Wal-Mart Stores, Inc. (WMT), The Procter & Gamble Company (PG), Chevron Corporation (CVX): Using Options to Increase Your Dividends

Page 1 of 2

With the dividend yield of the S&P 500 well below the historical average, finding stocks that sport both a high yield and a safe dividend isn’t as easy as it used to be. Luckily, there is a fairly conservative way to boost the income generated from your portfolio by selling call options. The premium received using this method can easily double your dividend yield even for big, blue-chip stocks. Here are three examples of dividend boosts that can be achieved by selling call options.

The Procter & Gamble Company (NYSE:PG)

The Procter & Gamble Company (NYSE:PG) is a $200 billion consumer goods company that owns well-known brands such as Gillette, CoverGirl, Duracell, Charmin, Pampers, and countless more. The stock currently yields about 2.9%. Since 2003, the dividend has grown at an annualized rate of about 11%.

The Procter & Gamble Company (NYSE:PG)

The stock has run up significantly in 2013, almost 13% in just a few months, and from it’s 52-week low in June of last year the stock has increased by nearly 30%. At the time of that low the dividend yield was 3.8%, almost a percentage point higher than the yield today. Selling call options can bring the effective yield back to or even higher than that level.

With the stock currently trading at around $76.60, an $80 strike price would offer a 4.4% buffer against the option being exercised. This means that the stock would need to rise by 4.4% before the call option becomes in-the-money and the shares become at risk of being called away.

The other component of the option is the expiration date. The longer the time until expiration the greater the chance that the stock price rises above the strike price, so we’ll want to stick to fairly short-term options. Of course, the shorter-term the option the lower the premium, so there’s a balance between safety and premium.

The June $80 call option looks like it achieves that balance. The premium of around $0.53/contract/share leads to an annualized yield of 2.75%, which when added to the current dividend yield brings the total effective yield to 5.65%.

If greater safety is required then the June $82.50 call option has a larger buffer of 7.7%. With this larger buffer comes a reduction of the premium to $0.18/contract/share, which knocks the total effective yield down to 3.8%. This, however, brings the yield back to the level last seen at the 52-week low.

Chevron Corporation (NYSE:CVX)

Chevron Corporation (NYSE:CVX) is one of the major integrated energy companies with a market capitalization of $230 billion. I called Chevron Corporation (NYSE:CVX) the best big oil stock in a previous article when the stock was trading at about $115 per share. Since then, the stock has risen by a little more than 4%, bringing the dividend yield down just below 3%. Chevron Corporation (NYSE:CVX) has grown its dividend at an annualized rate of 6.77% over the past 5 years, but has recently picked up that pace with an 11% increase in the beginning of 2012. Using call options, the yield can be increased even further without waiting for the company to increase the dividend.

The June $125 call option has a strike price about 4.2% above the current stock price and a premium of $0.94/contract/share. This premium creates an annualized yield of 3.12%, which when added to the current dividend gives a total effective yield of 6.09%. This is more than double the current yield.

Because the June $130 call option looks unappealing, the September $130 is a better choice if more safety is required. The premium of $0.95/contract/share represents an annualized yield of 1.49%, or an effective total yield of 4.46%. Although this yield is lower than that of the previous option, the buffer is larger at 8.3%.

Wal-Mart Stores, Inc. (NYSE:WMT)

For being one of the largest companies in the world Wal-Mart Stores, Inc. (NYSE:WMT) has never paid a particularly exciting dividend. After rising slowly over the past decade, the yield currently stands at 2.53%.



WMT Dividend Yield data by YCharts

Wal-Mart Stores, Inc. (NYSE:WMT)’s payout ratio (using free cash flow) is about 50%, meaning that the dividend growth will come mainly from earnings growth in the future. Given that this is a company which already does $469 billion in annual sales, I think growth is likely to be slower than in the past. With a lower yield than the other two companies I’ve discussed and expectations of slow dividend growth, Wal-Mart Stores, Inc. (NYSE:WMT) is not an ideal dividend stock. But selling call options can change that.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!