No matter how seasoned an investor you might be, this is the sort of situation that will test you. So it’s important to be cognizant of the higher cyclicality associated with a company like Deere. Although the brand power is very real, the industry does not create the “steady eddy” nature of something like Dividend King Johnson & Johnson (NYSE:JNJ).
For those that can deal with the cyclicality – which happens to be on the downdraft at present – there are real rewards to be had. The company itself puts out a “why invest” section on its website.
Here’s the basic idea: the world’s population and especially the middle class will continue to grow. As such, grain-based diets and demand for farm commodities will keep increasing. On the other end of the spectrum, the world’s population is becoming increasingly urbanized.
These factors could aid Deere’s business is a couple of ways. First, you have more farm production needed with less rural labor to do so. Enter the John Deere tractor. Moreover, urbanization requires more infrastructure – buildings, roads, housing, bridges, etc. This too is something that Deere can help out with.
Deere & Company’s historical growth rate and future growth prospects are impressive. This combined with the company’s above-average dividend yield of 3.0% makes Deere & Company a favorite of The 8 Rules of Dividend Investing.
So to continue with the example, let’s suppose that you’d like to own shares in Deere & Co. You have a few alternatives:
1. You could buy shares outright
2. You could set up a limit order
3. You could sell a cash-secured put
The last alternative (sell a cash-secured put) involves getting paid to make an agreement. We’ll explore that route.
Let’s See What Put Option Contracts Are Available
Most online brokerages will have information about the available options, but of course not everyone uses the same platform. As such, using a public resource like Yahoo Finance works well for demonstration purposes.
I’ll walk you through the steps to get the information that you need. Once you type in “DE” for the ticker on Yahoo Finance, the site will provide you with a summary for the security. The third choice down is “options.”
Once you select “options” you will be taken to the option page for Deere & Co. The default setting will be the closest expiration date. You can change this by using the drop down menu below the company name.
Here I have selected the January 20th, 2017 expiration date. Note that I have no affinity for this date, but it makes comparisons a bit easier.
The first table gives you information on the various call options that are available, as we covered in the previous step-by-step guide. The second table shows you what put options are available with the strike price, contract name, last price, bid and ask.
Now we’re ready to think about a price at which we’d be happy to own shares of Deere. The last couple of times that shares have traded with a 3%+ dividend yield, it’s worked out quite well for investors. This is certainly not to suggest that this must happen again in the future, but this could be a benchmark that you happen to use.
The current quarterly dividend sits at $0.60, or $2.40 on an annual basis. Based on this payout the “current” dividend yield sits right at 3%. Let’s suppose that you’d be happy to own shares at a price of $75, representing a 3.2% yield should this transaction occur.
Here’s what that strike price (with the January 20th, 2017 expiration date) looks like:
The current bid for the $75 strike price is $5.35; let’s call it $5.25 to account for fees. This means that if you set aside $7,500 to buy 100 shares of Deere & Co. between now and January 17th of next year, you would receive ~$525 upfront for making that agreement.
