Wal-Mart Stores Dividend Capture Strategy

Dec. 1.11 | About: Wal-Mart Stores, (WMT)

Wal-Mart Stores, Inc. (NYSE:WMT)

  • Yield: 2.55%
  • Dividend Amount: $0.36
  • Ex-Dividend Date: December 07, 2011
  • Beta: 0.35

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. The company was founded in 1945 and is based in Bentonville, Arkansas.

There are quite a few dividend catching techniques, and I have utilized many. For the most success, an investor must be willing to own longer term in the companies as well. Once in a while things do not go as planned and the price drops. When this happens, as it will if you try to capture a dividend enough times, I am always happy that I limit my investing to companies worth owning. 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 that option decay can provide a return. This is especially true in lower yielding stocks. I have found that three weeks is about the amount of time I carry any given position.

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).

Strategy

In combination with my buying the stock and after checking company updates, offer to sell the December $57.50 strike call for $0.62 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 $0.37. If I get the dividend I will hope to make about $0.73 per share, a nice return for a little less than a month.

The current book value per share is 19.49.

The company has rising revenue year-over-year of $421.85 billion for 2011 vs. $408.09 billion for 2010. The bottom line has rising earnings year-over-year of $16.39 billion for 2011 vs. $14.37 billion for 2010. The company's earnings before interest and taxes are rising with an EBIT year-over-year of $25.54 billion for 2011 vs. $24.00 billion for 2010.

At $58.20, the price is currently above the 200-day moving average of 53.69 and above the 60-day moving average of 54.94.

In the last month, the stock has increased in price 0.93%, and moving in price 6.53% from one year ago.

The stock has done very well as compared to the overall market. When comparing to the S&P 500, the year to date difference is 11.96%.

paid2trade.com Dividend Payout Per quarter chart for WMT

paid2trade.com revenue gross bar chart for WMT Click to enlarge

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.

  • Dividend amount over $0.08 cents (I understand that many retail traders cannot make money with an $0.08 dividend due to transaction costs, but most pros can).
  • Active volume to avoid paying a large spread to leg in and out.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WMT over the next 72 hours.