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Big Dividend Captures With Microsoft, Walgreens, Lilly, Target and Duke

NEW YORK ( TheStreet) -- Dividend capturing is comparatively new to the retail shareholder. Prior to the Internet, transaction expenses, limited option liquidity and lack of information crafted barriers, thwarting investors from exploiting this market edge.

The most essential requirement to obtain a dividend is to be a shareholder on the necessary day of record. Options can be used to capture multiple dividends by retaining the stock and option longer than three months.

For writers of options, Theta (time decay of option premium) is their greatest comrade, and for buyers, the cruelest enemy. Options are a decaying resource much like milk, and using an option hedge while holding a stock can be profitable, even if the stock doesn't move higher. This is especially true in higher-yielding stocks, since higher-yield options have lower-time premiums, all else being equivalent.

Also, the longer I retain a covered-call position (like two weeks with a front-month option, for example) the lower the time premium is worth, all else being equal.

A requirement I have is to 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 object to an early exercise notice (which does happen from time to time, but is profitable if everything is done according to plan).

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. (Read my 5 Oversold stocks 5 Oversold Stocks Ready for a Bounce Higher article).

Microsoft (MSFT - Get Report)

MSFT Chart MSFT data by YCharts

Microsoft produces a wide range of software products for a multitude of computing devices. The company was founded in 1975 and is based in Redmond, Wash.

Yield: 2.61%
Dividend Amount: 20 cents
Ex-Dividend Date: Aug. 14
Beta: 1.01

Strategy: Buy Microsoft stock and offer to sell the August $27.00 strike or lower call for 32 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 24 cents, plus dividend.

I don't want the option hedge unless the sale will provide at least the minimum 32 cents over intrinsic value. (Read my article Sprint, AT&T Rip Higher In Front of Earnings .)

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 32 cents. The most I can make is 52 cents if I hold the covered call through option expiration day and the stock gets called away.

MSFT Payout Ratio TTM Chart MSFT Payout Ratio TTM data by YCharts

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DUK $78.68 0.40%
LLY $71.13 0.34%
MSFT $49.07 2.20%
TGT $81.53 0.18%
WAG $81.65 2.05%


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