As was expected, the selling spilled over into this week. Many stocks have fallen from their highs and are in the process of testing their moving averages. A key moving average for institutional investors is the 5-day simple moving average. The area around the average often triggers investors to buy a company. Here is a list of six blue chip companies that have fallen to their 5-day moving averages and how to use options to trade it.
A “blue-chip” company is typically an older and established company with a market cap in the billions. Frequently, these companies have a history of consistent earnings and typically pay dividends. Most blue-chip companies are household names and are companies that are typically leaders in their industry. Frequently investors look to these names for investment opportunities during market weakness.
Along with being blue-chip companies, all of the companies in this list are Dividend Aristocrats. These are companies that are members of the S&P 500 that have paid and raised their dividends for 25 consecutive years. In addition to the history of paying a dividend, the dividend yield is also important. For this list, all of the companies pay a 2.5% yield or more.
Let’s take a closer look at six blue-chip names that are at a key point of support near the 50-day moving average and a short put strategy to trade it.
Blue Chip Stock #1: Johnson & Johnson (NYSE: JNJ)
JNJ closed slightly below the 50-day moving average at $147.92. At its current price, the dividend yield is currently at 2.74%. The company has a 5-year dividend growth rate of 6.3% and a payout ratio of 68%.
The 16 OCT 20 $140 put can be sold for around $2.55. This option trade obligates the seller to buy 100 shares of stock and will be automatically exercised at expiration if the price is $139.99 or lower. If the trade is exercised, the cost basis for the stock is $137.45. Given the $4.04 annual dividend, the yield at the adjusted cost basis is 2.93%.
Blue Chip Stock #2: Illinois Tool Works Inc (NYSE: ITW)
ITW is trading slightly above its 50-day moving average at $187.64. The current annual dividend is $4.56, and the dividend yield is 2.39%. The company has a 5-year dividend growth rate 18.5% and a payout ratio of 63%.
The 16 OCT 20 $180 put can be sold for around $3.95. If the option is exercised, the cost basis for the stock is $176.05. Given the $4.56 annual dividend, the yield at the adjusted cost basis is 2.59%.
Blue Chip Stock #3: Colgate-Palmolive Company (NYSE: CL)
CL faded late on Tuesday and closed slightly below its 50-day moving average at $76.06. The current annual dividend is $1.76, and the dividend yield is 2.33%. The company has a 5-year dividend growth rate 3.7% and a payout ratio of 58%.
The 16 OCT 20 $72.50 put can be sold for around $1.23. If the option is exercised, the cost basis for the stock is $71.27. Given the $1.76 annual dividend, the yield at the adjusted cost basis is 2.47%.
Blue Chip Stock #4: Amcor PLC (NYSE: AMCR)
AMCR fell below the 50-day moving average at $10.81 on Tuesday but is trading near its previous low. The current annual dividend is $0.46, and the dividend yield is 4.27%. The company has a 5-year dividend growth rate 0% and a payout ratio of 120%.
The 15 JAN 21 $10 put can be sold for around $0.65. If the option is exercised, the cost basis for the stock is $9.35. Given the $0.46 annual dividend, the yield at the adjusted cost basis is 4.92%.
Blue Chip Stock #5: Kimberly Clark Corp (NYSE: KMB)
KMB slipped below the 50-day moving average at $150.71 today. The current annual dividend is $4.28, and the dividend yield is 2.87%. The company has a 5-year dividend growth rate 4.3% and a payout ratio of 56%.
The 16 OCT 20 $145 put can be sold for around $3.25. If the option is exercised, the cost basis for the stock is $141.75. Given the $4.28 annual dividend, the yield at the adjusted cost basis is 3.02%.
Blue Chip Stock #6: PepsiCo, Inc (NASDAQ: PEP)
PEP closed slightly below the 50-day moving average on Tuesday and is squeezed between the 50-day and the 200-day moving averages. The current annual dividend is $4.09, and the dividend yield is 3.02%. The company has a 5-year dividend growth rate 8.6% and a payout ratio of 79%.
The 16 OCT 20 $130 put can be sold for around $2.75. If the option is exercised, the cost basis for the stock is $127.25. Given the $4.09 annual dividend, the yield at the adjusted cost basis is 3.21%.