Dividend Captures for Fun and Profit

NEW YORK ( TheStreet) -- Not long ago the ability to capture dividends wasn't a realistic strategy for retail investors. Transaction costs, limited option liquidity, and a lack of reliable information kept everyone but a few marketmakers away. The situation has mostly changed, with the exception of reliable information.

Finding deep in-the-money call options to hedge a position with enough premium to justify the downside risk, is all but impossible. What investors can do however is find reasonable risk vs. reward setups to exploit for profit.

In the age of computers and automated trading, what keeps the strategy alive is the inability to scale. The inability to scale allows the retail investor continued opportunity.

I present these companies with potential dividend captures along with absolute minimum entry set up requirements needed. Ideally, having the discipline to demand even higher time value premiums will result in superior results.

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 amount needed over intrinsic value.

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.

UTX Dividend Chart UTX Dividend data by YCharts

United Technologies (UTX)

Background: United Technologies provides a broad range of high-technology products and services to the building systems and aerospace industries. Those products include Pratt & Whitney aircraft engines, space propulsion systems and industrial gas turbines; Carrier heating, air conditioning and refrigeration; Otis elevator, escalator and people movers; Hamilton Sundstrand aerospace and industrial products; Sikorsky helicopters and International Fuel Cells power systems. The company was founded in 1934 and is based in Hartford, Conn. United Technologies trades an average of 4.2 million shares per day with a marketcap of $70 billion.

Yield: 2.8%

Dividend Amount: 54 (53.5) cents

Ex-Dividend Date: Nov. 14 Beta: 1.05

Strategy: United Technologies offers us two different strategies. The first is to buy United Technologies stock and offer to sell the November $77.50 strike or lower call for $1.05 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 near 81 cents, plus dividend.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about $1.05. The most I can make is $1.59 if I hold the covered call through option expiration day and the stock gets called away.

The second strategy is more conservative and results in a faster bang for your buck. If you trade with a broker that charges very little or nothing for exercises, the second strategy becomes even more favorable. Buy United Technologies stock and offer to sell the November $75 strike or lower call for 40 cents over the intrinsic value.

As long as the stock remains above the strike price the day before trading ex-dividend, you can expect assignment of your shares. The profitability is 40 cents, however, your risk is lower and the trade only lasts for about two weeks.

UTX Payout Ratio TTM Chart UTX Payout Ratio TTM data by YCharts

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