Tuesday, September 17, 2013

Dividends & Income - COP a well oiled money machine

Conoco Philips (COP) is truly a well oiled money machine.   

I am not profiling this stock as a dividend machine because it is already included in the 2013 Dividend stock portfolio.    By the way, COP was a Dividend Machine in 2011 as well.  The point of this post is to illustrate the money making potential of a company like COP.    

COP has provided a consistent dividend, it gave 2011 holders an extra 50 shares of Phillips Refinery (PSX) and as you will see below, COP has call option income opportunity.


COP is at historical highs trading close to $70 today.    Even at this high price, the dividend yield is still 3.94%.   When I own a stock that is at a record high and I have significant profit, I try to work it for even more income by using covered calls.   

My theory is that if I lose the stock, there is always another stock to buy.   But, can I really find another stock that can deliver the returns that COP has?   Maybe I can find one, but probably not with the market at these lofty levels.   I may have to wait for a correction to find a good replacement. 

If I am going to take the risk that I lose COP to the call buyer,  I want to make sure the strike price is greater than the all time high and I want the call out far enough that I get the next expected dividend.   COP’s next expected ex-dividend date is October 11, 2013 and that dividend should be $.69.

COP Covered Call Calculations

I am going to show you two covered call options using two different cost bases.    First let’s look at how you would fare if you had bought COP when it was first profiled as Dividend Machine on May 16, 2011 and you sell a November $72.50 for a premium of $.50 or a January $75.00 call for a premium of $.66.


Next, look at the result if you bought COP as a 2013 Dividend Machine when it was profiled on April 9, 2013, using the same two calls.


Finally, what if you bought COP today?   See this table to determine your return.

Only you can decide if you want to trade into or out of a stock or when you are willing to risk losing a great Dividend Machine like COP to a call buyer.   

I still work my portfolio constantly and this post illustrates the analysis you can perform to help you make good income investment decisions.  

I will not add COP today but I am going to sell the January call on some of my position (cost basis is $55.37.)

The Money Madam