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One Of The World's Greatest Companies Offers 15% A Year Income Potential

 December 07, 2012 10:06 AM
 


Few companies can claim they actually contributed to changing the world. But less than 30 years ago, Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) did change the world as they defined the standards for personal computers (PCs). With Intel providing the hardware standards and Microsoft defining software, those two companies made the widespread acceptance of the Internet possible.

Today, these two companies are still leaders in their markets, but they have become more like stodgy utility companies than the growth juggernauts they were decades ago. Both now trade with low price-to-earnings (P/E) ratios and significant dividend yields. Of the two, I think Intel is the more attractive investmentoption.

[Related -Microsoft Corporation (MSFT) Earnings Preview: What To Watch In Q2 Results?]

Intel is the world's largest chipmaker and has been for 20 years. According to Computer World, the company accounts for about 17% of the sales in the $307 billion semiconductor market. While PC sales are slowing, they are still significant, and Intel is unlikely to lose its dominant position in the industry in the near future.

Analysts following Intel do seem to think the company's best days are in the past. They expect to see earnings per share grow at about 12% a year during the next five years, less than half the growth rate of 28% a year Intel achieved in the past five years. Based on next year's estimated earnings, Intel is trading with a price to earnings (P/E) ratio of about 10 after recently falling to a new 52-week low. The stock is now priced at a level that should make the company attractive to value investors.

[Related -Intel Corporation (INTC) and 5 Other Stocks That Could Pop on Earnings This Week]

In addition to the low P/E ratio, value investors may also like the rich 4.6% dividend yield that Intel offers. The dividend appears safe, with the payout requiring only about 45% of the company's earnings. Traders may overlook Intel because the prospects of a short-term gain in the stock price seem low; however, the dividend yield supplemented with a covered call options strategy could deliver double-digit gains.

Covered calls are call options sold against stocks that you own. It is a strategy that can be used to increase income. To write a covered call on Intel, you will first need to buy at least 100 shares of the stock. Each options contract will be for 100 shares, and to be covered you should own enough shares of the stock to deliver the stock if it is called away.

A call option would be called by the buyer if the stock's market price rises above the option exercise price. In this case, you sell the stock at the agreed upon price at a profit and keep the options premium received when the call was written as additional profit.

If you are confused on the concept of covered calls, looking at the specifics for Intel should help you better understand the strategy.

At the time of this writing, Intel is trading at about $20. A call option with a strike price of $21 expiring in January is trading at about 32 cents. Buying 100 shares of Intel would cost $2,000 and selling the call would generate $32 in income, in effect reducing the cost of Intel to $19.68 a share.

When the call expires at the close on Jan. 18, if Intel is below $21 a share, you are free to sell another call. In that case, the profit on the January call would be 1.4% for a seven-week holding period, or 10.36% on an annualized basis. If you continue writing calls for that same amount as they expire, you should be able to receive income of about 14.96% a year when the call premiums are added to the 4.6% dividend yield.

If Intel is trading above $21 when the options expire in January, you will be forced to sell the stock for $21 and accept a gain of 6.7% for the seven weeks that the position was open.

Covered calls on value stocks with stable dividends could be a high income strategy for traders to consider. Intel offers an excellent example of how this strategy could be implemented.

Action to Take --> Sell one Intel Jan 21 Call at the market price for each 100 shares of Intel bought at the market. Do not use a stop loss. This is a stock that can be held for the long-term. The profit objective is income of 1.4% in seven weeks if Intel declines or is unchanged, or a 6.7% profit if Intel rises above $21 and shares are called away.

This article originally appeared on TradingAuthority.com:

One of the World's Greatest Companies Offers 15% a Year Income Potential

-- Amber Hestla-Barnhart

Amber Hestla-Barnhart does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of INTC in one or more of its "real money" portfolios.
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