My typical “10% Trade” involves selling either a covered call or a cash-secured put on an already cheap dividend-grower that:
1) I’d be happy owning for the long-haul if the market tanks (for its growing dividend), or…
2) I’d be happy letting go for a double-digit annualized profit if its price rises in a relatively short period of time.
With these items in mind, I think Deere & Company (DE) fits the bill at current prices.
Last week I got a friendly reminder from Jason Fieber that if I wanted to capture that next dividend (of $0.60 per share) I would need to own shares at least one day before the company goes ex-dividend.
Since Deere & Company goes ex-dividend today, I needed to own shares yesterday.
On top of all of this, shares appear both cheap AND at a solid technical level…
Deere & Co. Looks Cheap
When valuing a stock, I like to use Chuck Carnevale’s FAST Graphs. It helps give me an instant picture of whether a stock is currently undervalued, in value, or overvalued based on both historical data as well as projected data.
There’s a lot going on in the FAST Graph below, but all you really need to know is that when the black line is below both the orange and blue line, as it is now, the stock appears to be undervalued. (For more on valuation, see Dave Van Knapp’s special lesson here).
Deere & Co. is Sitting Right Above Solid Price Support
As an added incentive to make a move now, Deere & Co. appears to be trading just above a key level of price support at $90 per share. Take a look at the 3-year weekly chart below. With the exception of one breakout (that didn’t stick), the $90 per share level served as an important level of price resistance throughout all of 2013. But since breaking up through that level in late March, $90 per share has since served as support.
Considering its 18% dividend boost, its ex-dividend date, its cheap valuation and the fact that it’s trading just above a solid support level, yesterday looked like the ideal time to finally make a “10% Trade” with Deere & Co.
So I jumped at the opportunity.
Capturing an 11.2% to 23.5% Annualized Yield from Deere & Co.
Yesterday, I bought 100 shares of Deere & Company (DE) for $90.71 per share and simultaneously sold one August 16, $92.50 covered call for $1.05 per share.
After commissions, this “10% Trade” immediately reduced my cost basis to $89.87 per share.
There are only two possible ways this trade will work out… and they both spell at least double-digit annualized yields…
Scenario #1: Deere & Co. stays under $92.50 by August 16
If Deere & Co. shares stay under $92.50 by August 16 I’ll get to keep my 100 shares.
In the process I’ll also have received $105 in covered call income ($1.05 x 100 shares) and $60 in quarterly dividends ($0.60 x 100 shares).
The covered call income — known as a “premium” in options speak — was collected instantly yesterday.
I’ll collect the dividend income on August 1 when Deere & Co. pays its next dividend.
At the end of the day, if “Scenario 1” plays out I’ll be looking at a $165 profit before commissions.
That may not sound like a heck of a lot, but take a look at the percentages: I received an instant 1.2% yield for selling the covered call ($1.05 / $90.71) and I’ll get a 0.7% yield from the upcoming dividend ($0.60 / $90.71).
When I subtract out the commissions I’m looking at a 1.6% return in 52 days… which works out to an 11.2% annualized yield. That’s quadruple the stock’s “regular” forward annual dividend yield of 2.6%.
Scenario #2: Deere & Co. climbs over $92.50 by August 16
If Deere & Co. climbs over $92.50 by August 16 my 100 shares will get sold (“called away”) at $92.50 per share.
In this scenario, not only will I get to keep the $105 in covered call income ($1.05 x 100 shares) and the $60 in quarterly dividends ($0.60 x 100 shares)… but I’ll also generate $179 in capital gains ($92.50 – $90.71 x 100 shares) in the process.
In this scenario, after commissions I’ll be looking at a $303.28 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.2% yield for selling the covered call ($1.05 / $90.71)… a 0.7% yield from the upcoming dividend ($0.60 / $90.71)… and a 2.0% return from capital gains ($1.79 / $90.71).
After subtracting out the commissions, I’m looking at a 3.3% total return in 52 days.
That works out to a 23.5% annualized yield from Deere & Co.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to generate a 10%-plus annualized yield from Deere & Co. (DE) — a high-quality, undervalued Dividend Contender. If I get to keep my shares, compound my income, and “rinse and repeat” this process to continue lowering my cost basis, great. Or, if I’m forced to sell Deere & Co. for a 23.5% annualized return, no problem. This is why I’m such a fan of “10% Trades.”