Review 2012-2021

When I buy an investment, 99% of the time, I intend to hold it for at least five years. This forces me to buy quality based on current performance and likely growth of the business and earnings. My strategy is also to have growing dividends. I purchased my first 200 shares of Eaton (ETN) in December of 2012 and happily collected dividends from that time until 2018. My first shares had a cost basis of $37.12 per share. Over time, in 2018, 2019, and 2020, I added shares so that I now hold 500 shares. ETN has continued to grow their dividend with some bumps along the way in 2018.

If you have a good investment, it can pay to add to it over time. Buy on the dips.

Covid-19 Scare Opportunity

In March 2020, the Covid-19 scare caused investors to run from most investments, including ETN. As a result, I purchased more shares at a very reasonable $85.50 per share.

ETN now pays an annualized dividend of $3.04 per share, giving us income of $1,520 per year (assuming no reductions or suspensions of the dividend payments). It is unlikely that this will change dramatically, as the payout ratio is currently 54.21%. Any payout ratio between 20-70% is generally reasonable for most industrial stocks.

This shows all of the ETN transactions, including covered calls from 2018 through the present.

Covered Calls

ETN’s yield is a reasonable 2.18% based on the current price of $139.49 per share. However, the P/E ratio is 24.87, which seems a bit rich at this point. This doesn’t mean I would necessarily run from the investment, but I want to grab some additional income if the risk/reward is appropriate. Therefore, on March 15, 2021, I sold three covered call contracts for my ETN shares. Two of them were for 200 shares each and one was for the remaining 100 shares. The total income, after commissions and fees was $746.52. This is about half of the annualized dividend, and I did not have to wait to receive it.

In each case the contracts I sold were for higher stock prices. The first contract was for a stock price of $139, the second for $140 and the third for $141. Each contract expired at a price below my contract price, so I got to keep the covered call income and my shares. Not only that, I received a quarterly dividend of $380 for my 500 shares of ETN on March 30th.

Next Steps

This next image shows the current covered call contract prices for ETN for a stock price of $142. The April 9 bid price is $0.50, the April 16 price is $1.15, and the April 23 price is $165. Because the probability that the stock will increase more in three weeks, the potential income from the April 23 contract is higher. However, a better strategy might be to sell a contract for 200 shares for April 9 and another one for 200 shares for April 16. I would be inclined to increase the April 16 price to $143, even if the contract brings in fewer dollars.

The further out you go, the more likely your contract will be worth more. This can change by Monday.

What If the Shares Are Called?

The primary “risk” of entering a covered call is that I might be required to sell my shares. However, bear in mind that I could rebuy ETN during a future dip in the market. Furthermore, there are other ways to put the money to work. It might just be easier to buy more shares of VYM, which includes a much broader array of dividend-focused investments. VYM also sports a 2.96% dividend yield.

Full Disclosure

Current Position is 500 shares. If the shares get called away I lock in the profit.

Cindie and I own 500 shares of ETN as a long-term investment. However, the covered call strategy may result in a reduction in our ownership if some or all of the shares are called away through the sale of covered calls. #1 is the current unrealized profit and #2 is the profit from the sale of covered calls excluding the most recent profit of $199.