Many companies offer quarterly (or more often) dividends to shareholders. This can be a great source of income and with each dividend payment received, investors are able to lower their risk in an investment. The one requirement to receive a dividend from a company is to be a shareholder on the day of record for the dividend.
For the most dividend catching 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.
Microsoft Corporation (MSFT) develops, licenses and supports a range of software products and services for various computing devices worldwide. The company's Windows and Windows Live Division segment offers PC operating system that primarily includes Windows 7 and Windows Vista operating systems, Windows live suite of applications and Web services, and Microsoft PC hardware products.
Dividend Amount: 23 cents
Ex-Dividend Date: November 13, 2012
Strategy: Buy Microsoft stock and offer to sell the November $28.00 strike or lower call for 44 cents over the intrinsic value.
The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near 13 cents, plus dividend.
It is important to sell the call option hedge at or near the asking price for at least the minimum amount over intrinsic value. I don't want the option hedge unless the sale will provide at least the minimum 44 cents over intrinsic value.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 44 cents. The most I can make is 67 cents if I hold the covered call through option expiration day and the stock gets called away. Learn more about stock options by clicking here.
My last step (completed before making a trade on the same day) is to check company announcements and news sources for possible price moving events. This is especially critical during earnings season.
What makes Microsoft a great company to capture a dividend from is if the stock doesn't perform well in the next few weeks it's a great buy and hold company. The forward PE ratio is under 10 and they print money like they are part of the Fed.
I will admit I am not overly crazy about the new hardware offerings, but Microsoft could decide to stop all new product ideas and generate billions of dollars in free cash flow for years.
I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, albeit not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MSFT over the next 72 hours.