While I already own Wells Fargo (WFC) in my long-term dividend growth portfolio (and plan on holding it for the long-haul), I’m always open to potential “10% Trade” opportunities with the stock that could boost my income.
With this in mind, on Friday, when the stock pulled back to both price support and its 50-day moving average — which has previously served as an important level of support — I made a move.
The trade should generate an 11.1% to 34.5% annualized yield… which is significantly more income than what I’m collecting from my “buy and hold” shares.
Capturing an 11.1% to 34.5% Annualized Yield from Wells Fargo
On Friday I bought 200 shares of Wells Fargo (WFC) for $51.22 per share and simultaneously sold two August 16, $52.50 covered calls for $0.32 per share.
After commissions, this “10% Trade” will reduce my cost basis to $51.01 per share.
There are only two possible ways this trade will work out and they both spell at least double-digit annualized yields…
Scenario #1: Wells Fargo stays under $52.50 by August 16
If Wells Fargo stays under $52.50 by August 16 I’ll get to keep my 200 shares.
In the process I’ll also have received $64 in covered call income ($0.32 x 200 shares) and probably another $70 in dividend income ($0.35 x 200 shares).
The covered call income — known as a “premium” in options speak — was collected instantly on Friday.
I should collect the dividend income when Wells Fargo makes its next quarterly payout.
If “Scenario 1” plays out, after subtracting the commissions, I’m looking at a profit of $112.52 — or a 1.1% return in 36 days.
That may not sound like a heck of a lot, but it works out to an 11.1% annualized yield from Wells Fargo. That’s quadruple the stock’s “regular” forward annual dividend yield of 2.6%.
Or look at it another way: I’m collecting about 42% of the stock’s “regular” annual income (1.1% yield vs. 2.6% yield) in about 10% of the time (36 days vs. 365 days).
[hana-code-insert name=’adsense-article’ /]Scenario #2: Wells Fargo climbs over $52.50 by August 16
If Wells Fargo climbs over $52.50 by August 16 my 200 shares will get sold (“called away”) at $52.50 per share.
I’ll have generated $64 in covered call income ($0.32 x 200 shares), potentially $70 in dividend income ($0.35 x 200 shares) and $256 in capital gains ($52.50 – $51.22 x 200 shares).
In this scenario, after commissions I’ll be looking at a $348.53 profit.
From a percentage standpoint, after subtracting out the commissions this “10% Trade” will deliver a 3.4% total return in 36 days.
That works out to a 34.5% annualized yield from Wells Fargo.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to generate a 10%-plus annualized yield from Wells Fargo (WFC) — a high-quality, dividend growth stock that appears undervalued at current prices. On one hand, if I get to keep my shares, compound my income, and “rinse and repeat” this process to continue lowering my cost basis, great. Or, if I’m forced to sell Wells Fargo for a 34.5% annualized return, no problem. This is why I’m such a fan of “10% Trades”… and why I’ll continue to take advantage of them to boost my income.