Interesting January 2015 Stock Options For MMM
Selling a put does not give an investor access to MMM's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. So unless 3M Co sees its shares fall 14.3% and the contract is exercised (resulting in a cost basis of $117.68 per share before broker commissions, subtracting the $2.32 from $120), the only upside to the put seller is from collecting that premium for the 2.8% annualized rate of return.
Worth considering, is that the annualized 2.8% figure actually exceeds the 2.5% annualized dividend paid by 3M Co, based on the current share price of $140.11. And yet, if an investor was to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to lose 14.34% to reach the $120 strike price.
Always important when discussing dividends is the fact that, in general, dividend amounts are not always predictable and tend to follow the ups and downs of profitability at each company. In the case of 3M Co, looking at the dividend history chart for MMM below can help in judging whether the most recent dividend is likely to continue, and in turn whether it is a reasonable expectation to expect a 2.5% annualized dividend yield.