Dividend Paying Stocks: Double Your Income Stream
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You can double or triple your dividend income stream by selling out-of-the-money covered calls against your dividend-paying holdings. The key is to sell far enough out of the money that the likelihood of getting called out is minimal. Let’s look at an example. Vanessa loves adding blue chip, dividend-paying stocks to her retirement portfolio. Among her holdings is Exxon, a blue chip oil-and gas company with an excellent balance sheet and a steady record of paying out dividend income. She has 500 shares in her IRA. It currently pays has a dividend yield of about 2.4%, and recently has passed on $0.42/share to its shareholders quarterly. That translates to $210 per quarter or $840 each year in dividend payments. Vanessa is also aware of the benefits of covered-call writing. She tries to sell 5 contracts of calls at a strike price of about five dollars higher than the current price six times per year. She is aiming to sell these out-of-the-money options with about 2 month’s life left in them and is willing to let them expire. Recently, with Exxon trading at about $70/share, she notices the two-month out 75 calls can be sold for $0.30 each. Selling 5 contracts against her 500 shares would produce $150 in premium. Assuming she could duplicate this 6 times in the year she would receive $900 in premium income. Of course, there is no guarantee that she’s pocket $150 in premium every two months; she knows that is variable. She is also aware that she could be called out. But she doesn’t worry about that because she would be willing to sell cash-secured puts to acquire Exxon back at a favorable price if she is called out. If you have dividend-paying stocks in your portfolio, seriously consider selling out-of-the-money calls to enhance your dividend income.
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