There are many dividend capturing strategies, and I have used more than one. In this article we will go over an upcoming dividend that I may capture with 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.
Monsanto Company (MON)
Dividend Amount: $0.30
Ex-Dividend Date: October 05, 2011
Strategy: In combination with my buying the stock and after checking company updates, offer to sell the October $55.00 strike call for $0.90 over the intrinsic value. The option may get exercised early for a gain. If not, after qualifying for the dividend, I will look to close out the covered option with a gain of about about $0.16.
The current trailing twelve months (ttm) P/E ratio is 22.9 The forward P/E ratio is 22.4. The current book value per share is 22.18. For the same fiscal period year-over-year, revenue has declined to $10.50 billion for 2010 vs. $11.72 billion for 2009. The bottom line has falling earnings year-over-year of $1.11 billion for 2010 vs. $2.11 billion for 2009. The company's earnings before income and taxes are falling with an EBIT year-over-year of $1.61 billion for 2010 vs. $3.10 billion for 2009.
At $64.32, the price is currently below the 200 day moving average of 69.37, and below the 60 day moving average of 70.33. The stock has fallen in price -6.94%, with a one year change of 21.20%. Compared to the S&P 500, the year to date difference is 1.94%.
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 advice, 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 MON over the next 72 hours.