Investors can read about many dividend capturing strategies, most of them work better on paper than they do in practice. I tried just about everything over the years, and I learned quickly it is better to use a sim account first. Now I use a few methods that produce consistant results.
In this article we will go over an upcoming dividend that I may capture at a minimum amount of risk. The criteria that I use is that I must be able to sell a call option in either the front, or first back month that is in the money, and with enough premium that I will not mind getting exercised early (which happens often and can be a good thing if the trades are executed correctly).
This is one of my favorite and easy to understand methods of making gains through options and dividends. Although much of the gains will come from dividends, it should be noted in my experience, the option decay can provide a return. This is especially true in lower yielding stocks.
Willis Group Holdings PLC (WSH)
Dividend Amount: $0.26
Ex-Dividend Date: September 28, 2011
In combination with my buying the stock and after checking company updates, offer to sell the October $35.00 strike call for $1.27 over the intrinsic value. The option may get exercised early for a gain. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near $0.14.
The P/E ratio has been discounted, as the current trailing twelve months (ttm) P/E ratio is 23, while the forward P/E ratio is now 12.6. It will be interesting to see if pricing is currently at a discount, or if the market has been correct to price in lower growth expectations. The current book value per share is 15.66.
For the same fiscal period year-over-year, revenue has improved to $3.34 billion for 2010 vs. $3.26 billion for 2009. The bottom line has rising earnings year-over-year of $455.00 million for 2010 vs. $438.00 million for 2009. The company's earnings before income and taxes are rising with an EBIT year-over-year of $753.00 million for 2010 vs. $694.00 million for 2009.
At $36.27, the price is currently below the 200 day moving average of 38.33, and below the 60 day moving average of 38.99. Looking at the price movement over the last month, the stock has moved higher in price 9.35%, with a one year change of 24.42%. Comparing to the S&P 500 price changes, the price performances are 2.24% vs. the S&P 500 from a month ago, and year to date difference is 14.86% vs. the S&P 500 price change.
Remember, you must buy a stock at least three business days before the record date (at least one business day before the ex-dividend date) to qualify for a dividend.
My last step (completed before making a trade on the same day) is to check company announcements, and news sources for possible events that may cause the stock price to move. This is especially important during earnings season.
I research the different call options and calculate the expected probabilities based on Beta, Bid, Offer, Volume traded the current day, open interest, and time value / implied volatility. The options offer some level of protection from down moves in the stock, and provide revenue to cover the times that the options do not fully cover down moves in the stock. Income is not needed from the option premiums, so a break even from premiums received/stock losses ratio is a win.
I use a proprietary blend of technical analysis, financial crowd behavior, and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. Nothing in the article should be considered investment advise, but you may want to use this article as a starting point of your own research with your financial planner. I use Seeking Alpha, Edgar Online, and Yahoo Finance for most of my data.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WSH over the next 72 hours.