A â€ś10% Tradeâ€ť can be a safe way to boost your income on some of the best companies in the world.
If you’re working with a high-quality dividend growth stock that you think is trading at a reasonable price, you may be looking at a low-risk opportunity to generate above average income.
Consider the “10% Trade” I just made with theÂ Coca-Cola (KO),Â Â aÂ safe Dividend King now trading near its 52-week low…
Opportunity to Capture a 12.1% to 15.7% Annualized Yield from KO
On Friday I boughtÂ 200Â shares ofÂ KOÂ forÂ $40.26Â per share and simultaneously â€śsold to openâ€ť twoÂ February 17,Â $40.00 covered callsÂ forÂ $1.38Â per share.
With this in mind, there are likely two ways this trade will work out â€” and they both spell at least double-digit annualized yields on my purchase priceâ€¦
Scenario #1:Â KO stays under $40.00 by February 17
If KO stays under $40.00 by February 17, I’ll get to keep my 200 shares.
In the process Iâ€™ll also have received $276.00 in covered call income ($1.38 x 200 shares).
The covered call income â€” known as a â€śpremiumâ€ť in the options world â€” was collected instantly on Friday. It was deposited in the account where I made the trade, which is my 401(k) retirement account.
At the end of the day, if “Scenario 1″ plays out Iâ€™ll be looking at $266.46 in profit after commissions and fees.
On a percentage basis, I received an instant 3.4% yield for selling the covered call ($1.38 / $40.26).
When I subtract out the commissions and fees Iâ€™m looking at a 3.3% yield in 77 days, whichÂ works out to a 15.7% annualized yield.
Scenario #2:Â KO climbsÂ over $40.00 by February 17
If KO climbs over $40.00 by February 17 my 200 shares will get sold (â€ścalled awayâ€ť) at $40.00 per share.
Like “Scenario 1″, I get to keep the $276 in covered call income ($1.38 x 200 shares)… but Iâ€™ll incur a $52 capital loss Â (-$0.26 X 200)Â since I bought shares at $40.26 and will be selling at $40.
In this scenario, after commissions and fees Iâ€™ll still be looking at a $204.92 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 3.4% yield for selling the covered call ($1.38 / $40.26)Â and a -0.6% capital loss (-$0.26 / $40.26).
After subtracting out the commissions and fees, Iâ€™m looking at a 2.5% total return in 77 days.
That works out to a 12.1% annualized yield from KO. Not bad, considering the stock’s “regular” yield is 3.47%.
P.S. I realize the typical financial advisor may think itâ€™s crazy to trade individual stocks in a retirement accountâ€¦ no matter how safe the stocks may appear.Â And in many cases theyâ€™re probably right â€” especially if youâ€™re not properly diversified and youâ€™re heavily dependent on the income from this account.Â So IÂ urge you not to blindly follow my lead today without first speaking to a professional advisor or doing your own due diligence and research. In addition, Iâ€™m not a tax advisor and I donâ€™t claim to beâ€¦ so please consult a professional for any tax related questions you have.