The population in North America and the rest of the developed industrialized world is getting older, the bulk of which is the so-called baby boomers. In the U.S., the number of baby boomers is 77.3 million, while Canada has more than 8 million, and there are millions more in other industrialized nations.

With this trend comes a larger demand for insurance — long-term care insurance, life insurance, annuities and mortgage insurance. This is precisely the wheelhouse of Genworth Financial (NYSE: GNW).

This Fortune 500 financial services company provides various insurance products and services, as well as investment and financial solutions, in the U.S. and internationally. Genworth — which my colleague Tim Begany profiled earlier this month — has more than $100 billion in assets and operates in more than 25 countries.

Last month, the company released outstanding fourth-quarter results that beat analysts’ estimates on all fronts. Net income for the quarter rose 24% year over year to $208 million. For the full 2013 year, net income was up 72% to $560 million, and net operating income increased 53% to $616 million.

The gains were helped by a strong U.S. mortgage business, but the company is also in the process of improving its long-term care insurance business through new offerings and pricing increases. It filed for an estimated $250 million to $300 million increase in premium rates through 2017 that hinged on state regulatory approval. At the end of 2013, Genworth reported it had received approval from 41 states, representing nearly $200 million of the expected premium increase.

The company’s principal life insurance subsidiaries are rated A by A.M. Best, A- by Standard & Poor’s, and A3 by Moody’s.

Independent research and rating company Weiss Watchdog, a division of Weiss Research, rates GNW “excellent” for risk and reward. It also got the highest mark for growth, price volatility and solvency.

GNW has rallied more than 20% since its earnings release in early February, and in the past year, shares have gained an impressive 74%.

As the population ages, it seems that the appetite for GNW’s various insurance products is strong and growing. I am excited about the upside potential for GNW, but the company does not pay a dividend. But we can create our own “dividend” with a covered call strategy.

A call option gives the buyer the right but not the obligation to buy shares of the underlying stock at an agreed-upon price (the option’s strike price) within a certain period of time.

The seller of a call option (also known as the writer) sells the right to the buyer for a payment known as a premium. In doing so, the seller assumes the obligation to deliver the shares at the agreed upon price should the buyer choose to exercise her or his right.

With GNW trading at about $17.27 per share at the time of this writing, we can buy 100 shares and simultaneously sell a June call option with a $17 strike price, which is currently trading for about $1.18 ($118 per contract) and expires on June 20.
Since we receive $1.18 for selling the call, our net cost is lowered to $16.09 per share ($17.27 purchase price minus $1.18 premium). Prices may be slightly different depending on when you read this, but I like this trade at a net cost of $16.40 or less.

Here’s how this covered call trade could work out:

If the shares stay above the strike price, the options buyer will purchase the shares from us at $17, giving us a gain of at least $0.60 per share, or 3.7% in 86 days. This works out to a 15.5% per-year rate of return.

If GNW trades lower, we would not experience a loss unless it falls below our net cost of $16.40 or lower, giving us a cushion of about 5% at current levels. And if the stock is below $17 at expiration, then the call option will expire worthless. We then have the ability to sell another call option against the shares to generate more income and lower our cost basis further.

If you were able to generate $1.18 in income every 86 days on this stock, that would add up to about $5 a year, which is a yield of 29% at current prices. Not bad for a stock that doesn’t even pay an actual dividend.

This article was originally published at ProfitableTrading.com:
The Boring Insurance Company Throwing Off a ‘Secret’ 29% Yield

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