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)

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

WAG Chart WAG data by YCharts

Walgreen (WAG)

Walgreen is a national retail pharmacy chain and considered the leader in innovative drugstore retailing. The company was founded in 1901 and is based in Deerfield, Ill.

Yield: 3.18%
Dividend Amount: 28 cents
Ex-Dividend Date: Aug. 15
Beta: 0.99

Strategy: Buy Walgreen stock and offer to sell the August $33.00 strike or lower call for 40 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 25 cents, plus dividend.

I don't want the option hedge unless the sale will provide at least the minimum 40 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 40 cents. The most I can make is 68 cents if I hold the covered call through option expiration day and the stock gets called away.

WAG Payout Ratio TTM Chart WAG Payout Ratio TTM data by YCharts

LLY Chart LLY data by YCharts

Eli Lilly & Co. (LLY)

Drugmaker Eli Lilly directs its research efforts primarily toward the search for products to diagnose, prevent and treat human diseases. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. The company was founded in 1876 and is headquartered in Indianapolis, Ind.

Yield: 4.41%
Dividend Amount: 49 cents
Ex-Dividend Date: Aug. 13
Beta: 0.67

Strategy: Buy Eli Lilly stock and offer to sell the August $42.00 strike or lower call for 67 cents over the intrinsic value. I want to close out the covered option with a profit of about 45 cents, plus the dividend paid by the company.

Large yield stocks, like Eli Lilly at 4.41%, often attract a lot of interest in dividend capturing so the option premium may be hard to get.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 67 cents. The most I can make is $1.16 if I hold the covered call through option expiration day and the stock gets called away.

The best trades are those that an investor can sell at the offer and buy at the bid.

LLY Payout Ratio TTM Chart LLY Payout Ratio TTM data by YCharts

DUK Chart DUK data by YCharts

Duke Energy (DUK)

Duke is an integrated energy and energy services provider in electricity and natural gas throughout the U.S. and abroad. The company was founded in 1916 and is headquartered in Charlotte, N.C.

Yield: 4.63%
Dividend Amount: 77 cents
Ex-Dividend Date: Aug. 15
Beta: 0.34

Strategy: Buy Duke the August $65.00 strike call for 10 cents over the intrinsic value.

The time premium is very small and will cost less than five cents to hold the option until option expiration day. Stocks tend to rise in front of a big dividend payment. Since the time premium is so small as a result of the upcoming dividend it's possible to receive nearly all the increase while holding risk to less than $6 a share.

My profit target is 50 cents, which means Duke will need to increase about 65 to 70 cents a share. Based on the chart pattern, it appears Duke offers a very good risk-to-reward ratio. TheStreet's Jim Cramer writes about working with entry areas Entry Points Galore (You need a Real Money Pro account to read, but Cramer's analysis alone makes it worthwhile.)

DUK Payout Ratio TTM Chart DUK Payout Ratio TTM data by YCharts

TGT Chart TGT data by YCharts

Target (TGT)

Target operates large-format general merchandise and food discount stores in the U.S., which include Target and SuperTarget stores. The company was founded in 1902 and is headquartered in Minneapolis, Minn.

Yield: 2.35%
Dividend Amount: 36 cents
Ex-Dividend Date: Aug. 13
Beta: 0.88

Strategy: Buy Target stock and offer to sell the August $60.00 strike or lower call for $1.03 over the intrinsic value. I will attempt to close out the trade with a gain of near 75 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 $1.03 over intrinsic value.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about $1.03. The most I can make is $1.39 if I hold the covered call through option expiration day and the stock gets called away.

TGT Payout Ratio TTM Chart TGT Payout Ratio TTM data by YCharts

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.