3 Dividend Plays: Coca-Cola, CSX, McDonald's

NEW YORK ( TheStreet) -- Economic and tax concerns for investors in 2013 are turning many investment plans upside down. After the people voted to keep a divided Washington in place, you should expect a lot more of the same short-term patches and lack of long-term guidance.

There are few things Wall Street hates more than uncertainty; the only certainty coming from leaders is two scoops of more uncertainty. While many investors are full of gloom and doom, keep in mind the market travels in circles.

The circle includes both good and bad economic times. Right about the time the media is fully bullish, we start rounding the corner in the other direction like a pendulum on a clock. Round and round we go.

While many investors struggle to keep up with the direction of the market you can get a jump on it. Finding stocks you're willing to hold for long-term value, but positioned to provide short-term gains may give you a market edge in a tough market environment.

We can examine a few solid names that will trade ex-dividend soon. Selling covered call options as a hedge, we collect a quick return or hold for an expected greater return. I call this method dividend capturing, and it's one of the few strong edges a retail trader enjoys currently.

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.


McDonald's (MCD)

Background: McDonalds is the leading global foodservice retailer with more than 33,500 local restaurants serving approximately 69 million people in 119 countries each day. More than 80% of McDonalds restaurants worldwide are owned and operated by independents .

Yield: 3.52%

Dividend Amount: 77 cents

Ex-Dividend Date: Nov. 29

Beta: 0.40

Strategy: Buy McDonalds stock and offer to sell the December $82.50 strike or lower call for 55 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 43 cents, plus dividend.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 55 cents. The most I can make is $1.32 if I hold the covered call through option expiration day and the stock gets called away. I expect the shares to get called away as long as the option remains in the money.


Coca-Cola (KO)

Background: Coca-Cola, a beverage company, engages in the manufacture, marketing and sale of nonalcoholic beverages worldwide. The company primarily offers sparkling beverages and still beverages.

Yield: 2.77%

Dividend Amount: 26 cents

Ex-Dividend Date: Nov. 28

Beta: 0.51

Strategy: Buy Coca-Cola stock and offer to sell the December $35.00 strike or lower call for 21 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 16 cents, plus dividend.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 21 cents. The most I can make is 47 cents if I hold the covered call through option expiration day and the stock gets called away.

The payout rate of the dividend is about 50% of this fiscal year's earnings and slightly less for next year's estimated earnings. The dividend has increased steadily, even during the financial meltdown in 2009.


CSX (CSX)

Background: CSX, together with its subsidiaries, provides rail-based transportation services. It offers traditional rail service and the transport of intermodal containers and trailers.

Yield: 2.7%

Dividend Amount: 14 cents

Ex-Dividend Date: Nov. 28

Beta: 1.24

Strategy:

CSX is a different type of dividend trade. It's not worth selling a covered call because the option premium is only about five cents. But lack of option premium doesn't mean we can't profit from the upcoming ex-dividend date.

The rules of this trade are much different because it only makes sense if you are already bullish and want to buy CSX. Instead of buying CSX directly, buy the December $17.50 strike call for five cents above intrinsic value.

The advantages of buying the call over the stock are overwhelming for an investor ready to buy shares. If you buy the call option, your total risk is about $2.14 based on Wednesday's closing price.

Even though your total risk is about 12% of the underlying shares, the upside is unlimited, just like the shares.

The main disadvantage of buying calls instead of the underlying stock is premium/time decay; however, the time decay is virtually eliminated. The upcoming ex-dividend date skews the option premium to the point that buying calls is free or nearly free from a time premium point of view. The ex-dividend date isn't for two weeks, yet the time premium is only five cents for a stock with a beta of 1.24.

The option will always have at least the intrinsic value to the option owner because even if you can't sell the option, you can always exercise it and then sell the shares. With a time premium of only five cents, that is the most you will have to pay in time premium, and likely the time premium will not go down between now and the day before CSX trades ex-dividend.

Close out or exercise the option before CSX trades ex-dividend to capture gains from now until then.

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

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