Overview
This article takes a deep look at Altria Group Inc. (MO) and explains why it is a fantastic choice as part of a portfolio that is designed to generate passive income through dividends and covered call premium.
What Makes Altria a Good Fit for This Strategy?
Lower Than Average Stock Price Volatility
Yahoo Finance indicates that Altria has a 5-year monthly beta of only 0.63. If we compare Altria’s stock volatility to that of other high-flyers like Nvidia (1.76), Tesla (2.07), etc., we see that it is considerably less volatile. If a stock’s beta is less than 1, but greater than zero, then its volatility will be lower than the market’s.
Since Altria has a lower beta, its stock price fluctuates less frequently. This bodes well for the covered call strategy, which requires the ability to repeatedly sell covered calls in order to receive premiums as income without surrendering the underlying stock.
Strong Dividend Returns
Altria is a winner when it comes to dividends. The current dividend yield is just over 8% annually. Thus, it’s not hard to see why a stream of passive income would be appealing. The compounding impact of dividend yields means that dividends, when reinvested, can lead to extremely high returns.
If you put $10,000 into Altria on March 11, 2003, and kept reinvesting your dividends, you’d have over $171,000 in your account right now. It was only about $47,000, which isn’t much when compared to what you would have gotten if you had simply bought and held the stock without reinvesting the dividends.
Why Altria Is a Fantastic Stock for Covered Calls
Low Beta
This technique favors Altria because of the stock’s generally low beta. According to Yahoo Finance, its beta (5-year monthly) is 0.63. If the stock’s beta is lower than 1, but more than zero, it will be less volatile than the market as a whole.
What Is Beta?
For example, a beta of 1.5 indicates that the stock is 50% more volatile than the S&P 500. Based on its beta, we can estimate a 9% return on that equity if the market rises by 6%. Conversely, a 10% drop in the market is predicted to result in a 15% drop in that stock.
Why is Altria a great candidate for covered calls?
Therefore, if the market were to move by 2% and MO had a beta of 0.63, then its value would be expected to rise or fall by 1.26%, respectively. The covered call strategy works well with stocks that have little volatility and maintain a consistent, upward trending range.
Risk of Selling Covered Calls on a High-Yield Dividend Stock
Why We Sell Covered Calls
Covered call writing is a strategy for generating passive income through the collection of option premium. If the stock price increases above the strike price of the call we sold, we risk losing our holdings. This is due to our agreement to sell, for instance, call options at $50 in exchange for the call option premium.
When Things in Covered Call Trading Go Awry, What Can Be Done?
We will need to make a decision when the stock price rises above $50, and our call option is about to expire.
- Buying back the call options we previously sold is an option. That means we get to keep the stock.
- Alternatively, if the stock price stays at $50 or above when the option expires, we will be required to sell the shares.
- Rolling the covered calls is another strategy. To roll a covered call means to “purchase back” the calls that were previously sold. Concurrently, we sell near-term call options. This means we can safely hold onto the stock.
For instance, we had previously sold a call option with a $50 strike price for $1. The stock price is $51 two days before the option expires. We’ve decided to roll the covered calls. In this situation, we’ll pay $1.10 to repurchase the option we previously sold. Concurrently, we will sell another call option with a $50 strike price that expires 32 days later for $1.60. This trade yielded a net premium of $0.50, or $50 in passive income. What’s more, we get to keep the stock.
Conclusion
Altria is a solid stock to own. Dividend yield is above 8% per year. What’s more, the stability of share prices bodes well for the covered call strategy. With dividend reinvestment, one can build a passive income stream that is both reliable and lucrative.