strategies would call for) and not get greedy.

How it works

If you own a typical portfolio, you probably own several stocks. In our example, we will look at someone who owns Royal Bank of Canada (RY) stock. As I write, it trades at $55.20CAD. Imagine an investor who owns 1000 shares of RY and does not intend on selling these shares for the moment.

In a covered call strategy, this investor will sell 10 contracts which are currently worth $0.65 (each option contract is equivalent to 100 shares). This will entitle the buyer of the options to buy shares at the strike of the option.

A covered call is basically selling the right to buy your stocks to someone else. We will take a look at APRIL 60 CALLS. This gives the buyer the right to buy RBC stocks at $60 on expiry. And so the investor might have to sell his stock at $60. For this option sold, you receive $0.65 x 10 (contracts) x 100 (options multiplier) = $650

-If RBC is worth $58 at expiry, you will have received the $650 and the options will become worthless to the buyer – you can restart the strategy.
-If RBC is worth $60 at expiry, it will be the exact same thing.
-If RBC is worth $62 at expiry, you will have received $650 and will be forced to sell your shares at 60$.

As you can see, as long as you select a “low strike”, you will end up getting more money than if you only had your stock position.

Even if your shares do climb a lot and you miss out on some of it, you will have profited.

Upside and downside

The upside is that if you select the correct strikes, you will add cash flow to your portfolio. You can do this 3-4 times per year on most positions and make a few thousand bucks.

The main downside is that if the stock goes up by a lot very quickly, you will lose out on some of the rise. For example, if the stock goes up 15% in 3 months, you could end up making only 7-8%… Which is not that bad is it? That is why this is called a covered call. You do not have much risk besides losing out on potential gains, which are extraordinary. I know of many managers who are able to get big returns every month thanks to this method.

Risk involved

One of the main risks of this strategy is becoming greedy. If you want to collect too much, you will trade lower strikes and by doing that you:

-increase your payout (interesting)

-Increase the chances your option will be called (and that you will lose on potential gains) – less interesting.

Overall, this is a very safe strategy because it has so little downside risk. It must be used with caution like any other trading strategy.

Payoff

Here is a graph of the covered call payoff strategy:

Please feel free to ask questions, I know this is not straightforward but used with caution, it can make a big difference to your returns.

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Last post of the year but not the least! This is the big announcement of the final results of our stock contest for 2009!

Quick reminder: on January 1^st, each Blogger had to select 4 stocks (including ETFs) on Canadian or American markets. We have also decided to include dividend in the yield calculation. Each quarter, we followed the rankings and provided commentary on our picks. You can see my 3 quarters here:

Best stock picks 2009 1^st quarter

Best stock picks 2009 2^nd quarter

Best stock picks 2009 3^rd quarter

2009 appeared to be a great year for the stock market but this is not what we were anticipating back in January. We all knew it was meant to come back but we didn’t know when and how strong the stock market would arise from its brutal crash of 2008. I am actually surprised they haven’t given a special name yet to the darkest period  most investors have seen in their lifetimes, any suggestions?

In the end, most of bloggers finished with a positive return and some of them would have made a lot of money with their picks. While 4 stocks is not enough to have a balanced and diversified portfolio, you can build something solid if you use at least 10 stocks,  feel free to use our picks as the foundation  ;-)

So here are my results:

Google (Nasdaq: GOOG):

According to me, this was an easy pick. Google was already on the rise when I picked it in January. Some other techno stocks like Amazon did pretty well too. Google is a strong company and it is demonstrates continuous improvement and innovation. You don’t need any investment services to tell you it’s a good stock to pick!

Com Dev Intl (TSX: CDV):

This was my biggest disappointment of the year. While it was a very promising company with liquid assets and a track record of growth over the past 3 years, Com Dev still flew under the radar of most investors so the stock never picked up. I guess that people were so afraid of investing in 2009 that they would pick small stocks to compliment their portfolios. Make sure to put Com Dev in your track investment apps next year!

Johnson and Johnson (NYMEX: JNJ):

This was my defensive stock pick for 2009 in case we continue to go deeper and deeper. While it didn’t appreciate much, JNJ was more like a safety net in my portfolio than anything else. With its small dividend and its small stock price increase, I am still happy to have it in my 2009 picks

Bank of Nova Scotia (TSX: BNS):

Here again, another easy pick. Canadians banks have always been solid and I knew that it would continue to be the case in 2009. I decided to pick Bank of Nova Scotia since it was the most international of all Canadian Banks. Therefore, I thought that if it was going to be better in another country than Canada in 2009, BNS was surely going to participate. It appeared that any Canadian bank was a good stock pick in 2009 . It also pays a great dividend too!

So overall it is good news since I have finished with at positive yield of  44% and none of my picks were negative! I have finished 4th in the competition. Here are the other results (links to other blogger will update as their post go onlin in the upcoming days):

Stay tuned to see our stock picks for 2010 late tonight and tomorrow morning!

see also:
What does winter look like for Crude? Click Here
Looking for an alternative to gold? Click Here

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