How do you define a great income stock? If you start with the dividend, you’ve got it all wrong.
Research by Cabot Wealth Network shows that 417 of the stocks in the S&P 500 pay a dividend, but only 37 of those have yields over 4%.
The highest-yielding stock in the index is Frontier Communications (FTR), which throws off a 15%-plus yield. However, shares of this landline phone company are down roughly 80% in the past year.
I don’t know about you, but no dividend is large enough to make me throw my money into a dying industry with little chance of a turnaround in shares.
Now, I want you to compare the chart above with the one I’m about to show you, because this stock has not only roughly doubled in the past year, but it can easily generate income of 25% to 35% a year.
Do I have your attention?
The company is Western Digital (WDC), and the chart speaks for itself.
If WDC wasn’t on your radar, you’re far from alone.
Many individual investors, not to mention the geniuses on Wall Street, saw Western Digital as simply a hard disk drive company and thought competition would hurt profits.
But WDC is much, much more than that.
In May 2016, Western Digital completed its acquisition of flash memory storage chip maker SanDisk. Flash memory chips are used in smartphones, tablets, laptops and, increasingly, in external mass storage devices. With the acquisition of SanDisk, Western Digital became the only company to offer both hard disk drive and flash memory.
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This gives WDC a major competitive advantage over other outfits serving the same customer base, like Seagate Technology (STX) and Micron Technology (MU), by enabling the company to meet the diverse needs of device manufacturers and smooth out the development cycles of the two product categories.
What’s more, we are at the beginning of a smartphone super cycle due to the anticipated announcement of the iPhone 8, which is expected in September. This announcement will trigger major redesigns not just in other smartphones, but in tablets and laptops as well, as the arms race for the latest and greatest tech products rages on.
These next-generation products will need next-generation components like the ones supplied by WDC. I expect this super cycle to last at least 18 months and be a huge boon to Western Digital.
Now, even though shares have nearly doubled in the past year, WDC remains a misunderstood company and a dirt-cheap stock.
On Friday, shares sold off 7.5% after a solid earnings beat in which the company reported that diluted earnings per share more than doubled from the year-ago quarter on a 37% increase in revenue.
Shares are now trading for just over 7 times forward earnings. That is less than half the forward multiple of the S&P 500, and a nearly 14% discount to competitor Seagate, despite Western Digital having a superior business model and growth opportunities.
I think the post-earnings reaction is a combination of profit-taking and fatigue in the tech sector, and it makes for the perfect entry point in the shares.
Last month, we also got news about the ongoing battle between Western Digital and its flash memory partner Toshiba. Toshiba is on the verge of bankruptcy and looking to sell its flash memory manufacturing business. Western Digital wants to buy that business but Toshiba isn’t playing ball.
Tensions have been running high, and the companies are now entering arbitration. But with the exception of the occasional headline moving shares for one or possibly a few days, this is a non-issue for the stock.
However, the public sparring has been good for one thing… elevating volatility in the stock. This brings me back to my main argument, which is that Western Digital is a superb income stock.
Sure, the company pays a $0.50 quarterly dividend for an annual yield of around 2%. But, as I mentioned, WDC is throwing off 25% to 35% a year in income for me, and a big part of that is due to the volatility in the shares creating enormous premiums in the stock’s options.
In fact, I just told subscribers of my Options Income Blueprint service about an opportunity to generate $130 per contract by selling put options on the stock. If that put expires worthless in three weeks, they will earn 1.6%, or 27% on an annualized basis.
And just last week, we sold a put on WDC that brought in $49 in income and expired just two days later, netting us 0.5%, or 27% on an annualized basis.
Western Digital is one of my favorite stocks to sell options on. In the past four months alone, we have sold puts on WDC seven times, earning annualized returns ranging from 27% to a whopping 76%.
If you’re interested in trading a stock with great growth potential and great income potential, Western Digital is it.
Disclosure: I own WDC shares and have sold calls.
About The Author
Michael Shulman is a 30 Year Veteran of the financial markets – as a trader, a financial analyst, a financial writer and most recently as an educator.
Mr. Shulman made his first option trade in 1985 – COMPAQ Computer calls – a position that expired worthless. His second trade broke even; the third brought him a year’s salary, a near twenty to one return on his investment. He has never looked back. He entered the financial publishing business formally in 2001 as director of research for ChangeWave Research’s institutional research business and as the writer and editor of Hedge Fund Investing.
He has published two books – Sell Short and Made in America – both of which can be found on Amazon.com, and he is a frequent contributor to reputable financial sites like Seeking Alpha, MSN, MainStreetInvestor, and Traders Reserve.
Most importantly, since 2010, he has dedicated himself to teaching income investors how to get more income from their portfolios using simple yet safe options selling strategies which produce income every week. This approach was developed from the ground up in Mr. Shulman’s own accounts, his goal to develop a strategy that cannot be replicated by institutional investors of any size and therefore independent of fads and trends that change too often to provide a consistent approach for individual traders.
His trade recommendations in his Options Income Blueprint, Perpetual Income Portfolio Club and Income Masters services maintain a 98% success ratio, meaning his trades produce the expected income 98% of the time. No one’s perfect.