Setting up for a Cheerios Dividend

• Posted by Greg Harmon
• on March 17th, 2015

General Mills ($GIS) reports their earnings before the open tomorrow. And for dividend investors this presents the perfect opportunity to add a high dividend name to your portfolio. You can do this with options. Yes, I know that when you trade options you forgo dividends, and many people that look for dividend income believe options are too risky. This just the wrong way to think about it.

The chart above shows how General Mills had been a strong performer in early 2013 and has drifted higher since. Heading into earnings the stock is closer to the low end of the 1 year range, but also very near the 100 week Simple Moving Average (SMA) that has been a support area in October and 2012.

In fact, since the stock started higher in 2009 and crossed the 100 week SMA, it has pulled back to that level 3 times and each time has started a move back higher. Maybe it will happen again? Nobody knows for sure. But what I do know is that at the 100 week SMA the dividend yield will be 3.43%. Not too shabby. That level is about 70 cents below the current price.

What does this have to do with the earnings report you ask? Well You could wait until after the report and buy the stock. it may go higher and then you will get a lower dividend yield. Or it may go lower and give you a real bargain. The problem is there is no certainty to either. The options market is pricing about a $1.10 move by Friday, but it does not tell you which direction.

Using options you can participate in the stock move higher (if it reacts that way) and still have a low entry with a good dividend yield if it falls….or if it rises. How? A bullish Risk Reversal. Specifically the March 50/52.5 bullish Risk Reversal. This is buying the March 52.5 Call and selling the March 52.5 Put.

This trade will put about 60 cents in you pocket per contract to enter. At expiry if the stock stays under 52.50 you will be put the stock with a basis of 51.90, about where it is now. If it rises above 52.50 you can exercise the calls to own the stock at 51.90, or just sell them for a profit to add to your 60 cent credit.

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