Warren Buffett's largest holding within Berkshire Hathaway (BRK.A) is Coca Cola (KO). The company is comprised of over 3,500 diverse beverages. An investment in Coke can be considered an investment in hydrating the world. The company has multiple brands under every letter of the alphabet except for X and Z.
The company is not undervalued, nor does it provide above average earnings growth. What it does provide is dividends and earnings consistency. Coke has increased its dividend payments every year since 1963. The current yield is 2.8%.
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For the past five years the company has grown earnings annually at 7.36% and it is expected to grow earnings annually at 7.97% for the next five years. This is a little under the growth that I typically like. Usually, I like to see the combination of dividends and earnings growth to equal at least 15%. However, I see Coke as a good candidate for a covered call strategy to accelerate your potential gains. The predictability of the company creates this opportunity.
The covered call strategy is for those who already have a position in Coke and wish to hedge against potential losses and for those who want to collect some option premium to bring in extra money from the investment.
First, we'll look out one month and sell the June $75 call for $87. If the stock remains below $75 by June expiration, the $87 which was credited to our account is ours to keep. If the stock does rise above $75 by June expiration, we'll have to buy the call back for a slight loss, but that means that the shares that are owned have risen about 1% which is good.
After June expiration, continue to do this for the next available month. Coke also has options in August, and November of this year where we can continue selling the near the money call options with the intent of collecting premium for each time period.
Let's say that we sold calls six times throughout the year for an average contract price of $75. That is a total of $450 if each option successfully expired or about a 6% yield for 100 owned shares. That strategy has the potential to add to the current dividend yield of 2.8% for a total of 8.8%. Now that makes the stock much more exciting.
Coca Cola is a consistent buy and hold company for the long-term. The covered call strategy can make the holding process a little more lucrative while providing a hedge on your position. The total yield as dividends and stock appreciation should approximately yield 10.8% annually. This total yield can exceed 16% annually with the covered call strategy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
