Today, 8/9/11, I BTC 2 NLY Oct11 16.00 Puts and STO 2 NLY Jan13 15.00 Puts for a net deposit of $294.96 in my taxable account.  My basis for these NLY shares, if Put to me, would be about 13.61 plus trading costs.  This transaction represents a simple return of about 9.77% and an annualized return of about 6.74%.

My Oct11 16 Puts were above the strike price but, as I have mentioned in some posts yesterday, I am trying to raise some cash in this taxable account to mitigate an anticipated margin call in this account.  In this case, I also reduced my potential liability by decreasing the strike price but at the cost of extending the expiration date out to January of 2013.  I may find that I will be able to roll these Calls in and up to generate some additional cash flow when the market appears to be a little more stable as I don’t generally like being exposed for so long in this account.

S&P continues its 12 month price target of $18 with a Hold recommendation.  MarketEdge Second Opinion has a price opinion of $16.78, down from $17.94 last month  with an Avoid recommendation, down from an earlier Long recommendation.  The Yahoo! Analysts have a 12 month price target of $18.87, up a little from $18.68 last month and a 1.9 recommendation, up from the 2.2 recommendation last week where 1.0 is a Strong Buy and 5.0 is a Strong Sell.

Many of the stocks that I own and write Covered Calls upon also pay dividends.  Dividends occur on a regular basis and add significantly to my annual investment income.  Year to date I have received a total of $5,898.16 in dividends in my various accounts for 2011.  My year to date average monthly dividends received is currently $807.17.  The year-to-date dividends currently represent about 29.55% of my average monthly investment cash flow and about 2.28% return on my current basis value.

My YTD dividends are up by $202.89 on a monthly average from last year.  That represents a 33.58% increase to date year over year.  I attribute the increased dividends to a few companies raising their dividends and to my purchasing additional dividend paying stocks.  During July, I received notice of the following dividends paid in various accounts for a total of $1.152.32.

Please notice that PGF is an ETF and pays dividends monthly.  The annualized dividend yield for PGF is based upon the simple and false assumption that it will pay the same dividend each month for the next 12 months.  The actual annualized dividend yield may be more or less than illustrated here.

 ANH, MFA and NLY are mortgage REITs that make their money on interest rate spreads.  Their current high annualized dividend yields on my basis are probably at risk when the Fed begins to raise its discount rates.  As of this writing, my current basis, excluding dividends, for many of these stocks is now below their current market price which increases my yield on those stocks.  I attempt to sell Covered Calls on these stocks to reduce my basis which, to some extent, will help mitigate any possible future reduction in their dividend payouts.  I find myself just holding some of these stocks sometimes while I wait for their price to rise to a point that I am comfortable selling new Covered Calls.  If I do not sell new Covered Calls I am content to capture the nice dividend for an indefinite period.  Notably, PGF, NLY, ANH and MFA fall into this category.

I use my basis per share to determine the simple and annualized percentage return because I feel that it gives me a better representation of the value of the dividends as they relate to my portfolio.  My basis may be above or below the market price which causes my return to be lower or higher than published yields for a stock.  I calculate my basis per share as my acquisition price less any option premiums received on those shares.  I do not use dividends to reduce my basis.

Today, 7/28/11, I sold 2 NLY Oct11 16.00 Puts for a net deposit of $66.48 in my taxable account.  My basis for these NLY shares, if Put to me, would be about 15.09.  This transaction represents a simple return of about 2.07% and an annualized return of about 8.77%.

My NLY Jul11 17 Put expired worthless so I thought I would try again with the October expiration at a lower strike price.  The option premium return is good and if I am assigned I will be quite happy to collect the excellent dividends that NLY pays.

Speaking of dividends, NLY pays a very good dividend at about 15.06% at its current price.  My return on shares that I already own in another account was slightly lower at 14.49% on the last payout in April because the payout was slightly lower in April than the upcoming payout.

S&P continues its 12 month price target of $18 with a Hold recommendation.  MarketEdge Second Opinion has a price opinion of $17.94, slightly up from $17.42 last month  with a Long recommendation up from a Neutral recommendation last month.  The Yahoo! Analysts have a 12 month price target of $18.68, up a little from $18.54 last month and a 2.2 recommendation, down a little from the 2.1 recommendation last week where 1.0 is a Strong Buy and 5.0 is a Strong Sell.

I tend to think of NLY as part of my core holding because of its good return and for the extra income I can receive from selling Covered Calls.  The combination provides me with a pretty good return on my basis.  On the other hand, I am a little concerned that the market price and the dividend may suffer when interest rates begin to rise which is the reason that I only “tend” to think of NLY as part of my core holdings.