Kimberly-Clark stock has an amazing track record of dividend increases, with 58 straight years of dividend growth.
The consumer staples giant produces a broad range of essential products, from tissues and toilet paper to diapers and tampons, under well-known brands such as Kleenex, Kotex, Scott and Huggies.
Kimberly-Clark stock is up 15% year-to-date, but is down 3% in the last three months. The stock is forming a flat base.
The stock also has an above-average annualized dividend yield of 3.5% and a very low beta of 0.40.
Income investors who want to generate increase the yield on this defensive stock could look at a covered call trade.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered-call strike.
Kimberly-Clark Trade Yields 9.3%
Let's look at how a covered call trade on Kimberly-Clark might take shape.
Buying 100 shares of the stock would cost around $13,973.
A Dec. 20, 142-strike call option trading around $0.85 late Tuesday, generating $85 in premium per contract.
Selling the call option generates an income of 0.61% in just under one month. That equals to around 9.31% annualized.
If the stock closes above 142 on the expiration date, the shares will be called away at 142, leaving the trader with a total profit of $312 (gain on the shares plus the $85 option premium received).
That equates to a 2.25% return, which is 34.17% on an annualized basis.
Of course, the risk with the trade is that the stock might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
According to the IBD Stock Checkup, Kimberly-Clark stock is ranked No. 10 in its industry group. It has a Composite Rating of 53, an EPS Rating of 67 and a Relative Strength Rating of 51.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
