Dividend Increase Combined With Call Premium

by Mike Scanlin

Recently analysts have written about a potential dividend increase coming from several blue chip companies. They base these predictions on past trends, current profitability, and current levels of relatively low dividend yield and dividend payout. Some of the symbols that come up on multiple analysts' lists include (alphabetically): AXP, BAC, CL, GE, JNJ, JPM, KMB, KMP, KO, MCD, MDT, MSFT, PFE, PG, WAG, and WMT.

Since the market treats a dividend increase as a bullish sign, the stock price tends to go up when a dividend increase is announced. Clearly you don't want "anticipated dividend increase" to be your only investment criteria. But if you like the company anyway then it's an additional reason to like it even more, and it could be an opportunity to enter a company you may not currently own before the increase is announced.

An even better strategy (in our opinion) would be to buy a blue-chip company where you thought a dividend increase was coming and then write covered calls against it so that you get the call premium and the [potentially increased] dividend.

We entered the analysts' symbols above into Born To Sell's Watchlist feature to create two lists of covered call candidates where analysts feel a dividend increase is likely. Below are the top Annualized Return If Flat results. The first list has no earnings releases before the January expiration. The second list does have an earnings release before expiration. In this second case, it may still be worth taking the earnings risk because any dividend increase will probably be announced at the same time that earnings are announced.

List 1: No earnings before Jan 22 expiration

Symbol	Stock Ask	Call Strike	Net Debit	Moneyness	Annualized Return If Flat
WAG	40.92	41	40.46	ATM	36.5%
AXP	45.32	45	44.61	1% ITM	29.9%
MDT	36.56	37	36.29	1% OTM	23.2%
JNJ	62.34	62.5	61.98	ATM	19.9%
KO	62.85	62.5	62.13	1% ITM	19.9%

List 2: Earnings before Jan 22 expiration

Symbol	Stock Ask	Call Strike	Net Debit	Next Earnings Date	Moneyness	Annualized Return If Flat
JPM	43.60	44	42.88	Jan 14	1% OTM	56.4%
BAC	14.70	15	14.48	Jan 21	2% OTM	49.8%
GE	18.49	17.5	17.31	Jan 21	5% ITM	36.5%
GE	18.49	19	18.32	Jan 21	3% OTM	29.9%
JPM	43.60	45	43.22	Jan 21	3% OTM	29.9%

Disclaimer: These are not meant to be trade recommendations. Just a filtering strategy to provide some ideas and candidates for further research. If you're not sure about some of the terms, our covered call tutorial explains net debit and moneyness.

Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.

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