Tuesday, July 10, 2012

How to employ a covered call strategy on a stodgy company.

English: A photo of Eli Lilly and Company's or...English: A photo of Eli Lilly and Company's original laboratory located at 15 W. Pearl St, Indianapolis, Indiana. Photo was taken in 1876. The two people on the right side of the doorway are Colonel Eli Lilly (the taller one) and his 14 year old son Josiah K. Lilly (shorter one). The man on the left side is the only other other business employee. (Photo credit: Wikipedia)
This blog concentrates on dividend machines,  but other dividend producing companies can be good stocks for income investors to own.  Companies that pay a dividend and have for a long time but do not warrant "dividend machine" status because they have not increased the payout every year, can provide even more income than a "dividend machine" if you can sell covered calls. 

The "dividend machine" hurdle is high and the "almost dividend machine" is not much lower.  I want to make sure you understand that in order to mitigate risk, I eliminate all companies with too much debt even if they increase the dividend every year.  I also eliminate all companies whose last four quarters of earnings are less than their dividend payout.  

When you apply those screens you find companies that have a dividend yield less than three percent but have increased it regularly;  or you find a company that has a dividend yield greater than three percent but has not increased the payout regularly.
               
                You will find many of these companies through your dividend machine searches.   How do you narrow down which company you should buy?  Which company will yield the most income?  Income investors who read this web/blog know I use covered calls extensively to boost my income.  When I can find a solid dividend company that has a covered call, I move on it.  What company is a good company with a good covered call?

  I think Eli Lilly (LLY) is a stock you should look at.   In the first table provided below, you will find LLY’s fundamentals; they reveal that LLY is a solid company but not quite a dividend machine.      The second table calculates your yield and your gain if you buy LLY at about $43.00 (it closed at $42.86 on Tuesday July 10, 2012) and sell a September $46 covered call and the third table calculates your yield and your gain if you sell an October $46 covered call.

Eli Lilly (LLY) Fundamentals



Price when profiled
$42.80
Last 4 Qtrs Earnings
$3.86
Last 4 Qtrs Dividend
$1.96
Current Dividend Yld
4.60%
No. of Years increased

Debt/Equity ratio
36.00%


Eli Lilly (LLY) September $46 Covered Call



Cost Basis
$42.80
Strike Price
$46.00
Call Premium
$0.88
Dividend
$0.49


Gain in $ if assigned
$4.57
Call Yield
2.06%
Gain Yield
10.68%


Eli Lilly (LLY) Oct. $46 Covered Call



Cost Basis
$42.80
Strike Price
$46.00
Call Premium
$1.31
Dividend
$0.49


Gain in $ if assigned
$5.00
Call Yield
3.06%
Gain Yield
11.68%


Who would think a company considered “stuck in the mud” by analysts could yield you more than seven percent in a year?   I hope that LLY will perform as your call buyer expects and you will receive a tidy gain of between ten and eleven percent.

                Readers, good income investing comes from a disciplined strategy.  Few income strategies are more disciplined than mine is.

Very Truly

TheMoneyMadam
Enhanced by Zemanta