Not only does Target (TGT) have 46 consecutive years of dividend increases under its belt, but the company has increased its dividend by an average of 19.8% a year for the past 10 years. And despite its recent problems, it will likely do whatever it takes to keep its track record intact.
But rather than buying this Dividend Champion outright at the market price, you may want to consider making a “10% Trade” instead.
In short, you’d have the opportunity to 1) capture a double-digit annualized yield or 2) pick up a high quality dividend growth stock at a compelling discount to what it’s currently trading for.
Both of these scenarios are attractive to me, which is why I jumped on a “10% Trade” with TGT yesterday.
At the time I made my trade, TGT was selling for $58.04 per share and the June 21, $55.00 puts were going for $0.72 per share.
My “10% Trade” involved selling three of these puts… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate a 10.0% annualized yield from TGT without even buying shares.
On the other hand, I’d get to buy a solid dividend growth stock at a hefty 6.3% discount to what it was trading for yesterday.
Here’s the math behind each scenario…
Scenario 1: TGT falls below $55.00 by June 21
If TGT falls below $55.00 by June 21, I’ll be obligated to buy 300 shares at $55.00 per share. That’s significantly cheaper than what the stock was trading for when I sold the puts yesterday.
This money was deposited into my account immediately.
Taking this income into consideration – and subtracting out the commissions – my cost-basis will drop to $54.39 per share.
That represents a 6.3% discount to the $58.04 share price that TGT was selling for at the time I made this trade yesterday.
So in “Scenario 1” I’m getting paid instant cash while I wait to buy TGT on the cheap.
Scenario 2: TGT stays above $55.00 by June 21
If TGT stays above $55.00 by June 21, the contract expires worthless and I get to keep the $216.00 in income (before commissions).
After commissions, this works out to a 1.2% return on what my purchase obligation would have been ($0.72 / $55) in about six and a half weeks.
If I can repeat this trade over the period of a year I could generate a 10.0% yield from TGT without even buying shares.
I’ll continue to keep you posted as I make these trades, but please keep in mind that they aren’t intended to be specific recommendations. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
P.S. To help keep track of the performance of my “10% Trades”, we’ve added a special Track Record section to the main menu bar on TradesOfTheDay.com. Check it out. As you’ll see, four “10% Trades” closed out in April. All four were winners and generated annualized yields of 16.6% to 43.8%.[hana-code-insert name=’stansberry-article’ /]