How to Safely Double Your Dividend Yield With Covered Call Options
As it turns out, despite the summer swoon, income investors were the big winners in 2011.
While the Dow Jones Industrial Average finished the year with a gain of just 5.5%, the 100 highest-yielding stocks tracked by the Dow Jones - as measured by the iShares Dow Jones Select Dividend ETF (NYSE: DVY) - returned a market beating 11.73%.
Of course, the question today is whether or not that performance will carry on in 2012.
However, given the contentious nature of the U.S. presidential race, the ongoing turmoil in the Eurozone and the clouds hanging over the global economy, 2012 is looking like it will provide another great year for dividend investors.
The reason stems from what Martin Hutchinson, editor of the Permanent Wealth Investor, discussed last week in his look at dividend stocks.
"The problem with going for capital growth," Martin points out, "is that you very often don't get it, and then you've got nothing - the investment just sits there."
By contrast, Hutchinson added, "Dividends are easy... All you have to do is figure out which companies have genuinely solid business models that aren't going away."
Options Strategy: Boosting Your Yield With Covered Calls
What's more, if you're willing to put in a little extra time and make use of a proven strategy involving call options, you can safely double, triple, or even quadruple the amount of income you receive from your dividend-paying stocks - even if the share price does absolutely nothing.
The technique is known as "writing covered calls," and implementing the strategy is quite simple.
All you do is sell (or write) one out-of-the-money call option - i.e., one with a strike price higher than the stock's current market price - for each 100 shares of the stock you own (the underlying security).
The call is said to be "covered" because you own the underlying shares. As a result, you don't have to put up any added money or "margin" in order to make the trade.
All of the money you receive for selling the calls - the "option premium" - is yours to keep regardless of what happens to the price of the underlying stock.
This "option premium" is then added to your overall gains, boosting the yield you are set to earn from the dividend.
Here's how it works in practice:
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