With the market on pace to wrap up its best August in 30 years, now presents an interesting opportunity to generate attractive upfront income with a dividend capture covered call option strategy on Federal Realty Trust (FRT). This trade may sound daunting because FRT is in the highly challenged “retail REIT” industry, and because this option trading strategy is less common. However, we believe the trade is an attractive one to place today, and potentially over the next few days, as long as the underlying stock price doesn’t move too dramatically and you can get comfortable with the moving parts of this simple yet attractive opportunity. On an annualized basis, the trade will net us up to 17% extra income over the next 47 days.
Federal Realty Investment Trust (FRT)
Dividend Yield: 5.2%
Briefly, Federal Realty Investment Trust is a shopping center-focused retail REIT that owns high-quality properties in eight of the largest metropolitan markets (Chicago, Boston, New York, Philadelphia, Washington DC, Miami, Los Angeles and Sillicon Valley). We wrote about it in great detail just 3-week ago, and you can read that report here. In a nutshell, if you are a long-term income-focused investor, we believe shares of FRT are worth considering for a spot in your prudently diversified portfolio because it is in much better shape than its retail REIT peers, especially considering its strong liquidity, strong balance sheet and history of smart capital allocation decisions. Plus, we view the dividend as very safe, especially considering it has delivered 53 consecutive years of increased dividends (with the most recent increase coming in Q220).
The Trade:
Buy Shares of FRT, Sell Call Options on FRT with a strike price of $85 (~6% out of the money, it currently trades at ~$80.16), and an expiration date of October 16, 2020, and for a premium of at least $0.70 (this comes out to approximately +6.8% of extra income on an annualized basis, ($0.70/$80.16 x (365/47 days, annualized)). Furthermore, this trade not only generates attractive premium income for us now, but it gives us the possibility of also capturing the FRT dividend as long as the shares don’t get called away from us prior to the ex-dividend date on September 21st. The dividend payment is $1.06, which equates to 10.2% of extra income on an annualized basis ($1.06/$80.16 x (365/47 days, annualized)), and it can actually be higher if you exit this trade prior to expiration.
Further still, in our view, FRT is a very attractive long-term investment, so if the shares don’t get called we’d be happy to keep them. And if the shares do get called we still get to keep the premium income we generated for selling the calls and possibly also the dividend income. Plus, if the shares do get called then that frees up our capital to move on to another “dividend capture covered call” trade. This trade will net us 6.8% to 17.0% of extra income (on an annualized basis) on our $80.16/share investment. Rinse and repeat.
Your Opportunity:
We believe this is an attractive trade to place today and potentially over the next few days as long as the price of FRT doesn't move too dramatically before then, and as long as you’re able to get your arms around the workings of this trade as well as generate annualized premium that you are comfortable with.
Our Thesis:
Again, our thesis is basically that FRT is an attractive long-term dividend investment trading at an attractive price. Furthermore, the income generated by this trade (i.e. upfront premium income + the possibility of receiving the dividend) is also attractive. If the shares get called before the ex-dividend date—we’re moderately happy, if they get called after the ex-dividend date—we’re even more happy, and if they don’t get called at all—we’re happy to keep owning this attractive long-term dividend investment.
Important Trade Considerations:
Two important considerations when selling put options are contract sizes and earnings announcements. With regards to options contracts, they trade in lots of 100, so you need to be comfortable purchasing 100 shares of FRT in your account—which is considerable for some readers considering FRT trades at around $80.16/share. We often share options trades on stocks with lower prices than FRT’s so investors can get in and out with a smaller capital outlay if they so choose. Secondly, it’s important to pay attention to earnings announcement dates because this is often when new news comes out that can move the stock price significantly thereby impacting your trade. However, in this case, FRT isn’t expected to announce earnings again until after this contract expires, so this is a bit of a none issue in this case.
Conclusion:
Federal Realty Investment Trust is an attractive dividend investment despite the fact that it’s in the troubled retail REIT industry. In fact, because of the challenges this industry has recently faced (i.e. online shopping and the coronavirus) shares of FRT trade at an attractive low price in our view—especially for such a strong dividend aristocrat, and even after considering this month’s rally. The annualized premium (and potentially dividend) income on this trade is quite compelling, and repeating this type of trade can lead to significant regular income payments. Importantly, FRT is an attractive long-term income investment in its own right. Overall, we view this trade as an attractive opportunity if you are an income-focused investor.