Note from Daily Trade Alert: The goal of our High-Yield Trade of the Week column is to show you how to safely boost your income from some of the best stocks in the world. It’s our sincere hope that you benefit from this service.
This week’s High-Yield Trade of the Week is with Kimberly-Clark (KMB), a Dividend Champion whose brand name products include Kleenex, Huggies, Pull-Ups, Little Swimmers, Depend, Cottenelle, Kotex, Scott, VIVA and more.
How safe is Kimberly-Clark’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 97.
Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak.
With this in mind, Kimberly-Clark’s dividend appears very safe, with a dividend cut extremely unlikely (you can learn more about Dividend Safety Scores here.)
This is great news for conservative investors looking for safe, growing dividend income they can depend on over the long haul.
But what about today? What if you’re in or nearing retirement and you need safe, high income right now?
Even with the Kimberly-Clark’s dividend yield climbing to a 52-week high of 3.4% (and well above its 5-year average of 3.1%), a million-dollar portfolio at that yield would pay you just $34,000 a year.
Unless you’re following a program like Jason Fieber’s “Early Retirement Blueprint”, it’d be very difficult to live off of that kind of income.
And what if this trade was designed to be safer than buying the stock the “traditional” way?
It’s a strategy that I personally use in my retirement accounts (401k and Roth IRA), and one that’s engineered to pay 10%-plus annualized income from some of the best companies in the world.
In short, the strategy I’m talking about involves selling a cash-secured put or a covered call on a high-quality dividend growth stock when it’s trading at a reasonable price (which is typically at or below fair value).
In fact, I just made one of these high-yield trades with Kimberly-Clark this morning… and I’m generating a 9.8% to 30.8% annualized yield.
I like the setup here with the stock…
Fundamentally, thanks to a pro-longed pullback, it now appears to be trading in fair value territory.
There’s a lot going on in the FAST Graph below, but all you really need to know is that when the stock’s price (black line) is below its normal P/E (blue line) in multiple time frames, shares look relatively cheap. When the black line is on the blue line, as it is now, it appears to be fairly valued. Note: I’m using the 8-year normal P/E in the chart below.
With all of this in mind, the following setup is what we’re looking at as we go to press. It’s the same high-yield trade I made in my retirement account just minutes ago, shortly after opening bell.
High-Yield Trade of the Week:
Sell the December 15, 2017, $115 call on shares of Kimberly-Clark (KMB)
As we go to press, KMB is selling for around $112.04 per share and the December 15 $115 calls are going for about $1.38 per share.
Our trade would involve buying 100 shares of KMB and simultaneously selling one of those calls.
By selling call options, we would be giving the buyer of the option the right, but not the obligation, to purchase our 100 shares at $115 per share (the “strike” price) anytime before December 15 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option would be paying us $1.38 per share (the “premium”) per option.
Because we’re collecting immediate income when we open the trade, we’re lowering our cost basis on the shares we’re buying.
That’s what makes this trade safer than simply purchasing shares of the underlying stock the “traditional” way.
With all of this in mind, there are two likely ways our High-Yield Trade of the Week would work out, and they both offer significantly higher income than what we’d collect if we relied on the stock’s dividends alone.
To be conservative, we don’t include any dividends in our calculations for either of the following scenarios. The annualized yields are generated from options premium and applicable capital gains alone. So any dividends collected are just “bonus” that will boost our overall annualized yields even further. Let’s take a closer look at each scenario…
Scenario #1: KMB stays under $115 by December 15
If KMB stays under $115 by December 15, our options contract would expire and we’d get to keep our 100 shares.
In the process, we’d receive $138 in premium ($1.38 x 100 shares).
That income would be collected instantly, when the trade opens.
Excluding commissions, if “Scenario 1″ plays out, we’d receive a 1.2% yield for selling the covered call ($1.38 / $112.04) in 46 days. That works out to a 9.8% annualized yield.
Scenario #2: KMB climbs over $115 by December 15
If KMB climbs over $115 by December 15, our 100 shares will get sold (“called away”) at $115 per share.
In “Scenario 2” — like “Scenario 1” — we’d collect an instant $138 in premium ($1.38 x 100 shares) when the trade opens. We’d then collect another $296 in capital gains ($2.96 x 100) when the trade closes because we’d be buying 100 shares at $112.05 and selling them at $115.
In this scenario, excluding any commissions, we’d be looking at a $434 profit.
From a percentage standpoint, this scenario would deliver an instant 1.2% yield for selling the covered calls ($1.38 / $112.04) and a 2.6% return from capital gains ($2.96 / $112.04).
At the end of the day, we’d be looking at a 3.9% total return in 46 days, which works out to a 30.8% annualized yield from KMB.
Here’s how we’d make the trade…
We’d place a “Buy-Write” options order with a Net Debit price of as close to $110.66 ($112.04 – $1.38) as we can get — the lower the better. Options contracts work in 100-share blocks, so we’d have to buy at least 100 shares of Kimberly-Clark (KMB) for this trade. For every 100 shares we’d buy, we’d “Sell to Open” one options contract using a limit order. Accounting for the $138 in premium we’d collect for selling the contract, that would require a minimum investment of $11,066.
Good Trading!
Greg Patrick
P.S. We’d only make this trade if: 1) we wanted to own the underlying stock anyways 2) we believed it was trading at a reasonable price 3) we were comfortable owning it for the long-haul in case the price drops significantly below our cost basis by expiration and 4) we were comfortable letting it go if shares get called away. To be mindful of position sizing, except in rare cases, the value of this trade wouldn’t exceed 5% of our total portfolio value. In addition, to minimize taxes and tax paperwork, we would most likely make this trade in a retirement account, such as an IRA or 401(k).
Please note: We’re not registered financial advisors and these aren’t specific recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we do our research, to the time we publish our article, to the time you’re alerted about it. So please don’t attempt to make this trade yourself without first doing your own due diligence and research.