How To Use The Apple Cash Machine For High Yield Income

This article will cover two ways to improve upon the 2%-plus dividend yield of Apple, (AAPL), via selling options.

After hitting an all-time high of over $700.00 in September 2012, Apple fell out of favor with the market over the next several months, finally bottoming out just below $390.00, in July 2013.

AAPL started picking up steam again in the last half of 2013, hitting a high of over $570.00 in December 2013. AAPL's share price was helped considerably by activist Carl Icahn, who accumulated shares worth around $3 billion. Mr. Icahn's company, Icahn Enterprises (IEP), is a high dividend stock, and was the subject of one of our recent articles.

Apple's past stellar growth had to eventually slow down, and the market wasn't pleased when it finally did. It averaged over 35% revenue growth, and over 42% EPS growth over the past 5 years, and the average analyst estimate for EPS growth over the next 5 years is now 19.58% per annum, but this still makes AAPL look undervalued on a forward 5-year PEG basis:

But 5 years forward is a very long time, considering the slowdown in revenue and earnings growth that AAPL has had over the past 4 quarters:

Analysts' average EPS estimates for 2014 and 2015 definitely aren't anywhere near Apple's past growth rates either, but at least they're positive, which is an improvement upon the negative EPS growth in the first 3 quarters of 2013:

Dividends: AAPL initiated a quarterly dividend of $2.65 in late 2012, and upped it to the current $3.05 in 2013. It has returned $43 billion to shareholders via dividends and share repurchases.

Option Income Opportunities: Here are 2 ways you can improve upon AAPL's dividend and generate higher yield income.

1. Selling Covered Calls - We've added the 2 trades below to our Covered Calls Table. AAPL's next 2 quarterly ex-dividend dates will be in May and August, and it currently has options expiring in May, (after the ex-dividend date) and in October. You'll get paid a higher call option premium, ($34.15 in October vs. $19.45 in May) for taking the risk of going further out in time. The higher October premium will give you a lower breakeven, but it's a lower annualized yield:

(click to enlarge)

May 2014 Covered Call trade Income Scenario: By selling a covered call at the $535.00 strike price, you leave yourself enough room for potential price gains of $7.87, which more than compensates you for any loss of dividend income if your AAPL shares get assigned/sold away prior to the ex-dividend date in May.

2. Selling Cash Secured Puts: Another approach is to try to sell cash secured puts below AAPL's price/share. In these 2 trades, we used the $500.00 strike price, which is around 5% below AAPL's price/share on 2/27/14. Again, the October option pays you a higher premium, $28.90, than the May option, $13.30, but it's a lower annualized yield. However, the October put gives you a lower breakeven of $471.10, which is over 10% below AAPL's price/share.

You can see more details on these and over 30 other put trades in our Cash Secured Puts Table.

(click to enlarge)

One of the advantages of selling options is that you'll get paid the option premium money within 3 days of selling vs. waiting for the next quarterly dividend.

Taxes: The downside is that this income is taxed as a short term gain vs. the lower tax rate for qualified dividends, even if you sell an option that doesn't expire in over one year from now.

However, if you sell an option which expires in 2015, and you don't close out the position until 2015, you'll get paid now, when you sell the option, but you won't be liable for the taxes on it until 2016. So, you get the use of this money now and defer the taxes for 2 years.

Even though its growth has slowed, Apple is still a highly admired company with a world-leading brand that has strong consumer loyalty. Indeed, Apple was just named #1 again, by Fortune magazine on its annual "Most Admired Companies" list, beating out Amazon, Google, Starbucks, Disney and many other iconic companies.

Financials: AAPL boasts very strong Management Efficiency and Debt/Equity ratios. Although its margin has decreased somewhat, it's still impressive.

Additional Valuations:

Performance:

Disclosure: Author was short AAPL put options at the time of this writing.

Disclaimer: This article was written for informational purposes only.

Source: How To Use The Apple Cash Machine For High Yield Income

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I'm long AAPL, via being short AAPL put options.

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