Boring has become the new “sexy” for investment managers as they turn away from speculative growth stocks and toward more stable blue-chip names. 

#-ad_banner-#Last week, I presented a chart of the S&P 500 compared with the Russell 2000. The difference is remarkable, as capital can be seen flowing out of the small-cap index while the large-cap index is hitting new highs.

Today, we have another income opportunity that benefits from this institutional capital rotation toward stability. After all, what could be more stable than a company with a recession-proof portfolio of products that generates reliable revenue month after month?

GlaxoSmithKline (NYSE: GSK) is a well-established drug company that also has an attractive suite of consumer staples products. 

This is attractive to money managers right now because analysts can come up with fairly accurate earnings expectations. As a general rule, GSK is expected to continue to sell its drugs and vaccines at a reliable rate (this is a much different business than the biotech drug discovery business), and consumers are going to continue to buy staples like toothpaste and personal products.

Another feather in GSK’s cap is the fact that the stock currently has a 4.6% yield, which is at the high end of the range for blue chips. This dividend payment should help to support the stock price.

A final selling point for GSK is the recent deal the company struck with Novartis (NYSE: NVS), which will alter the company’s drug portfolio. GSK is reportedly selling its oncology division for $16 billion. GSK will then turn around and acquire a portfolio of vaccines from Novartis for a net price near $7 billion. Finally, the two companies will combine their consumer products division, with GSK owning 63.5% of the joint venture. 

The total transaction should help to boost GSK’s capital balance, which in turn, could support higher dividends in future quarters. This should further help support the stock price and give us even more confidence in our income play.

To create income from GSK, we’re going to be selling puts. Specifically, the GSK June 55 Puts are trading at about $0.80 per share ($80 per contract) as of this writing. By selling these put contracts, we are accepting the obligation to buy shares of GSK at the $55 strike price if the stock is trading below this level when the puts expire. Keep in mind, each put contract represents 100 shares.

There are two possible outcomes from this trade. First, if GSK remains above $55 through expiration on June 20, the puts will expire worthless. In this case, we would be able to keep the $80 per contract free and clear.

However, if GSK is below $55 when the puts expire, we will be obligated to purchase shares at $55. Since we are receiving $0.80 per share in premium from selling the puts, we will only need to set aside $54.20 per share ($5,420 per contract) of our own capital in case shares are assigned.

Given the stability of the drug and consumer staples sectors, the recent transaction with Novartis, and the generous dividend yield, I’m convinced GSK makes for a healthy long-term investment. And I would be happy to own shares at this discounted level. 

If we are not assigned shares, our $80 in income represents a 1.5% return over the $5,420 set aside in 36 days. This may not sound like much, but it nets out to a per-year rate of return of 15%. This is an excellent level of income considering the fact that traditional investors in GSK only receive a 4.6% dividend yield.

Action to Take –> This trade is basically a win-win. We either earn triple the income of the average investor — or we get to buy this stable blue-chip company at a discount. 

This article was originally published at ProfitableTrading.com: 
Earn 3x More Income Than the Average Dividend Investor on This Blue Chip

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