Tuesday, August 2, 2011

Almost Dividend Machine Target, symbol TGT

This is a row of Cash Registers at a Target st...Image via Wikipedia          Target comes and goes in my portfolio.  TGT pays an ever increasing dividend and has earnings nearly four times the payout.  Their debt to equity ratio is 1.00 which is the upper limit for a company in my income portfolio.    Target is not quite a dividend machine because the dividend yield is only 2.42%.  However, as readers of this blog know, I often use almost dividend machines that have call options to goose my income.

          Target, as a stock, has another component that I like which is the stock moves seasonally with the retail market.  Buy your retail stocks now and sell them in November.  In November the market anticipates Christmas buying and many retailers' stock prices increase.  Today I find Target to be a bargain at $49.50.  I am willing to take the risk that TGT will continue to pay and even increase the dividend.  I am also willing to take the risk that if I write a call of TGT, someone will take it from me.   Next year, I will probably do this whole trade again like I have in previous years.

          Here is the math for today's trade.  Bought TGT at $49.50; sold an October call with a strike price of $55.00; I received a call premium of $.51 and I will receive the recently enhanced dividend of $.30 on September 10, 2011.   If I hold TGT for an entire year and only write this one call, my income yield is the sum of the dividend $1.20 and the call premium of $.51 for a total of $1.71 which is a yield of 3.45%.  If the call buyer takes my stock my return will be 12.70%.  I calculate this as $55.00 plus the call premium of $.51 plus the dividend of $.30 for a total income of $55.81 divided by my cost basis of $49.52.

          You see how income investing can be more interesting than you may think.

Very Truly Yours,


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