As mentioned in my posts last week, my wife and I have decided to consider dividend paying companies as the underlying stock in future covered call trades.  The idea is to not only capture the call premium, but also receive a dividend during the period in which we hold the underlying shares.  It’s important to note that using a single company as the underlying adds concentration risk compared to using an ETF, but we hope to mitigate that somewhat by picking our companies from the list of 2009 Dividend Aristocrats.

Investment research

I believe using a Dividend Aristrocrat helps mitigate the concentration risk for two reasons.  First, these companies tend to be large companies with multiple lines of business across multiple countries, thus there is some in-built diversification.  Second, you’re unlikely to find another situation where you’re more likely to get the dividend that you’re doing this for in the first place.  While nothing is guaranteed, actually getting the dividend can help provide a buffer in the event things go a little worse than you’d hoped for.  And lastly, while not addressing concentration risk, I am willing to hold the stock of these companies for longer periods of time so I’m less worried if the call doesn’t get assigned.

Okay, so on to the analysis.  The following is a list of 2009 Dividend Aristocrats (well sort of, I’ve removed any companies that have already cut their dividend since the list was generated in Dec, 2008) that are likely to pay dividends prior to August expiration.  The following companies have a record of consistent quarterly dividends and enough of a consistency in ex-dividend date (at least 4 years of +/- 3 days) that I felt comfortable predicting it.

1. ADM @ $28.63; likely ex-dividend of Aug 17 for $0.14
2. AFL @ $31.50; likely ex-dividend of Aug 17 for $0.28
3. BMS @ $26.76; likely ex-dividend of Aug 15 for $0.225
4. ED @ $37.39; likely ex-dividend of Aug 13 for $0.59
5. EMR @ $33.97; likely ex-dividend of Aug 12 for $0.33
6. GWW @ $84.56; likely ex-dividend of Aug 7 for $0.46
7. LLY @ $33.53; likely ex-dividend of Aug 13 for $0.49
8. PBI @ $22.20; likely ex-dividend of Aug 13 for $0.36
9. PPG @ $49.56; likely ex-dividend of Aug 8 for $0.53
10. SHW @ $56.52; likely ex-dividend of Aug 20 for $0.355
11. STR @ $32.15; likely ex-dividend of Aug 18 for $0.125
12. TGT @ $39.56; likely ex-dividend of Aug 18 for $0.16
13. WAG @ $29.82; likely ex-dividend of Aug 18 for $0.113
14. WMT @ $48.49; likely ex-dividend of Aug 12 for $0.273
15. XOM @ $68.52; likely ex-dividend of Aug 10 for $0.42

The next step for me will be to look at August calls for these and filter down to those with a net debit that fits within my cash available, and an acceptable volume in options.  Then I’ll sort by the calculated return, and starting with the best return, do research on the underlying to figure out whether I’m willing to own the stock for multiple months.  If I can’t find anything that makes me comfortable, I’ll go back to looking at ETF covered calls.