Tuesday, June 21, 2011

WSO – covered call for more income

Milking money out of our dividend machines is a two edged sword.  You get more income but you could lose your stock.  How do we milk more money out of our dividend machines?
  You sell covered calls against your position.  Income investors do this all the time. What is the risk?  Well, you may very well lose your dividend machine to the person who bought the call from you.

Here is an example of a call I wrote today on Watsco, symbol WSO.  I profiled WSO as a dividend machine in January.  January 3, 2011 WSO was trading at about $64.17.  Since then we have received two quarterly dividends on was $.52 per share and the other $.57.  I would expect to receive another $.57 in July.

With the market being strong today, I always look for a chance to sell covered calls to make more cash.  I took advantage of this strength to write a covered call on WSO.  The call, if exercised, will pay me $70.00 for WSO and I receive a call premium of $.85.  Using my cost basis of $64.17, I calculate my capital gain at 11.3%.  If I add in the dividends, my return is 12.57 percent. 

I am willing to take the chance that the call buyer will take my WSO.  If the economy sputters between now and August 20, 2011, I may get to keep this very nice dividend machine.
Very Truly Yours,