Boost Your General Mills Dividend Yield

Retirees seek reasonable, consistent yield without a threat to the nest egg. For the last two weeks I have revisited a method for doing this, one I first described six years ago.

The Quest for Yield (Part 6): Enhancing the Yield from Your Dividend Stocks, written in March 2012 explained the concept. While I have made a few changes, it is working as expected. I hope to write a series of posts describing and explaining some of our current choices and trades. While this is not investment advice for any specific reader, those who need to increase their yield may find it interesting. (More on this subject below).

Introduction

The program, simply described, consists of buying a good dividend stock and selling a call against the position. While there are many dividend programs and many covered call programs, there is a powerful synergy from putting them together. There is also skill in choosing suitable stocks and the right call to sell.

I began the series with IBM, emphasizing criteria for finding suitable stocks. The next installment covered AT&T (T), with an emphasis on the choice of which call to sell. Each week I am highlighting a different part of the process using an actual holding in our portfolio. In this post I discuss elements of managing a position, using the example of General Mills (GIS).

Choosing a Suitable Stock

The best stocks for this approach have the following characteristics:

• A reasonable dividend – 2.5% or more is fine.
  
• A good balance sheet.
  
• A reasonable payout ratio, providing confidence that the dividend can be maintained.
  
• Limited downside risk.
  
  • A cheap stock on a P/E basis.
    
  • Evidence of technical support.
    

We do not care about the immediate chances for an upside move. We do not care about the “organic” earnings growth versus share buybacks. We do not care if the stock is out of favor or boring.

We seek a safe platform for selling calls. Wherever someone sees a “value trap,” we see a candidate for this program.

General Mills Qualifications

Let’s start with the dividend history, an impressive record, but slowing over the last year.

For valuation, I use FAST Graphs to verify that the current price is attractive. It is still quite reasonable and was even more attractive when we first bought the position, 9/24/18.

History and Management of the Position

This investment included the following elements:

• The original covered call (9/24/18)
  
  • Purchased stock at $44.22.
    
  • Sold OCT 45 call for 42 cents.
    
• Collected dividend of 49 cents (holders of record on 10/9/18)
  
• Call expired worthless (10/19/18 – stock at $44.54).
  
• New call sold (JAN 47.5 for 78 cents).
  
• Anticipated dividend of 49 cents (holders of record 1/9/19).
  

Here is the history in chart form.

There are several key lessons here.

1. Even though we made the initial trade after waiting for a significant dip, there was another decline in the stock. Viewed as a trade, the stock lost about a dollar and the calls only about fifteen cents.
   
2. The dividend of 49 cents (shown on the ex-dividend day) is taken out of the stock price.
   
3. The calls expired worthless. The stock was close to the original price, and we still liked it. Rather than selling we sold another round of calls, moving the strike up to 47.5 and going out to January. This allowed us to capture another dividend.
   
4. So far, we have collected $1.20 in call premiums and will also get $0.98 in dividends. This is a total of $2.18 on $44.22, or about 4.9% in four months.
   
5. We do not know, of course, what the stock price will be at January options expiration. If it moves above $47.50, we can make another three dollars. If not, we’ll decide whether to sell more calls.
   
6. And importantly, please note that this position looked like a loser for much of the history if you only checked current positions and unrealized losses. The gains from past call sales and dividends are the key part of the strategy.
   

This is a portfolio strategy. You need not and should not fixate on each trade.

Putting It All Together

It is a good idea to have several positions in diverse sectors. I currently use 14 positions, with no more than two in a single sector.

Of our targeted portfolio yield of 9%, 4/5 of it comes from selling calls. Most people can take 5% yield on the original investment and reinvest the rest. The yield payout comes from the dividends and call sales, not from selling your stocks. In that sense, it is like a regular dividend program. An advantage is that if the underlying stocks decline, the reinvested yield increases your position size. You are “buying low.” When stocks are sold (closing above the target price) you are “selling high.”

Can It Work for You?

You could begin the GIS position right now, selling the JAN 47.5 call for about 68 cents. This is less than we collected, but the remaining time to expiration is shorter. It is still attractive. Our prior examples of IBM and T are still active, and I’ll provide overall updates on the positions described in this series – all current holdings.

If you are an income investor, you might give this approach a try with a small, starter position. But beware. Here is what I wrote six years ago:

Here is the qualification test — hardly anyone can pass it!

You cannot look at your brokerage statement, the daily mark-to-market, the monthly mark-to-market, or anything else for ten years.

This is what you would do with a bond portfolio.  You buy expecting to collect the coupon and the principal at maturity.  It is a simple test, yet a difficult one.  The bond investor does not worry about daily marks.

Psychologically, people cannot do this with stocks.

Today’s installment shows how a winning position might not appear as such on your statement.