This Microsoft (MSFT) “Income Trade” Could Yield at Least 19% Annualized Returns

dda-cashMicrosoft (MSFT) is a Dividend Contender that has increased its payments each year for the past 11 years in a row.

At current prices, the stock yields 3.1%.

With a low payout ratio of just 41.9%, the company is generating more than enough earnings to cover its current above average dividend yield (the S&P 500 yields just 1.9%).

According to Dan Ferris, editor of the popular 12% Letter, Microsoft is a “cash-gushing powerhouse with thick, consistent profit margins… and a huge competitive moat around its business.”

This is how the company can afford to raise its dividend year after year. And the raises are significant too. On average, Microsoft has boosted payments by 15% a year over the past 10 years, with its latest increase clocking in at 21.7% (from a quarterly payout of $0.23 a share to $.028 a share).

It’s for this reason that dividend growth investors are so attracted to the stock. But while many of these investors are are happy to simply hold shares for their 3.1% annual yield, we can do better and generate at least a 19% annualized return — safely — from these very same shares.

How? By selling covered calls.

Here’s the opportunity we’re looking at today…

For the past 11 consecutive years Microsoft has paid paid its first quarter dividend on or before Feb. 19. If history repeats, its next dividend will be paid to shareholders before the Feb. 22 expiration date of the covered calls list in the table below. This would allow us to not only collect income from the options premium, but we’d collect Microsoft’s next dividend payment too.

Microsoft (MSFT)

Action to Take
We’d consider selling Microsoft’s (MSFT) Feb. 22 $38 calls in anticipation of collecting MSFT’s next big dividend AND some decent income from the call premium. Here’s how it would work…

Scenario 1:  MSFT is currently trading for $36.89. If the stock is trading below $38 on Feb. 22 we would make a $70 profit on every options contract in 5 weeks (19% annualized return) and still get to keep our shares. At that point we could repeat the process and perhaps sell the March calls for even more income.

Scenario 2: MSFT is currently trading for $36.89. If the stock is trading above $38 on Feb. 22 our shares would get called away, as we would be obligated to sell them at $38 per share. However, this trade would yield us a $210 profit on every options contract in 5 weeks, for an annualized return of 57%.