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 Gilead Sciences (GILD).
Back in July, GILD was highlighted by Michael Robinson as one of three stocks that could deliver 100% returns over the medium haul.
With GILD down roughly 16% from its 52-week high, the stock’s dividend yield has climbed to 2.9%. How safe is that dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 88.
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, GILD’s dividend appears very safe, with a dividend cut extremely unlikely (you can learn more about Dividend Safety Scores here.)
But rather than wait a year for a near 3% payout, it’s possible to collect more than triple that income today.
Plus, the strategy I have in mind is designed to be safer than buying 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 GILD this morning… and I’m generating a 10.5% to 11.0% annualized yield.
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 September 21, 2018, $72.50 call on shares of Gilead Sciences (GILD)
As we go to press, GILD is selling for around $72.18 per share and the September 21, 2018 $72.50 calls are going for about $6.18 per share.
Our trade would involve buying 100 shares of GILD and simultaneously selling one of those calls.
By selling a call option, we’re giving the buyer of the option the right, but not the obligation, to purchase our 100 shares at $72.50 per share (the “strike” price) anytime before September 21, 2018 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option is paying us $6.18 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 from $72.18 to $66. In other words, we’re buying the stock at an 8.6% discount to its current price.
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: GILD stays under $72.50 by September 21, 2018
If GILD stays under $72.50 by September 21, our options contract will expire and we’ll get to keep our 100 shares.
In the process, we’ll receive $618 in income ($6.18 x 100 shares).
That income would be collected instantly, when the trade opens.
Excluding commissions, if “Scenario 1″ plays out, we’d receive an 8.6% yield for selling the covered call ($6.18 / $72.18) in 298 days. That works out to a 10.5% annualized yield.
Scenario #2: GILD climbs over $72.50 by September 21, 2018
If GILD climbs over $72.50 by September 21, our 100 shares will get sold (“called away”) at $72.50 per share.
In “Scenario 2” — like “Scenario 1” — we’ll collect an instant $618 in income ($6.18 x 100 shares) when the trade opens. We’ll then collect another $32 in capital gains ($0.32 x 100) when the trade closes because we’ll be buying 100 shares at $72.18 and selling them at $72.50.
In this scenario, excluding any commissions, we’d be looking at a $650 profit.
From a percentage standpoint, this scenario would deliver an instant 8.6% yield for selling the covered call ($6.18 / $72.18) and a 0.4% return from capital gains ($0.32 / $72.18).
At the end of the day, we’d be looking at a 9.0% total return in 298 days, which works out to an 11.0% annualized yield from GILD.
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 $66 ($72.18 – $6.18) 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 Gilead Sciences (GILD) 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 $618 in premium we’d collect for selling one contract, that would require a minimum investment of $6,600.
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.