How I'm Earning "Bonus Dividends" From Coca-Cola

Amber Hestla's picture

Thursday, May 2, 2019 - 12:00am

by Amber Hestla

If you've been following along with me lately, then you know I'm concerned about the market right now for a number of reasons.

Nevertheless, the bull market remains intact. For now

In the meantime, while I'm watching the market, I don't see any reason to avoid making new trades rights now, especially if they're the kind of conservative income trades my readers and I make over at Maximum Income.

Case in point: I recently recommended a trade in The Coca-Cola Company (NYSE: KO)

And today, I'm going to share the details with you...


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For starters, you should know that this is a covered call trade. That's a trade involving options, but don't let that scare you. In fact, covered calls are one of the most conservative options trading strategies out there.

For those who aren't aware, a call option is simply the right -- but not the obligation -- to buy 100 shares of a stock at a specified price before a specified date. Selling a covered call obligates us to sell that stock to the call buyer if it moves above a specified price (the option's "strike price"). When we accept that obligation, we receive income upfront (known as a "premium"). You can be asked to sell the stock at any time between the moment you collect the premium and the expiration of the option contract. To minimize risk, we will only sell calls on stocks that we own 100 shares of -- that's what makes it a "covered" call. 

A Good Defensive Trade
This trade came across my desk after noticing the bullish signal from my Income Trader Volatility (ITV) indicator. I'll spare you the details of this indicator for now -- all you need to know is that this is the indicator I personally developed after years of refinement to identify successful options trades. (This indicator also won the prestigious Charles H. Dow award a few years ago.)

KO PAM chart

KO has been a market laggard and is currently trading at the same price as it was in February 2018. It's provided investors with a total return of just 31% in the past four years as the S&P 500 gained more than 52%. And half of KO's returns have come from dividends. 

KO was also a market laggard in 1999, while the tech IPO bubble was building. As the NASDAQ 100 dropped more than 80% from March 2000 to October 2002, KO lost less than 2%, an extraordinary performance in a devastating bear market. 

I believe KO's defensive characteristics make the stock attractive right now, as market risks continue to rise. 

Let's Earn "Bonus Dividends" From Coca-Cola 
I originally recommended this trade on April 26, so keep in mind some of the numbers may have changed. It's possible that both the stock and the call option will be trading for slightly different prices than what you see in the trade example below; that's OK. As long as you can enter this trade for a cost basis below $47.25, I recommend executing the covered call trade. To ensure you get the price you want, I recommend setting a limit order. 

At the time, KO was trading around $48.35. I recommended buying 100 shares of KO and then selling one KO Jun 48 Call for every 100 shares of KO you purchased or own already. That's a call option on KO with a strike price of $48 that expires on June 21. This will also allow us to collect regular dividends on KO, which will be paid in June.

At the time I recommended this trade, the KO Jun 48 Calls are trading around $1.10 per share. The goal was to enter this trade at a cost basis of $47.25 or less. (Your cost basis is simply the price you purchase shares at minus the premium received when selling the call.)

This call will obligate you to sell KO at $48 a share if the stock trades above that on June 21 (the last day these options can be traded). 

Assuming KO trades for $48 or less on June 21, we'd keep the $110 premium ($1.10 x 100 shares) as well as the $40 dividend ($0.40 per share x 100), giving us a total of $150 in income for every 100 shares of KO we control. Assuming you were able to buy 100 shares at the price noted above ($48.35), at $4,835, this would earn 3.1% in 57 days. If we can repeat a similar trade every 57 days, we'd earn a 19.9% return on our capital in 12 months. 

Now, if KO trades above $48 on June 21, we'd keep the income we received from selling the call and collecting the distribution, but we'd have to sell KO at $48 per share. In this case, we'd realize a profit of about $1.15 per share ($48 - $46.85 new cost basis), or $115 per 100 shares. This is a profit of 2.5% in 57 days. If we can repeat a similar trade every 57 days, we'd earn a 15.7% return on our cost basis in 12 months. 

Want To Earn More "Bonus" Dividends?
Now I realize all those numbers may be a lot to process, but once you understand how easy this can be, there's no reason you can't be earning "bonus" dividends like this, too. In either of the scenarios I laid out above, we're basically looking at a "win-win". That's what makes covered calls so appealing. 

Frankly, in this dangerous market, I don't know why more investors aren't doing this. That's why thousands of investors have already joined me over at Maximum Income. They're not content to simply accept the income offered by traditional stocks and bonds, and you shouldn't be either. 

That's why I'm happy to tell you about my research report, which explains how covered calls work, and how you can use it to generate hundreds -- even thousands -- of dollars per month, no matter whether the stock market is moving up, down or sideways. If you'd like to learn more, simply go here.

P.S. There's another way you can trade that beats "buy and hold" every time... And on May 9th, master trader Jim Fink is going to show a small group of regular investors how use it to turn $5,000 into $125,000 in the next 12 months. This free event starts at 1 p.m. sharp. And spots are limited. Click here for details.

Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.