I Just Made This “10% Trade” with Coca-Cola (KO)

[stextbox id=”info”]Please keep in mind that these “10% Trade” alerts are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. The ideas we publish are simply ideas that we feel fit our specific needs and that we’re personally making in our own portfolios. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we make our trade to the time you’re alerted about it. So please don’t attempt to make this “10% Trade” yourself without first doing your own due diligence and research.[/stextbox]

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:

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.

"10% Trade" with Coca-Cola (KO)

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.

There are only two possible ways this trade will work out… and the result should be at least a 10% annualized yield either way.

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.

"10% Trade" with Coca-Cola (KO)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
"10% Trade" with Coca-Cola (KO)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

[hana-code-insert name=’SA-Max Income 3′ /]