How to Boost High Dividend Covered Call Returns

Boost Returns With High-Dividend Stock Covered Calls

Writing covered calls on high-yield dividend stocks is a common way to increase returns on an investment portfolio. This is because the call option premium protects against the drop in share price on the ex-dividend date. When the yield is high, the risk is low. The option premium is what we get when we sell a covered call option. The cost of breaking even goes down because of the premium. When you add the dividends and the call option premium together, the yield on the investment goes up. As a result, the portfolio returns go up.

Why Dividends?

Companies that pay dividends are less risky than those that don’t because dividends come from the actual income of the company. In order to pay a dividend, a company’s management has to pay attention to cash flow and earnings and, in the end, make the company only care about making money. Dividends are a steady way for investors to make money. Dividend stocks are a great choice for people who want a steady income and less risk.

What to Look for in a Dividend Stock?

Even though high yields are great, it’s also important to look at the quality of the company and how long it has been paying out dividends. We want to find companies that have paid dividends for a long time, have been consistent, and, if possible, have raised dividends over time. To summarize,

  • yield
  • consistency
  • quality

Ex-Dividend Date

The U.S. Securities and Exchange Commission set the ex-dividend date one day before the date of record.

This lets the company get information about who bought and who sold before the record date. Setting the ex-dividend date to the day before the date of record gives the company time to get ready to pay the dividend.

The Significance of Ex-Dividend Date

For investors to get a dividend, they must still own the stock when the market opens on the ex-dividend date. So, even if they sell their shares on the ex-dividend date, they will still get the dividend. Investors who buy shares on the ex-dividend date, on the other hand, will not get the payment. Also, if you sell your stock before the ex-dividend date, you won’t get a dividend payment.

How to Handle Dividend Payments?

The best thing to do is to reinvest dividends. By putting the dividends back into buying more stock, the costs go down. The most important benefit is that dividends and interest can add to each other. If the dividends go up every year, the power of compounding is amazing.

Writing Covered Calls on High Yield Stocks

When a covered call option is sold, the premium on the call option lowers the breakeven basis. The risk of an investment is lessened by the option premium and the dividends. In turn, this helps protect against a drop in the price of the stock on the ex-dividend date. The idea is to keep holding on to the high-quality stocks that pay consistent dividends and to be able to collect both the dividends and the premium for the call option. The same strategy can be used month after month or quarter after quarter if this is possible.

Boost Returns with High Dividend Covered Calls

On August 10, 2022, I paid $35.57 for Chemours (CC) stock and sold the $34 August 19 ’22 In-the-Money call for $1.77. The ex-dividend date was August 12, 2022. The dividend payout was $0.25 for each share. Even though the share price opened on August 12, 2022, at $36.05, the covered call was not assigned. I was supposed to get the dividends on September 15, 2022.

Shares Cost				35.57
Covered Call Premium Received		1.77
Actual Cost of Stock			33.8
Covered Call Assigned at $34		34
Covered Call Profit			0.2
Dividends				0.25
Total Profit				0.45
Total Profit %				1.33%
Number of Trading Days			9
Annualized %				70.89%

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