Sectors To Watch: Health Care Stocks Paying Big Dividends

| June 18, 2012 | 0 Comments

Covered Calls on XLVHealth care stocks are hanging tough in a volatile market.

So far this year, the Health Care Select Sector SPDR (XLV) is up nearly 8%.  And the ETF has tacked on 4.5% in the month of June alone.

The strong performance isn’t a recent development.  XLV has been trending steadily higher for more than three years.  Over that time, XLV has shot up 43%.

Right now XLV is trading at $37.06.  It’s just 1.5% off its 52-week high and 28% above its 52-week low.      

The sector’s recent gains have been paced by Johnson & Johnson (JNJ). 

Last week, JNJ received government approval to acquire medical device maker Synthes.  Since then, JNJ has soared more than 6%. 

Make no mistake, that’s a big move for a company with a $180 billion market cap.   

The massive health care stock is XLV’s biggest holding.  In fact, JNJ accounts for more than 12.5% of XLV’s holdings.

Obviously, any time the biggest holding of an ETF is moving higher, it will help fuel a rally in the ETF as well.

Mergers and acquisitions aren’t a recent phenomenon.  Widespread M&A activity has helped fuel the strong rally in healthcare stocks over the last few years.

But it’s not the only thing…

Healthcare stocks are also benefitting from their solid dividend.

In today’s low interest rate environment, many income investors can’t generate the income they need to live from fixed income alone.  And dividends are the best way to increase the amount of income you can generate from your nest egg. 

As a result, income investors have flocked to the relative safety of XLV to beef up their returns. 

Right now XLV pays a solid 2% dividend yield.  But even 2% can fall short of generating enough income for many income investors.

In order to juice up the income from your XLV investments, take a look at selling covered calls against your ETF holdings.

Remember, each option contract controls 100 shares of stock.  So you can sell 1 option for every 100 shares of the XLV you own.

Right now you can sell the September $40 call for 37 cents.  So you’ll collect $37 for every option that you sell.  That generates an additional 1% of income over the next quarter.

If you can generate an additional 1% of income from option premium every quarter, you can juice up the income on your XLV investments from 2% to 6%.

And that’s the type of cash generation income investors should be thrilled to get while interest rates remain near record lows.

Good Investing,

Corey Williams

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Category: Sectors To Watch

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.