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 withÂ Qualcomm (QCOM), a recent Undervalued Dividend Growth Stock of the WeekÂ andÂ one of the 29 stocks selected for Dave Van Knapp’s new dividend growth “ETF”…
Opportunity to Capture an 18.1% to 41.3% Annualized Yield from QCOM
On Friday I boughtÂ 100Â shares of QCOMÂ forÂ $65.37Â per share and simultaneously â€śsold to openâ€ť oneÂ February 17,Â $67.50 covered callÂ forÂ $1.68Â 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 QCOM stays under $67.50 by February 17
If QCOM stays under $67.50 by February 17, I’ll get to keep my 100 shares.
In the process Iâ€™ll also have received $168.00 in covered call income ($1.68 x 100 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 $158.55 in profit after commissions and fees.
On a percentage basis, I received an instant 2.6% yield for selling the covered call ($1.68 / $65.37).
When I subtract out the commissions and fees Iâ€™m looking at a 2.4% yield in 49 days, whichÂ works out to an 18.1% annualized yield.
Scenario #2:Â QCOMÂ climbsÂ over $67.50 by February 17
If QCOM climbs over $67.50 by February 17 my 100 shares will get sold (â€ścalled awayâ€ť) at $67.50 per share.
Like “Scenario 1″, I get to keep the $168 in covered call income ($1.68 x 100 shares)… and Iâ€™ll also realize a $213 capital gain Â ($2.13 X 100)Â since I bought shares at $65.37 and will be selling at $67.50.
In this scenario, after commissions and fees Iâ€™ll still be looking at a $362.10 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 2.6% yield for selling the covered call ($1.68 / $65.37)Â and a 3.3% capital gain ($2.13 / $65.37).
After subtracting out the commissions and fees, Iâ€™m looking at a 5.5% total return in 49 days.
That works out to a 41.3% annualized yield from QCOM. Not bad, considering the stock’s “regular” yield is 3.2%.
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.