Over the past week or so I’ve been telling you about the awesome income-generating power of “10% Trades.”
I’m talking about potentially doubling… tripling… or even quadrupling your annualized yield on safe stocks like Wal-Mart (WMT), McDonald’s (MCD), Microsoft (MSFT) … and many more like them.
The thing is, I’m not just touting these opportunities here and then doing something else with my own money at home.
I’m actively making “10% Trades” in my real-life, real-money portfolio… and I’m encouraging close friends and family to consider doing the same.
You’re more than welcome to follow along of course.
I already told you about the “10% Trade” I made with Pepsi (PEP) last week. Today I’ll walk you through the “10% Trade” I made with Coca-Cola (KO) yesterday.
Why Coke?
Not only is Coke a significant holding of billionaire investors Warren Buffett and Bill Gates, but:
- It’s one of the world’s greatest companies…
- It could be a perfect inflation hedge for your portfolio…
- It takes its shareholders seriously…
- … and it can produce high returns on its assets without requiring large and ongoing capital investments
Coke is also a Dividend Champion that’s paid a quarterly dividend since 1920… and it’s increased its payment each and every year for the last 51 years in a row.
These aren’t small raises either: over the past 10 years alone the company has boosted its dividend by an average of 9.8% a year.
And given the company’s multi-billion cash balance and modest payout ratio of less than 60%, there should be plenty of room for continued increases in the future.
[hana-code-insert name=’adsense-article’ /]With all of this in mind, Coke is the kind of stock I’d be happy buying at a reasonable price and holding “forever” for its ever-growing dividend.
So when shares experienced their biggest one-day drop in recent memory yesterday, I jumped on the opportunity.
At current prices Coke offers a trailing yield of 3.0%.
That’s certainly a decent entry yield for a stock like Coke, but income hunters can do much better by making a “10% Trade.”
In fact, the “10% Trade” I just made yesterday could quadruple my income from Coke over the next 12 months… and deliver a 12.4% to 20.0% annualized yield.
Read on for the details.
Capturing a 12.4% to 20.0% Annualized Yield from Coca-Cola
At 11:42am EST yesterday I bought 300 shares of Coca-Cola (KO) for $37.47 per share and simultaneously sold three April 19, $38 covered calls for $.56 per share.
Scenario #1: Coca-Cola stays under $38 by April 19
If Coke shares stay under $38 by April 19 I’ll get to keep the 300 shares I just bought.
I’ll also have received $168 in covered call income ($0.56 x 300 shares) and $84 in quarterly dividends ($0.28 x 300 shares).
The covered call income — known as a “premium” in options speak — was collected instantly yesterday.
I’ll collect the dividend income with Coke’s upcoming dividend payment. The company is actually due for a dividend raise, so the $0.28 per share figure I mention above is a conservative estimate.
After commissions, the premium and dividend income alone will have already reduced my cost basis to $36.98 per share — a 1.3% “discount” on my purchase price yesterday and a level that is just below the stock’s $37 price support.
The ability to reduce your cost basis like this — especially if it can be reduced below a key support level — is a great example of how a “10% Trade” can be safer than a conventional stock trade.
At the end of the day, if this scenario plays out I’ll be looking at a $229.77 profit.
That may not sound like a heck of a lot, but take a look at the percentages: I received an instant 1.5% yield for selling the covered call ($0.56 / $37.47) and I’ll get a 0.7% yield from the upcoming dividend ($0.28 / $37.47).
When I subtract out the commissions I’m looking at a 2.0% return in 60 days… which works out to an 12.4% annualized yield, from a safe stock like Coca-Cola.
That’s the power of a “10% Trade.”
Scenario #2: Coca-Cola climbs over $38 by April 19
If Coke climbs over $38 by April 19 my 300 shares will get sold (“called away”) at $38 per share.
In this scenario, not only will I get to keep the $168 in covered call income ($0.56 x 300 shares) and the $84 in quarterly dividends ($0.28 x 300 shares)… but I’ll also generate $159 in capital gains ($0.53 x 300 shares) in the process.
Again, this is another example of the safety of a “10% Trade”: I’m getting paid now in order to agree to sell my stock at a higher price than what I just bought it for.
In this scenario, after commissions I’ll be looking at a $368.78 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.5% yield for selling the covered calls ($0.56 / $37.47)… a 0.7% yield from the upcoming dividend ($0.28 / $37.47)… and a 1.4% return from capital gains ($38 / $37.47).
After subtracting out the commissions, I’m looking at a 3.3% total return in 60 days (two months).
That works out to a 20.0% annualized yield from Coca-Cola.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to generate a 10%-plus annualized yield from a world class dividend grower like Coca-Cola (KO). If I get to keep my shares and compound my income, great. If I’m forced to sell Coke at a 20.0% annualized profit, no problem. This is why I’m such a fan of “10% Trades.”
Greg Patrick
TradesOfTheDay.com