Investing In Coke: The 7% Solution For Rookie IRA Investors

| About: The Coca-Cola (KO)

The Coca-Cola Company (NYSE:KO) is a popular carbonated beverage first launched in 1886 as a healthful patent medicine and nerve tonic whose key ingredients were cocaine, caffeine, and sugar. It quickly caught on with thirsty customers as a recreational drink, especially as a healthful alternative to alcohol.

However, the formula of Coca-Cola was modified early on to exclude the cocaine, while retaining a characteristic flavor influenced by coca leaves and kola nuts.

The company produces concentrate, which is then sold to licensed Coca-Cola bottlers throughout the world. The bottlers, who hold territorially exclusive contracts with the company, produce finished product in cans and bottles from the concentrate in combination with filtered water and sweeteners. The bottlers then sell, distribute and merchandise Coca-Cola to retail stores and vending machines. The company also sells many other drinks and snacks.

Recently fellow Seeking Alpha contributor Five Plus Investor wrote an excellent article about investing in Coca Cola. Five Plus Investor only writes about investments that pay a minimum dividend of 5% and since The Coca Cola Company has an annual dividend payout of only 2%, she ingeniously made a cyber pilgrimage round the globe identifying independent publicly traded Coca-Cola bottling companies that pay dividends, finding several that paid a higher dividend than the Coca-Cola Company, but ultimately failing in the quest to find the mystical 5% grail that could have found a home in her portfolio.

Ever sensitive to the woes of a investor in distress, Rookie IRA investor vowed to ride to the rescue in the quest for the 5% Coca-Cola investment, so he mounted his computer and rode straight to the option tables.

He immediately saw that current price of Coca-Cola company ordinary stock is $73.35 and the January 2013 $72.50 call can be sold for $3.50 in the process known as a buy-write or covered call.

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If the investor buys 100 shares of The Coca-Cola Company for $7335, simultaneously selling the January 2013 $72.50 call for $350, her total outlay will be $6985 and if the stock is above $72.50 on options expiration on the third Friday of January 2013, the stock will be called away and she will receive $7250.

This is a profit of 3.8% in 9 months, but if we annualize the calculation, it comes to 5.05%, so we already have our 5% solution. In fact we have more, because we can also pick up the KO dividend of 51 cents for three quarters and earn an additional 2% so really we have ourselves a 7% solution.

"It is Coke" said Sherlock Holmes, "a seven-per-cent solution. Would you care to try it?" [A Study in Scarlet: Sir Arthur Conan Doyle]

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.