| Boost Your Annual Income by 386% From This Blue-Chip Stock | The Federal Reserve's recent dovish statements regarding long-term interest rates have lit a fire under dividend-paying stocks. Low interest rates naturally support stock prices for companies that pay dividends because investors who need to generate income from their capital have little choice but to buy equities that have generous payouts. Fixed-income products like corporate and Treasury bonds simply don't offer enough yield when interest rates are low.
Leading up to the FOMC meeting, investors were beginning to price in the potential for the Fed to start paving the way for rising interest rates. However, Fed Chair Janet Yellen threw the market a curve ball by essentially stating that the Fed remains committed to holding interest rates in the current target range (between 0% and 0.25%) for an extended period after the bond-buying program ends.
With rates expected to remain low for a longer time, the Fed essentially gave the "all clear" signal to continue investing in dividend stocks. As capital flows into these names, we can employ a put selling strategy with a reasonable expectation that these stocks will remain stable or trade higher. The stock I'm interested in selling puts against today is Freeport-McMoRan Copper & Gold (NYSE: FCX), a company that currently pays a quarterly dividend of $0.313 for a current annual yield of 3.5%.
Traditionally, Freeport has been focused on mining base metals such as iron ore and copper, which were in high demand as China made huge investments in its infrastructure over the past decade. But as China's growth has been called into question, some investors are worried that FCX will be hurt by soft base metal pricing and weakening demand.
FCX met this challenge head on, by expanding well beyond its metals business into oil and gas exploration and production. These additional lines of business allow the company to diversify revenues. The move was initially met with investor criticism, but oil prices have been on the rise this year, which helps to validate the company's decision to move into the energy arena.
FCX has been rallying since mid-March and is currently trading near $36. To set up our income trade, we're going to sell the FCX Aug 35 Puts with a limit order of $0.75.
By selling these puts, we are accepting the obligation to buy 100 shares of FCX per contract at the $35 strike price if the stock is trading below this level when the puts expire on the third Friday in August.
As compensation for accepting this obligation, we are receiving $0.75 per share, or $75 per contract. This represents the income that we are generating from this trade, and if FCX remains above $35, we will get to keep this income free and clear with no further obligation.
Of course, we will need to set aside capital as collateral in case we are assigned the shares. Because we collect $0.75 in option premium, our net cost per share is lowered to $34.20. Therefore, we should set aside an additional $3,425 per contract.
If FCX remains above $35 as I expect and the puts expire worthless, our $75 in income represents a 2.2% rate of return over the $3,425 in capital set aside. Since we will realize this over 47 days, our per-year rate of return nets out to 17%, which is very attractive given the low level of interest rates. In fact, this is five times as much as the stock's annual yield. Put another way, by selling puts, you could boost your annual income by 386% over the traditional dividend investor.
In the off chance that FCX pulls back enough for our obligation to kick in, we will be able to buy it with a net cost of $34.20 per share, and we have a good shot at holding the stock for gains as the company's oil and gas business grows. In the meantime, as shareholders, we will be receiving dividend payments and can also sell covered calls against our position to generate additional income.
Note: My colleague Amber Hestla has closed 52 straight winning trades using this strategy. You can see her entire track record and learn exactly how you can make the same winning trades yourself by following this link.
| Disclosure: None.
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