This Strategy Is Boosting My Yield on PotashCorp by 50%

I think that PotashCorp is a great income stock for an IRA. That's why I'm looking to add the company to my own IRA. However, instead of just buying the stock outright, I'm using a simple strategy that's actually boosting my overall yield by 50%. Here's what I did.

A surging dividend that's getting a boost
PotashCorp's dividend surged an astounding 950% since the fourth quarter of 2010. Its current yield is above both Agrium's and Mosaic's as the following slide points out.

Source: PotashCorp Investor Presentation (Link opens a PDF) 

While a yield of around 4% is exceptional, I'm always looking for additional income. That's why I'm using a simple strategy to earn an additional 2% yield on PotashCorp's stock before I add it to my portfolio. That strategy is to write puts on PotashCorp instead of simply buying the stock outright or setting a limit order. In doing so, I was able to set myself up to buy PotashCorp at my desired price of $35 per share, which would lock in a 4% yield. Further, I was paid around $85 up front to write the puts, so I could potentially earn 6.4% of income on PotashCorp's stock this year as opposed to just 3.9% if I bought the stock today. My biggest risk is missing out on an opportunity to buy PotashCorp's stock as it could end above my $35 strike price at expiration, which would result in my not buying shares. However, I could potentially repeat the process and continue writing puts on PotashCorp until I do finally obtain shares.

Boosting yields
PotashCorp is my fertilizer stock of choice due to its diversity into the top three crop nutrients of potash, nitrogen and potassium. Further, I like the fact that it's 93% complete with its capital program. That tells me that the company's income should start seeing a boost as its expansion capacity comes online. Further, free cash flow should increase as the company's won't be spending as much money on capital projects. That suggests to me that the company's surging dividend still has plenty of growth left. 

With that being said, Mosaic or Agrium also have compelling futures, and investors could also use this simple strategy to boost the yields of both stocks too.

For example, suppose an investor wanted to profit not only from fertilizers, but from the long-term trends in agricultural retail. In that case, Agrium would be the investment of choice. A similar put writing trade on Agrium would see an investor write an October 2014 $90 put for around $2.60 per share. That trade could enable an investor to earn an addition 3% yield on Agrium's stock, which would nearly double the income earned on the stock in the first year all while buying the stock at a discount to today's price.

Photo credit: Flickr/Aaron Patterson

Likewise, an investor interested in a juicy income trade on Mosaic's leadership in phosphate could write September $47.50 puts for around $180. In that trade an investor could earn 3% in income on that one trade alone, which is far more than just collecting Mosaic's current 2.1% dividend yield.

Investor takeaway
Fertilizer stocks like PotashCorp, Mosaic and Agrium provide investors with a solid dividend yield. However, the simple strategy of writing puts can really boost that yield and potentially net an investor an even better buy price. That's why I've chosen to use that strategy to add PotashCorp to my IRA, which could boost my yield in the first year by 50%.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3048760, ~/Articles/ArticleHandler.aspx, 8/30/2015 12:23:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes