All of these calls will expire soon; I don't think any will be assigned. This post is to demonstrate the result of using covered calls on dividend stocks to boost income.
- Eight dividend stocks and one none dividend stock delivered income equal to 5.24% over the past year.
- Call option income from one call nearly doubled dividend income.
- Except for Home Depot, HD, all stocks have acceptable D/E (debt to equity) ratios.
- Except for Square, SQ, all stocks have EPS (earnings per share) greater than Dividend Paid out.
Earning over 5% on nine different stocks from the combined total of dividends and one call is the subject of this post. Each stock has been in my portfolio for all of 2018 except for Square. These are not all the stocks we own, nor all the stocks on which we sell calls. These are just the stocks we sold calls on with a December expiration date.
My goal is to receive no less than 5% income on my income stocks. I could put it all in At&T or Ford and get more than 5%. I confess, we have both of these in our income portfolio. A well diversified portfolio cannot chase yield. Our holdings must be balanced to sleep at night.
Nine Stocks with Calls that expire in December:
The stocks that are on call cost us about $110,000. The average dividend yield of this group of nine stocks is 2.73%. Clearly I needed to think of something to boost income from them. I could sell the low yielding stocks and put it all in the one high yielding stock. The dividend yield of these stocks ranges from 0% to 4.23%. In stead of selling good companies with a lower yield than I need, I sell calls on shares of them.
Two tables below present the result of this strategy on these nine stocks. In the first table is the list of nine stocks, the strike price and income from 16 calls sold on the stocks, and the basis and current value.
Call income is presented in the first table.
|
Stock Symbol
|
Basis
|
Current
|
Strike Price
|
No Contracts
|
Call Premium
|
|
NTR
|
$56.28
|
$47.58
|
$55.00
|
1
|
$1.05
|
|
BAC
|
$26.58
|
$24.52
|
$30.00
|
1
|
$1.00
|
|
CVX
|
$106.00
|
$115.62
|
$125.00
|
1
|
$1.25
|
|
CVS
|
$75.00
|
$74.50
|
$77.50
|
2
|
$1.20
|
|
GILD
|
$74.00
|
$68.14
|
$77.50
|
1
|
$1.15
|
|
|
$74.00
|
$68.14
|
$82.50
|
1
|
$1.15
|
|
HCI
|
$42.00
|
$53.65
|
$55.00
|
5
|
$1.33
|
|
NUE
|
$58.29
|
$56.30
|
$60.00
|
2
|
$1.15
|
|
SQ
|
$70.68
|
$63.65
|
$75.00
|
1
|
$3.50
|
|
|
$70.68
|
$63.65
|
$80.00
|
1
|
$5.00
|
|
HD
|
$149.00
|
$174.21
|
$210.00
|
1
|
$2.25
|
|
|
|
|
|
|
|
|
SUM
|
$110,380.00
|
$115,536.00
|
|
INCOME
|
$2,770.00
|
|
Update
by MarketXLS
|
12/12/2018
|
|
|
Call Inc Yld on Basis
|
2.51%
|
Dividend income is presented in the second table which also illustrates how the combination of dividend income and at least one call can get you more than 5% income.
|
Stock Symbol
|
Shares
|
Div Income
|
Div Yld on Basis
|
Call Income
|
Call Yld on Basis
|
|
NTR
|
100
|
$172.00
|
3.06%
|
$105.00
|
1.87%
|
|
BAC
|
100
|
$60.00
|
2.26%
|
$100.00
|
3.76%
|
|
CVX
|
100
|
$448.00
|
4.23%
|
$125.00
|
1.18%
|
|
CVS
|
200
|
$400.00
|
2.67%
|
$240.00
|
1.60%
|
|
GILD
|
200
|
$456.00
|
3.08%
|
$230.00
|
1.55%
|
|
HCI
|
500
|
$750.00
|
2.03%
|
$665.00
|
1.55%
|
|
NUE
|
200
|
$320.00
|
1.52%
|
$230.00
|
1.97%
|
|
SQ
|
200
|
$0.00
|
0.00%
|
$850.00
|
6.01%
|
|
HD
|
100
|
$412.00
|
2.77%
|
$225.00
|
1.51%
|
|
SUM
|
|
$3,018.00
|
2.73%
|
$2,770.00
|
2.51%
|
|
|
|
Combined Income
|
$5,788.00
|
Combined Yld on Basis
|
5.24%
|
Preservation of Principle
I have always said, I don't care about the overall stock market. We invest in stocks with good fundamentals that pay us income. If the value of the stock goes down, we ignore it while we cash dividends. However, when the stock price goes down so do call option opportunities. Yet, if the fundamentals are good, it is not uncommon to be able to buy at a lower basis and sell a call when the market raises.
The value of these nine stocks, I was pleased to find out, is above our basis. That is a pleasant surprise as stock prices today are not so good. There is a lot of volatility to use as a sling shot to income. Some times your great stock will be called away. Don't sell a call on a position you cannot afford to lose. However, never feel you have to keep a stock just to sell calls on it. You need a combination of good stocks, with good fundamentals on which you can sell calls.
When you use a group of dividend stocks to create call income, it is not like buying a put. You are not paying for risk protection. I believe that even when a stock's price goes down, the dividend is protection. You can go a long time between times when call opportunities exist but you get paid dividends as you go.
How I select my calls
- Strike price above my basis
- Call premium plus dividend yields more than 5% income per year
- Expiration date captures the dividend when the call premium is less than 5%
Readers of this blog know I use a disciplined approach to everything and that include calls. On stocks like these nine, I try for a strike price that is greater than my basis. Sometimes I want even more. When my basis is low and I don't really want to lose the stock, I might pick a strike price at least 10% above the current price. This means I have less chance of losing the stock. Look at Chevron, CVX, and Home Depot, HD to see examples of strike prices well above my basis and above current trading levels.
It is important to note the strike price on CVS Health, CVS, Gilead, GILD, and Nucor, NUE are above my basis by not by much. These are lower yielding stocks that I sell calls on a lot. It is okay with me if they are called away.
Expiration dates are important. I like expiration dates that capture the next dividend but are not more than 90 days out.
You are fooling yourself when you sell calls on a stock and your expiration date is before the ex-dividend date. If your stock is assigned you get to keep the call premium but you don't get the dividend.
In situations like this you need to consider the call premium. If the call premium is more than 5% income on your basis, then you have met the goal already. Square, SQ, is a good example. It doesn't pay a dividend so the expiration date is less important. But the yield of 4.95% on one call and 7.07% on the other justify no dividend and short expiration dates.
It is possible to have a well diversified and safe group of stocks on which you can sell calls at least once per year and receive over 5% of income. Just think how much income you could create by using calls more than once per year.
M* MoneyMadam
Disclosure: Long all symbols with calls
