Wednesday, February 8, 2012

Microchip Technology Dividend Machine again

Image representing Microchip Technologies as d...Image via CrunchBase
Dividend Machine for week of February 6, 2012
            Earlier this month I profiled a high yield (read high risk) bond and that is new.  The stock market may seem boring but this week, so far, I have found two new companies that qualify as Dividend Machines but neither one has covered call options that could boost our income.  And, I have been waiting to profile a third stock that I included in the 2011 Dividend Machine list until covered call options on it looked attractive.

            In 2012 I do not expect to find forty eight stocks that qualify as Dividend Machines and that have covered call income potential.  However, I vowed to make more money this year from Dividend Machines than I did last year by leaning toward Dividend Machines that do have covered call option income potential.   In order words, when I have to decide between two stocks I would go with the company that gives me a chance for more income.

            The risks of this strategy are two fold.  One risk is you end up owning the stock because the price does not increase to the point where the call buyer benefits from buying your stock at the strike price.   This is a minimal risk. Your additional income was “icing on the cake” and you end up owning a good company.

 The other risk is the call buyer takes your stock.    If you follow my lead, you would make a minimum of 9-10 percent total return so that is not so bad but now you have to reinvest your original principal plus your profit.  I believe there is always another stock to buy.  The best support of this theory is my work this week.  I was able to find several companies that I could buy as part of my Dividend Machine portfolio.

            Microchip Technology, MCHP, was the very first Dividend Machine I profiled in last year’s effort and it is my pick for this week.   I personally have owned MCHP off and on for longer than that.  I tend to sell calls on MCHP that get taken.  I get back in when call options on this stock are attractive.

            Here’s the skinny on Microchip Technology which is a semi conductor company.  Today it traded at about $37.30.   The next quarterly dividend of $.349 will be paid on March 6, 2012 provided you own it by February 21, 2012.  The annualized yield is 3.74%.   The last four quarter dividends have been $1.387 and during that same four quarters, EPS (earnings per share) were $1.73.   The dividend has increased every year since the first dividend was declared in 2003.    D/E is a very respectable .48.

            Here is how the call option works.  You may want to use my covered call calculator to easily determine the income potential.   I bought MCHP at $37.30 which is my cost basis.  I sold an April call with a strike price of $40.00.  My call premium, which is my immediate income, is $.40 per share.  This is a yield of 1.07%.  My gain, if the stock is taken by the call purchaser at $40 is 7.24%.

            Moreover, I will get the dividend in March so my income will be $.40 from the call plus $.349 from the dividend.  That is a 2.0% yield in just under 80 days.  Add it all together and your gain if you lose the stock is nearly 10%.    Folks it pays to learn how to use call income on your Dividend Machines

            You may want to review the original post on MCHP as well as other posts relating to MCHP.   Consider this company for the dividend income producing part of your income portfolio.

Very Truly Yours,

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