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Squeezing Dividend And Options Premium From Mayo And Ketchup With Kraft Heinz Buy Write

John Dobosz is editor of Forbes Dividend Investor, which provides a weekly portfolio of high-yielding, value-priced income stocks, REITs and MLPs, and Forbes Premium Income Report, which sends out options-selling trade recommendations on two dividend-paying stocks every Tuesday and Thursday.

Shares of Kraft Heinz (KHC) initially sold off following the company’s quarterly earnings report on July 27 when it beat analysts’ expectations on the top and bottom lines and raised full-year profit guidance. Over the past two weeks, however, the stock has rallied 7.5%.

There is a dividend coming up in two weeks, which gives additional appeal to the idea of a buy write—buying the stock and selling call options on it—which adds another $0.70 in income to the $0.40 per share upcoming dividend.

Please email me ([email protected]) at any time with questions about how to use Forbes Premium Income Report. –– J.D.

Kraft Heinz (KHC) – Buy Write

Buy 100 KHC

Sell to Open 1 September 23 $40 Call

Execute for Net Debit of $38.55 or lower

Pittsburgh, Pa.-based Kraft Heinz (KHC) makes and markets food and beverage products that include condiments and sauces, cheese and dairy, and complete meals. Expected 2022 annual revenue of $26 billion is forecast to dip 0.15% compared to 2021, while earnings are seen falling 8.5%.

Even as business loses the boost from Covid-inspired purchases during the pandemic, Kraft Heinz still generates $2.60 per share in free cash. That’s more than ample to keep on paying and raising the dividend, currently paid at an annual rate of $1.60 per share.

Kraft Heinz shares yield 4.1% and the next dividend of $0.40 per share is coming up later this month with an August 25 ex-dividend date. Anyone who owns the stock through the close on August 24 earns the payout.

If you already hold 100 KHC, your cost basis in the stock is $36.95, so you’re sitting on a paper profit of 6%. If you do not wish to realize that profit now, I propose writing $40 September 23 calls for at least $0.70.

Here is the buy write: Buy 100 KHC ($39.25 current price) and sell to open 1 contract of KHC’s $40 September 23 (weekly) calls for a net debit of $38.55 or lower. The net debit is the maximum net price you’re willing to pay for each share of stock minus the options premium you earn for selling the calls. We are using weekly calls to earn more premium than we could from selling the September 16 monthly calls.

On the buy write, if you earn the $0.40 dividend in two weeks, and then if KHC closes above $40 at expiration on September 23, you will be assigned and your shares will be sold at $40, which would mean a per-share profit of $1.85. With $38.55 per share put at risk today, the total return would be 4.8%. For a holding period of 43 days, the annualized return would be 40.7%. If Kraft Heinz stock closes at or below $40 on September 23, you would still own the stock at a $38.15 per share cost basis.

There is the possibility of getting assigned early just before the ex-dividend date, which would be no reason to cry in your condiments, as it would result in a profit of $1.45 per share in less than two weeks.

Options income for this trade: We earn $70 selling 1 KHC September 23 $40 call contract. Click here for updated bid-ask and return characteristics.

NOTE: Forbes Premium Income Report is intended to provide information to interested parties. As we have no knowledge of individual circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any assets or securities mentioned or recommended. We do not guarantee that investments mentioned in this newsletter will produce profits or that they will equal past performance. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. John Dobosz and members of the staff of Forbes Premium Income Report may hold positions in some or all the assets/securities listed. Copyright 2022 by Forbes Media LLC.