Writing covered calls on high yield dividend stocks to boost returns in the investment portfolio is a popular strategy because the call option premium protects the drop in share price on the ex-dividend date. Higher yield means lower risk. By selling a covered call option, we receive the option premium. The premium received lowers the breakeven cost. Compounding the dividends and the call option premium together, the yield on the investment increase; therefore, we boost returns of the portfolio.
Companies that pay dividends are less risky than the ones that don’t, because dividends come from the actual income of the companies. Paying a dividend requires the management of a company to focus on the cash flow, earning capabilities, and ultimately, make them only focus on profitability. Dividends are a stable income for investors. For those who seek steady income and lower risk, investing in dividend stocks is a great way to go.
What to Look for in a Dividend Stock?
Although high yields are ideal, the quality of the company and the dividend payout history are very important. We want to look for companies that have demonstrated a long history of dividend payout, and that are consistent, and preferably, have increased dividends over time. To summarize,
How to Handle Dividend Payments?
Dividend reinvestment is the best way to go. By reinvesting the dividends into new shares of stock, it drives the costs down. The biggest benefit is to enjoy the power of compounding dividends and interest. If the companies raise the dividends every year, the power of compounding is phenomenal.
Writing Covered Calls on High Yield Stocks
By selling a covered call option, the call option premium lowers the breakeven basis. The option premium and the dividends lower the investment risks. It, in turns, provides some protection against the price drop on the stocks ex-dividend date. The idea is to continue to keep the high quality and consistent dividend paying stocks while being able to collect the dividends and the call option premium. Being able to do so, the same strategy can be repeated month after month or quarter after quarter.