With this in mind, I saw an opportunity with the stock’s pullback near the $24.50 price level — which served as an important level of both resistance and support in recent months — and ended up making a move yesterday.
The trade should generate a 12.6% to 21.8% annualized yield, which is significantly more income than what I’m collecting from my “buy and hold” shares.
Capturing a 12.6% to 21.8% Annualized Yield from Cisco
Yesterday I bought 500 shares of Cisco (CSCO) for $24.58 per share and simultaneously sold five October 18, $25 covered calls for $0.37 per share.
There are only two possible ways this trade will work out… and they both spell at least double-digit annualized yields on my purchase price…
Scenario #1: Cisco stays under $25 by October 18
If Cisco stays under $25 by October 18 I’ll get to keep my 500 shares.
In the process I’ll also have received $185 in covered call income ($0.37 x 500 shares) and $95 in quarterly dividends ($0.37 x 500 shares).
The covered call income — known as a “premium” in options speak — was collected instantly yesterday. It was deposited in my brokerage account.
I’ll collect the dividend income when Cisco pays its next dividend.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $257.70 in profit after commissions.
On a percentage basis, I received an instant 1.5% yield for selling the covered calls ($0.37 / $24.58) and I’ll get a 0.8% yield from the upcoming dividend ($0.19 / $24.58).
When I subtract out the commissions I’m looking at a 2.1% yield in 61 days… which works out to a 12.6% annualized yield. That’s quadruple Cisco’s “regular” annual dividend yield of 3.1%.
Here’s another way to look at it: In just 17% of the time (61 days / 365 days) I’m collecting 67% of the stock’s typical annual income (2.1% yield / 3.1% yield).
Scenario #2: Cisco climbs over $25 by October 18
If Cisco climbs over $25 by October 18 my 500 shares will get sold (“called away”) at $25 per share.
In this scenario, not only will I get to keep the $185 in covered call income ($0.37 x 500 shares) and the $95 in quarterly dividends ($0.19 x 500 shares)… but I’ll also generate $210 in capital gains ($25 – $24.58 x 500 shares) in the process.
In this scenario, after commissions I’ll be looking at a $447.71 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.5% yield for selling the covered calls ($0.37 / $24.58)… a 0.8% yield from the upcoming dividend ($0.19 / $24.58)… and a 1.7% return from capital gains ($0.42 / $24.58).
After subtracting out the commissions, I’m looking at a 3.6% total return in 61 days (two months).
That works out to a 21.8% annualized yield from Cisco.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to quadruple my annualized yield from Cisco (CSCO).
P.S. The reason I’ve gone public with many of my real-life, real-money “10% Trades” is so you can see for yourself how entirely possible it is to boost your annualized yield on high-quality dividend growth stocks. Just keep in mind that these trades aren’t intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
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