Thursday, August 4, 2011

An income investor's dream

Today was indeed unique.  Not only could you buy income on sale, you could write calls against it immediately.  It takes two sides to make the market work and we were on the contrarian side.  Moreover, someone else out there is even more contrarian I am and they bought  my calls.

Allow me to provide a concrete example.   Caterpillar, symbol CAT, is a very good income company that traded at around $90 today well off it's highs of about $116.50.  CAT pays a  $1.76 dividend for about a 2 percent dividend yield.  Today you could buy CAT at $90 and sell a call that pays you  nearly $4.00 per share immediately for a November strike price of $100.

I hope they take it at $100 and provide me with both income and a gain.  But if I still own it after November's expiration and I hold it for an entire year, collecting four dividends at this one call premium, I will have made a 6.3 percent yield.  That beats inflation by a long shot.

Good, simple, income investing using covered calls; try it!


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