On 12/20/11, my 2 PM Jan13 55 Covered Calls in an IRA account were assigned away from me.  My basis for these 200 shares was $44.39, excluding dividends received.  After execution costs, my profit on these shares is about $2,101.00 plus $1,350.50 in dividends.  I have owned these shares since April 2008.

PM went ex-dividend on 12/20/11, so these shares were called away so that somebody could collect the dividend.  I would have liked to continue holding PM because of the dividend (6.94% on my basis as of the prior payout in October 2011) and for the option premiums from selling Covered Calls.  However, the stock price rose high enough that I could not roll the Jan13 Calls out for a net credit transaction.

I may purchase PM again in the future but will wait for it to pull back before I do.  In the meantime, I will deploy the new cash in this in something else.

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 $8,154.06 in dividends in my various accounts for 2011.  My year to date average monthly dividends received is currently $741.28.  The year-to-date dividends currently represent about 31.00% of my average monthly investment cash flow and about 2.24% return on my current basis value.

My YTD dividends are up by $137.00 on a monthly average from last year.  That represents a 22.67% 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 October, I received notice of the following dividends paid in various accounts for a total of $1,305.59.

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 some 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, 6/14/11, I BTC 2 PM Jan12 55 Covered Calls and STO 2 PM Jan13 55 Covered Calls for a net deposit of $96.92 in an IRA account.  My basis for these PM shares is now 44.39, excluding dividends received.

S&P has a 12 month price target of $82, up from $54 when I last rolled PM in Sep10, and now has a Strong Buy recommendation from the previous Buy.  Thomson Reuters continues to have a Positive rating while MarketEdge continues to have a Long rating with a price opinion $62.25, up from a previous $49.67.  Everybody seems to be happy with the idea of owning PM.

PM has been steadily rising since late May 2010 although it is off  its 52 week high of 71.75.  PM goes ex-dividend in just a few days on June 21.  With its price well above my prior strike I wanted to minimize the chance that somebody would call it away to capture the dividends which is the reason that I rolled out the June Calls.  I have no hard evidence but my experience seems to be that the farther out the expiration date the less likely the option will be exercised.  I will be looking to roll these Calls out to Jan14 if I can also roll up to the next available strike price when the Jan14 LEAPS become available.

These transactions represent a 1.08% simple and .67% annualized return on my old basis which is not anything to shout about.  However, if I have saved the dividend then I will have deposited an additional $128 on July 11 with the dividend is paid.

I consider PM to be a part of my core holdings and would like to own more of it but just don’t have the cash available to do so at this time.  PM pays a decent dividend at about 3.71% on its current price and 5.7% on my basis at the last payout in April.  Even better, if I still own the stock when the next dividend is paid the dividend will represent an annual return of about 5.77% on my new basis.