Monday, May 9, 2022

Using low cost shares for income: keeping some powder dry.

Underlying Security Symbol: NUE

 

As a struggling income investor who uses call premiums, these past few sessions have been brutal.  If I can't sell calls and at least get my back my basis, I can't make a living.  Today's example shows the value of keeping some low cost shares to use for a rainy day. 

I have not written about every call I sell and I didn't want to bore you with the Nucor trade.  But this one is worthy of note.

I have a large position in Nucor and I have to sell calls on at least half of it to make up for the puny dividend yield of 1.53%.  Although the dividend yield needs supplementing, the recent dividend growth rate of this security is stellar.   I want to have it all and therefore I keep about half of my shares not on call to keep the dividend.

The calls have been very lucrative and that makes the trades enticing.  It would be easy to sell calls on all my shares. But every disciplined income investor must stick with their strategy.  My strategy is to milk both current and future income from my investments.  This requires restraint and keeping some shares unencumbered.

Back to Nucor, it has been very volatile and that makes it a terrific source of income.  I add on weakness and there has been ample opportunity.  I sell calls to buyers who have hope that Nucor will go up; and they too have been in ample supply.  Nucor is doing it's job of earning more than it pays in the dividend and is accelerating the payout to shareholders.  NUE's most recent dividend raise was over 23%.  All cylinders working on this income source.

April 25, 2022 I bought NUE at $157.65 and sold a May 6, 2022 $160.00 call.   I received $5.00 for that contract and it expired last Friday.   Here's the fun part.

With that expiration and those shares in my cabinet, I selected a lot of shares with a lower cost basis on which to sell a call.  March 11, 2022 I added NUE at $136.58.   I had not yet sold a call on that lot until today.  I try to think ahead.  What shares will I be able to use to create income when the market is soft as it is now.  I try to "keep a little power dry" as they say.  To some people that may mean cash but for me it often times means keeping those low cost shares for a rainy day.







 

 

 

 

 

 

The July 15, 2022 $140 call premium was $7.75.  This is equivalent to 15 and a half quarters of dividend payout.  

Yet the other shares with the basis of $157.65 are underwater at this time, the dividend they pay is safe and growing until we get a chance to sell more calls on that buy. 

My guess is this call will be assigned as the strike price is pretty low.  So far this year, I have had about 10 calls on NUE assigned at or around $140.  If NUE continues a downhill slide, I will most likely add and keep some of those shares for future call writing.

This post adds to my thesis that you need depth; you need to hold multiple lots of a good stock to receive adequate income from that chunk of money.

 

MM MoneyMadam 

Data from Schwab.com and Marketxls


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