6 Low-Yield Dividend Captures

NEW YORK (TheStreet) -- With a little work you can find lots of companies that are worth owning that also offer dividends.

Dividends can be a wonderful source of revenue, and each dividend payment decreases an investor's risk in his investment.

The basic requirement to receive a dividend is to be a shareholder on the day of record.

You can read on the Internet about plenty of strategies for capturing dividends, but many of them work better on paper than in practice.

I've developed my own strategies that I've tested by employing them in real trades.

Every once in a while the hedge I employ isn't enough to offset a strong adverse move, but I find that by entering into multiple trades, the gains I make more than offset the losses on the few trades that don't pan out.

Although much of the gains will come from dividends, option decay can also provide a return. This is especially true for lower-yielding dividend stocks.

Lower-yielding dividend captures have both pros and cons. Obviously, a lower yield will have less dividend to capture, but this is often more than offset by a larger option premium, easier-to-find opportunities and lless competition in writing the option hedges.

Baxter International Inc. ( BAX)

Baxter International Inc., through its subsidiaries, develops, manufactures, and markets products for people with chronic and acute medical conditions. The company was founded in 1931 and is based in Deerfield, Ill.
Yield: 2.48%
Dividend Amount: 34 cents
Ex-Dividend Date: June 6, 2012
Beta: 0.48

Strategy:

Buy Baxter International stock and offer to sell the June $52.50 strike or lower call for 27 cents over the intrinsic value.

Baxter International's coming stock dividend appears to be attractive and worth the time and effort to capture. A requirement I have is that I need 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 so that I will not object to an early exercise notice (which does happen from time to time, although one can still make a profit by doing everything according to plan).

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 27 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 27 cents. The most I can make is 61 cents if I hold the covered call through options expiration day and the stock gets called upon expiration.

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 critical during earnings season.

Stanley Black & Decker, Inc. ( SWK)

Stanley Black & Decker, Inc. provides power and hand tools, mechanical access solutions, and electronic security and monitoring systems. The company was founded in 1843 and is headquartered in New Britain, Conn.
Yield: 2.32%
Dividend Amount: 41 cents
Ex-Dividend Date: June 04, 2012
Beta: 1.45

Strategy:Buy Stanley Black & Decker stock and offer to sell the June $67.50 strike or lower call for 53 cents more than the intrinsic value.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 53 cents. The most I can make is 94 cents if I hold the covered call through option expiration day and the stock gets called.

Stanley's price has moved lower to test support near the 200-day moving average. A break below that average is bearish (especially a second break below).

Coca-Cola Enterprises Inc. ( CCE)

Coca-Cola Enterprises, Inc. produces, distributes, and markets nonalcoholic beverages. It provides still and sparkling waters, juices, sports drinks, juice drinks, coffee-based beverages, and teas. Coca-Cola Enterprises, Inc. The company was founded in 1986 and is based in Atlanta.
Yield: 2.18%
Dividend Amount: 16 cents
Ex-Dividend Date: June 06, 2012
Beta: 1.19

Strategy:

Buy Coca-Cola Enterprises stock and offer to sell the June $28.00 strike or lower call for 46 cents over the intrinsic value. What really makes this a strong dividend capture is the unlikeliness of the shares called away before the dividend. If CCE does move up enough to incentivize option owners to call the shares early, the gain is almost 2% for two weeks. The 200-day moving average is $26.85, supporting the hedge against anything other than really bad news about the company.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 46 cents. The most I can make is 62 cents if I hold the covered call through option expiration day and the stock gets called away.

Frontier Communications Corp. ( FTR)

Frontier Communications Corp. provides communications services for residential and business customers in the U.S. The company was founded in 1927 and is based in Stamford, Conn.
Yield: 11.53%
Dividend Amount: 10 cents
Ex-Dividend Date: June 6, 2012
Beta: 0.73

Strategy:

This is a Lotto ticket play unless you're already bullish on Frontier. If you're bullish it may be better to buy the June $3.00 strike for 6 cents over intrinsic value instead of buying stock.

At a current cost of about 35 cents, and virtually zero time decay between now and the day before trading ex-dividend, this is as close as you get to a free ride on Wall Street. Buying the option instead of the stock is like catching a falling knife with your bare hands vs. catching the knife with leather gloves on. You can cut your risk buying options to 10% for the same relative number of shares compared to buying the stock outright, giving up almost none of the upside for two weeks.

Praxair, Inc. ( PX)

Praxair, Inc. engages in the production, distribution, and sale atmospheric and process gases, as well as surface coatings in North America, Europe, South America, and Asia.
Yield: 1.97%
Dividend Amount: 55 cents
Ex-Dividend Date: June 5, 2012
Beta: 0.84

Strategy:

Like Frontier, only better, Praxair is another falling knife appearing to be ready for a bounce. I would wait and look for an entry price of less than $108 this week. A gap down like the one on March 6 followed by a reversal would get me interested. I would look to buy June $95.00 or $100 strike call for 20 cents over the intrinsic value. No reason to try to capture the dividend, the option will most likely get an early exercise and reaching for 55 cents with a $100 stock can end badly fast.

Legg Mason, Inc. ( LM)

Legg Mason, Inc., through its subsidiaries, operates as an asset management company worldwide. The company was founded in 1899 and is headquartered in Baltimore.
Yield: 1.88%
Dividend Amount: 11 cents
Ex-Dividend Date: June 8, 2012
Beta: 1.80

Strategy:

Buy Legg Mason stock and offer to sell the June $23.00 strike or lower call for 66 cents over the intrinsic value.

After qualifying for the dividend, I will look to close out the covered option with a gain of about 46 cents, plus the dividend received.

I don't want the option hedge unless the sale will provide at least the minimum 66 cents over intrinsic value. The value in this trade is the combination of option premium and dividend received. One or the other on its own isn't very attractive.

At the time of publication, the author did not hold a position in any securities mentioned.

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