Tuesday, March 8, 2016

Laddering Intel (INTC) covered calls

Intel, INTC is the subject of this post.  More important is the ability to ladder income from a stock like this.

I wrote about it the end of February as well.   At that time INTC was trading around $28 and now it is trading around $30.  I appreciate the capital gain, but I am really in it for the income.

This stock has been in and out of my personal portfolio many times.   It is an income stock with a nice yield, 3.4%, that would pass my Dividend Machine criteria in years past.   But this is 2016 and I have changed my expectations.

Let's stick with the income potential for owners of INTC.    Two sources of income are available.

Dividend Growth

Intel recently raised the dividend from $.24 to $.26 per share per quarter which is an 8.3% increase.  Technically, if you look back over 5 years and average out the dividend increases, INTC sports a very healthy dividend growth rate above 8%.    Again, INTC passes the hurdles from years past and for 2016.

Covered Call Income

Stocks with a lot of beta, Intel's is 1.23, often times command good call option premiums.  I like to receive no less than 1% premium yield.  For instance, if a stock is trading at $30 and you buy it at $30 and immediately sell a covered call, I require at least $.30 for the premium.  I like to pick a covered call with an expiration date after the next ex-dividend date.  Using this expiration date criteria allows me to receive both the dividend and the covered call income.

Strike price is important.  I want to sell calls to boost my income but there is a risk that the call buyer will buy my shares.   Sometimes this even happens before the ex-dividend date, or call expiration date.   Although 80% of options expire without action, I have had enough stock assigned, that I make sure I will realize a capital gain should the call buyer, "call away" my stock at the strike price.

For instance,   if I paid $30.60 today for INTC, I want a strike price no less than 8% greater than my basis or $33.

Today, you can sell a May, 2016 INTC $33 call for about $.40 and you should receive the dividend expected in May.   You can see the opportunity for taking a position in INTC.

Revenue Growth 

In order for INTC to be a long term hold in my personal portfolio,  a stock that I do not want to lose, I would like to see more revenue growth.  INTC fails on that criteria. I really want an average of 4% per year over the past three years.   INTC delivers less than 2% per year.   Technology changes all the time and INTC has proved to a good stock over time, so I hope that the revenue growth returns and I can put INTC in the 2016 portfolio.

INTC M* MoneyMadam criteria

INTC's fundamentals are presented in the table below.

Previous call in February.

Right now, INTC is simply an income stock.  I will forego the revenue growth criteria and add to my position and immediately sell the call.   I personally am hoping the call buyer takes it because that means my whole position will be worth more than $33 because no call buyer takes the stock unless the price is greater than the strike price.

The market gives and takes.   You have to be facile and work with those stocks that deliver income if you are retired like I am.  I used to ladder bonds and now I ladder calls.

M* TheMoneyMadam

Disclosure:  Long INTC with calls