After all, shares currently yield just 2.5%… yet a carefully selected “10% Trade” could easily quadruple that figure.
If you’re just joining us, a “10% Trade” is a conservative income-oriented trade that involves selling either a covered call or a cash-secured put on a reasonably-priced, high-quality dividend growth stock.
These trades typically last just six to 10 weeks — and not only are they a relatively safe way to potentially double… triple… or even quadruple your annualized yield, but they can be a great way to buy an already cheap stock for even cheaper.
With this in mind, I saw an opportunity with AFL’s recent pullback near the $58 price level and I ended up making a trade yesterday.
It’s poised to generate a relatively safe 10%-plus annualized yield. I’ll explain how in a moment.
An Opportunity with Aflac
I had actually been on the lookout for another “10% Trade” with Aflac ever since the last one closed out on August 16.
In case you missed it, that particular trade generated a 10.0% annualized yield.
As a whole, stocks have climbed higher since that trade closed, while AFL has pulled back.
In fact, over the past 12 months, U.S. stocks — as measured by the S&P 500 — are up about 16.6%.
Meanwhile, shares of Aflac — one of the best dividend growth stories of the last decade — are down roughly 3.8%. Take a look…
Pullbacks like this can be a dream for both dividend growth investors focused on the long-term as well as “10% Traders” looking to safely boost income in the short-term.
For dividend growth investors, they offer a rare opportunity to buy shares of a high quality dividend grower at a bargain price.
For “10% Traders”, selling a covered call or a cash-secured put on a stock that’s already trading at a discount simply adds an additional layer of safety to the trade.
To help get a gauge on a stock’s valuation I like to use Chuck Carnevale’s FAST Graphs tool.
There’s a lot going on in the graph below, but all you really need to know is that when the black line is below the blue line — as it is right now — shares appear undervalued.
In short, the stock is currently trading below its historical PE multiple, which suggests that right now the stock is relatively cheap compared to how the market has historically valued it.
From a technical standpoint, the stock is in a downtrend (so it could go lower from here) — but it’s also currently hovering just above an important level of price support at $58.
In addition, shares are emerging from oversold territory.
With all of this in mind, I think now could be a good time to make a move on the stock.
One option is to just buy shares outright at the market price and hold them for their 2.5% dividend yield.
Another option is to make a “10% Trade” and get paid immediately for simply agreeing to buy shares today and then sell them at a higher price in the future. This option adds a level of safety and promises a 10%-plus annualized yield.
I chose this second option yesterday… and I’m poised to generate an 11.6% to 28.4% annualized yield.
Capturing an 11.6% to 28.4% Annualized Yield from Aflac
Yesterday I bought 200 shares of Aflac (AFL) for $58.32 per share and simultaneously sold two November 22, $60 covered calls for $0.81 per share.
There are only two possible ways this trade will work out — and they both spell at least double-digit annualized yields on my purchase price…
Scenario #1: Aflac stays under $60 by November 22
If Aflac stays under $60 by November 22 I’ll get to keep my 200 shares.
In the process I’ll also have received $162 in covered call income ($0.81 x 200 shares) and $74 in quarterly dividends ($0.37 x 200 shares).
The covered call income — known as a “premium” in options speak — was collected instantly yesterday. It was deposited in my brokerage account.
I’ll collect the dividend income when Aflac pays its next dividend. (In fact, if history is any guide, Aflac will be boosting its dividend again within the next few weeks. To be conservative though — and to keep thing simple — we’ll just use the $0.37 per share dividend figure for these calculations.)
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $226.47 in profit after commissions.
On a percentage basis, I received an instant 1.4% yield for selling the covered calls ($0.81 / $58.32) and I’ll get a 0.6% yield from the upcoming dividend ($0.37 / $58.32).
When I subtract out the commissions I’m looking at a 1.9% yield in 61 days… which works out to an 11.6% annualized yield. That’s more than quadruple Aflac’s “regular” annual dividend yield of 2.5%.
Here’s another way to look at it: In just 17% of the time (61 days / 365 days) I’m collecting 76% of the stock’s typical annual income (1.9% yield / 2.5% yield).
Scenario #2: Aflac climbs over $60 by November 22
If Aflac climbs over $60 by November 22 my 200 shares will get sold (“called away”) at $60 per share.
In this scenario, not only will I get to keep the $162 in covered call income ($0.81 x 200 shares) and the $74 in quarterly dividends ($0.37 x 200 shares)… but I’ll also generate $336 in capital gains ($1.68 x 200 shares) in the process.
In this scenario, after commissions I’ll be looking at a $553.02 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.4% yield for selling the covered calls ($0.81 / $58.32)… a 0.6% yield from the upcoming dividend ($0.37 / $58.32)… and a 2.9% return from capital gains ($1.68 / $58.32).
After subtracting out the commissions, I’m looking at a 4.7% total return in 61 days (two months).
That works out to a 28.4% annualized yield from Aflac.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to generate a 10%-plus annualized yield from a Dividend Champion like Aflac (AFL). 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 Aflac for a 28.4% annualized profit, no problem. This is just one more example of why I’m such a fan of “10% Trades.”
P.S. The reason I’ve gone public with many of my real-life, real-money “10% Trades” is so you can see for yourself how entirely possible it is to boost your annualized yield on high-quality dividend growth stocks. Just keep in mind that these trades aren’t intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.