Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

How to Safely Double Your Dividend Income Yield With Covered Call Options

Companies / Dividends Jan 19, 2012 - 06:30 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleLarry D. Spears writes: As it turns out, despite the summer swoon, income investors were the big winners in 2011.

While the Dow Jones Industrial Average finished the year with a gain of just 5.5%, the 100 highest-yielding stocks tracked by the Dow Jones - as measured by the iShares Dow Jones Select Dividend ETF (NYSE: DVY) - returned a market beating 11.73%.


Of course, the question today is whether or not that performance will carry on in 2012.

However, given the contentious nature of the U.S. presidential race, the ongoing turmoil in the Eurozone and the clouds hanging over the global economy, 2012 is looking like it will provide another great year for dividend investors.

The reason stems from what Martin Hutchinson, editor of the Permanent Wealth Investor, discussed last week in his look at dividend stocks.

"The problem with going for capital growth," Martin points out, "is that you very often don't get it, and then you've got nothing - the investment just sits there."

By contrast, Hutchinson added, "Dividends are easy... All you have to do is figure out which companies have genuinely solid business models that aren't going away."

Options Strategy: Boosting Your Yield With Covered Calls
What's more, if you're willing to put in a little extra time and make use of a proven strategy involving call options, you can safely double, triple, or even quadruple the amount of income you receive from your dividend-paying stocks - even if the share price does absolutely nothing.

The technique is known as "writing covered calls," and implementing the strategy is quite simple.

All you do is sell (or write) one out-of-the-money call option - i.e., one with a strike price higher than the stock's current market price - for each 100 shares of the stock you own (the underlying security).

The call is said to be "covered" because you own the underlying shares. As a result, you don't have to put up any added money or "margin" in order to make the trade.

All of the money you receive for selling the calls - the "option premium" - is yours to keep regardless of what happens to the price of the underlying stock.

This "option premium" is then added to your overall gains, boosting the yield you are set to earn from the dividend.

Here's how it works in practice:

For example, let's say you own 300 shares of stock in Abbott Laboratories (NYSE: ABT), trading this week around $55.70 with an annual dividend of $1.92 a share. That equates to a current yield of 3.45%.

However, you decide that you would like boost your cash flow by writing covered calls.

What you'd do is write three covered calls against your 300 shares, choosing to sell the out-of-the-money $57.50 strike price calls with a May 18, 2012 expiration date.

Early Wednesday, those calls - with just four months of life left - were quoted at $1.00 a share or $100 per 100-share contract. That means selling three of them would put $300 in your account - minus a modest commission of, say, $15.

Thus, you'd be adding roughly $285 to the quarterly dividend of $144 you will receive on your 300 shares of Abbott stock - nearly tripling the amount of income from your position.

So long as Abbott's stock price stays below $57.50 until May 18, you get to keep both the stock and the premium received for selling the calls, as well as collecting the dividend.

And, since you can repeat this strategy every three months or so - adding an estimated $1,140 to the annual dividend payment of $576 ($1.92 x 300 = $576) - your annual cash flow will rise to about $1,716.

That equates to a one-year yield of 10.26% ($1,716 / 300 x $55.70 = $16,710 = 10.269%).

What about the risks? ....

Well, if Abbott's stock price falls, you suffer the same loss you would have faced by just holding the stock alone. But the premium you received from selling your covered calls helps offset part of the loss, softening the blow.

The bigger risk is that you might have to sell your shares at a price higher than where they're trading today. That is, if ABT is priced above $57.50 on May 18 and the calls are exercised, you'll have to sell the stock at that price, forfeiting any gains on the stock above that level. However, selling there would still give you a gain of $1.80 a share (or $540) from today's price.

What's more, you'll also earn the $1.00 a share ($285 net) you received for the options, giving you a total profit of almost $3.00 a share. Hardly an unpleasant outcome.

You would, of course, forfeit any future ABT dividend payments, but you could continue to earn revenue from Abbott Labs using the money you received to finance an alternate strategy known as "selling cash-secured put options" (which we'll detail in an upcoming Money Morning article) until ABT pulls back to an attractive level for repurchasing the stock.

A Second Way to Look at Covered Calls
This strategy can also be used to make stocks with fairly low yields more attractive to income investors.

For example, discount retailer Family Dollar Stores Inc. (NYSE: FDO), recent price $53.83, is a fairly attractive growth candidate given the still-high jobless rate and the iffy economy, which translates into more budget-conscious customers.

However, with an annual dividend of just 72 cents, FDO offers an annual yield of just 1.33% - hardly appealing to income investors.

But thanks to the extended period of market volatility, FDO options are carrying high premiums. To be precise, the April $57.50 call, almost $4.00 a share out of the money and having just three months of life left, was quoted at $1.10, or $110 per contract.

Thus, if you bought 300 shares of FDO stock at the present price, paying $16,149, then sold three April $57.50 calls, the $330 in option income plus the $54 quarterly dividend would increase the annualized yield on Family Dollar to roughly 9.51%. That's almost as good as what you would have gained in our Abbott Labs example.

This covered call strategy is also remarkably versatile. It can be used to produce an income stream from stocks that don't even pay a dividend, and it can be structured to provide a wide variety of yields and cash payouts by adjusting the choice of strike prices and expiration dates.

So, if you want to generate more income and higher yields from your stock holdings, consider covered calls.

The tables for options on most stocks are available on both Google Finance and Yahoo! Finance, as well as most brokerage firm trading platforms, and checking them can help you calculate how selling covered calls can boost your investment returns.

Source http://moneymorning.com/2012/01/19/how-to-safely-double-your-dividend-yield-with-covered-call-options/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules