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 attractiveinvestment option
.
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 semiconductormarket . 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 seeearnings 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 new52-week low . The stock is now priced at a level that should
make the company attractive to value investors.
In addition to the low P/E ratio, value investors may also like
the rich 4.6%dividend yield that Intel offers. Thedividend 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
acovered call on Intel, youwill first need to buy at least
100shares of the stock. Eachoptions contract will be for 100
shares, and to be covered you should own enough shares of the stock
to deliver the stock if it iscalled away .
Acall option would be called by the buyer if the stock'smarket
price rises above the option exercise price. In this case, you sell
the stock at the agreed upon price at aprofit and keep the options
premium received when thecall 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 astrike 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-weekholding
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