A few weeks ago, a good friend asked me for a stock recommendation that he might add to his Roth IRA. Three stocks with high yields came to mind that would be great in a retirement account. Note that I do not advise others what they should do, but share what I am doing or contemplating doing.
I recently included Merck (MRK) in a review of the granny portfolio, and discussed Royal Dutch Shell (RDS.A) in Chasing Value™: Buffett Must Be Buying Oil. I own Merck in all of my portfolios and have made Shell the largest holding in the largest portfolio. The third stock that I thought of I don't yet own -- Telefonica SA (TEF). I looked at it last May, and it currently pays a whopping 7.13% yield.
Telefonica is way off its 52-week high of $89.62, currently trading at a PE of 11. It has been dragged down by economic insecurity in Europe and deep concern that Spain could follow Greece into financial calamity. Not to worry, TEF has a blistering 39% return on equity (ROE) and does more business outside of Spain, as it has expanded throughout Europe and South America.
The conversation with my friend took place a few weeks ago, and as it turned out, Telefonica was the one that he decided to add to his portfolio. I believe he paid somewhere around $64 per share. But when I found this out, TEF was trading around $69. So if I bought my own recommendation, my friend would be making more than me on my idea!
I still liked the stock at that price, but instead of buying it I decided to check out naked put possibilities. I found that I could sell to open a position in TEF at a $70 strike price in December and receive a premium of $6.70. This was one of those beautiful deals that I could not resist. The annualized return on this trade is 42.34%. I doubt anybody reading this would not find that enticing. But what if it gets put to me and I have to pay $70 a share because the stock is less than that when the third week in December rolls around?
This is where the deal is raised to the level of art, in my mind. Having received $6.70 on day one, our break-even is $63.30, which is less than my friend paid for his shares. How is that for a deal? We are either going to make over a 42% return, or we are going to own the stock at far less than I could have bought it at the time, and less than my friend's buy-in when I first mentioned it to him -- I love these kind of win-win deals!
And to show you my strong conviction, I got my mother-in-law and daughter to make this trade as well. Regular Chasing Value™ readers already know that I eat my own cooking and never recommend anything I would not do myself.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value™ and Serious Money. Disclosure: He owns shares or options in MRK, RDS.A and TEF.