A quick look at its year-to-date chart, and you’ll notice that Wal-Mart (WMT) has been all over the place…
While the stock’s price action has likely frustrated many investors, it’s been favorable for some well-timed “10% Trades.”
Consider just the ones we’ve made public here in Trades Of The Day…
Added up, our “10% Trades” with Wal-Mart have generated a 7.6% yield in a total of 136 days. That works out to a 20.4% annualized yield — in a year where the stock is actually down.
In other words, these trades are doing exactly what they’re supposed to: generate safe, 10%-plus annualized yields. Take a look…
While I already own Wal-Mart in my long-term dividend growth portfolio — and plan on holding it for the long-haul — I’m always open to potential “10% Trade” opportunities with the stock that could continue to both boost my income and reduce my risk.
The trade should generate a 10.5% to 11.1% annualized yield, which is significantly more income than what I’m collecting from my “buy and hold” shares.
The income I’m collecting also helps reduce my cost basis, lowering my overall risk.
This is especially important since Wal-Mart could be headed lower in the short-term.
Capturing a 10.5% to 11.1% Annualized Yield from Wal-Mart
Yesterday I sold two September 20, $75 covered calls for $0.79 per share. I sold these calls on the shares I was “put” from my “10% Trade” that closed out on August 16.
There are only two possible ways this trade will work out… and they both spell at least double-digit annualized yields on my $75 purchase price — the price I just bought the stock for.
Scenario #1: Wal-Mart stays under $75 by September 20
If Wal-Mart stays under $75 by September 20 I’ll get to keep my 200 shares.
In the process I’ll also have received $158 in covered call income ($0.79 x 200 shares).
The covered call income — known as a “premium” in options speak — was collected instantly yesterday. It was deposited in my brokerage account.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $146.51 in profit after commissions.
On a percentage basis, I received an instant 1.0% yield for selling the covered calls ($0.79 / $75.00).
When I subtract out the commissions I’m looking at a 1.0% yield in 32 days… which works out to an 11.1% annualized yield. That’s more than quadruple Wal-Mart’s “regular” annual dividend yield of 2.5%.
Scenario #2: Wal-Mart climbs over $75 by September 20
If Wal-Mart climbs over $75 by September 20 my 200 shares will get sold (“called away”) at $75 per share. That’s the same price that I just bought the stock for.
I realize that may sound funny to be willing to sell the stock at the same exact price that I just bought it for, but keep this in mind: I was paid $230.51 to buy the stock at $75.00 per share… and with the “10% Trade” I made yesterday, I’m getting paid $158.00 (excluding commissions) to sell the stock at $75.00 per share.
So I’m getting paid to buy and sell the stock at the same exact price.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $158.00 in covered call income ($0.79 x 200 shares).
In this scenario, after commissions I’ll be looking at a $137.42 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.0% yield for selling the covered calls ($0.79 / $75.00). After subtracting out the commissions, I’m looking at a 0.9% total return in 32 days.
That works out to a 10.5% annualized yield from Wal-Mart.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to both boost my income and reduce my risk with my shares of Wal-Mart (WMT).
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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