[hana-code-insert name=’adsense-article’ /]As my colleauge Jason Fieber recently pointed out, McDonald’s (MCD) offers a substantial operational growth record, huge competitive advantages, and a price below fair value (which he calculated at $115 per share).
It’s also been a dream stock for dividend growth investors.
Not only does this Dividend Champion have 38 years of consecutive dividend increases under its belt, but it’s increased its dividend by an average of 22.8% a year for the past 10 years.
And with a payout ratio of just 58% there appears to be plenty of room for future increases as well.
On top of all this, the stock pays a respectable 3.3% forward dividend yield for anyone who buys today.
That’s not bad — it’s better than what you can get from a 10-year Treasury note — but what if I told you that it was possible to collect a 10.9% annualized yield from MCD without even owning the stock?
I realize that may sound far-fetched, but that’s exactly the opportunity I was looking at on Friday when I made a “10% Trade” with MCD.
I’ll explain…
At the time I made my trade, MCD was selling for $99.23 per share and the May 17, $97.50 puts were going for $1.10 per share.
My “10% Trade” involved selling one of these puts… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate a 10.6% annualized yield from MCD without even owning the stock. On the other hand, I’d get to buy MCD at a 2.6% discount to what it was trading for at the time I executed the trade.
Since safe, double-digit income is a no-brainer — and since I’d be happy buying more shares of MCD at a good price anyways — I’ll be happy however this trade works out.
Let’s take a closer look at each scenario…
Scenario 1: MCD falls below $97.50 by May 17
If MCD falls below $97.50 by May 17, I’ll be obligated to buy 100 shares at $97.50 per share. That’s cheaper than the $99.23 price the stock was trading for when I sold the put on Friday.
In exchange for my agreement, I was paid an instant $110.00 (100 shares X $1.10 per share) before commissions. This money was deposited into my account immediately.
Taking this income into consideration – and subtracting out the commissions – my cost-basis will drop to $96.68 per share.
That’s a 2.6% discount to the $99.23 share price that MCD was selling for at the time I made this trade.
So in “Scenario 1” I get paid instant cash while I wait to buy MCD at a discount. I’ll take it!
Scenario 2: MCD stays above $97.50 by May 17
If MCD stays above $97.50 by May 17, the contract expires worthless and I get to keep the $110.00 in income (before commissions).
After commissions, this works out to a 1.0% return on what my purchase obligation would have been ($1.10 / $97.50) in just just five weeks.
If I can repeat this trade over the period of a year I could generate a 10.6% yield from MCD without even buying shares!
This is just one more example of the power of a “10% Trade.”
I’ll continue to keep you posted as I make these trades, but please keep in mind that these aren’t intended to be specific recommendations. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
Instead, I’m sharing these real-life, real-money “10% Trades” as examples — so you can see for yourself how it’s entirely possible to safely double… triple… or even quadruple your yield on some of the best companies in the world.
Greg Patrick
TradesOfTheDay.com