Use This Easy Options Idea to Double Your Dividend Income

If you’re a buy-and-hold investor looking for great, steady dividend players, chances are you’re leaving money on the table. A lot. At least enough to double your dividend or more.

How? By using of one of the safest, lowest-risk options trades out there — covered call writing.

When you write a covered call, you’re essentially agreeing in advance to sell your shares at a certain price at a certain date, known as the strike date of the option.

If that date passes and shares don’t hit that price you keep your shares and the premium.

Used conservatively, this strategy can easily more than double your return on a dividend stock. And as the options are “covered” by the shares you own, there’s no possibility of doing anything that might blow up your trading portfolio.

Let’s dive a little more deeply into how to best select covered calls when you own a dividend-paying stock but still want to keep it.

Every stock is different and moves in different ways. An investor with a dividend-focused portfolio is typically looking at lower-volatility stocks but also ones that pay out a steady cash dividend over time.

When selecting a covered call wait until a stock has had a solid move higher and looks set to take a pause for a while before the next leg up.

The process at work

Using McDonald’s (MCD) as an example, shares of the company have rebounded nicely from their March lows, yet have had a tough time staying over $200 per share. Currently, shares yield 2.5%, paying out $5 per year or $1.25 quarterly.

A buy-and-hold investor might recognize that the company’s long history of dividend growth will take shares higher over time. However, short-term headwinds from lost sales may keep shares from heading higher quickly.

Rather than bemoan the situation, the McDonald’s investor can look to the options market to make more money from the trade.

Looking at prices in late July near $200, let’s say the trader selects the October 2020 $210 call. The ticker symbol is MCD201016C00210000.

That simply means the option is for MCD, the 201016 shows the year, month, and day of the month it expires. The C shows it’s a call option and 00210000 shows the strike price.

At a price of $200 a further gain of $10 is a 5% move higher. That’s not impossible for McDonald’s in the span of two-and-a-half months, but it seems unlikely right now.

Even better, the call option, which we sold, is in the 90-day window where time decay is at its worst. Time decay is the value the option that declines each day due to the passage of time. It declines at a faster rate the closer to expiration. Studies show the rate tends to hit its biggest acceleration within 90 days.

Finally, we get to the juicy part of the trade: The price. This option last traded for about $3.10. If you sold to open, this trade immediately put $310 in your brokerage account for every call you sold. If you only own 100 shares of McDonald’s and made this trade, that’s still an extra $310 in cash just from owning the position.

When the option expires, one of two things can happen. If shares are over $210 they get “called away.” It doesn’t matter if the price is $210.01 or $300. If shares are under $210, you keep the shares. Either way, you keep that $310 per contract that you sold.

Looking at the backdrop of McDonald’s annual dividend of $5 per share, the ability to make an extra $3 per share in under three months shows the power of using covered calls to at least double your dividend each year, if not more.

Recommended Articles

‘Healthy’ Foods That Might Be Harming Your Gut and What to Choose Instead

As our world produces and demands more processed foods for convenience, marketers are also getting clever. Foods are being labeled to cater to those with dietary requirements or those looking

5 Surprising Countries Where You Can Retire with Less Than $100,000

When retirement is inching closer, you might wonder about the kind of lifestyle you can lead and the level of financial security you will have if you just have about

fire method for early retirement

The Real Truth About the FIRE Method for Early Retirement

The FIRE method for early retirement has taken off in popularity in recent years. But are the risks well understood by its adopters? Retiring as early as possible then living

Feeling Bloated? 25 Natural Ways to Fix Constipation

We’ve all been there. Things are rumbling in your tummy, you feel big and uncomfortable, but you just can’t seem to poop. Constipation happens to the best of us, and

5 Ways to Ensure You Get the Lowest Possible Mortgage Rate

A 30-year fixed rate mortgage is the most widely chosen home loan option because of the high financial predictability it offers. Follow these tips if you want to obtain the

Robots Will Take 52 Million Americans Jobs. Here’s What Will Happen

A new research report compiled by the Brooking Institution reveals that innovative automation technologies are set to replace millions of American jobs. In fact, more than 52 million American jobs in

Online Loan Companies Are No Easy Fix for Desperate Borrowers

If there is one thing that most Americans need right now, its more money. Online loan companies know this — and it's dangerous for many of us. Since the financial

investing in a volatile market

Investing in a Volatile Market for Long-Term Gains

Investing in a volatile market gives everyone the jitters. Novices, in particular, tend to sell in a panic and then wait for the right time to re-enter the market. Selling

Legumes: Nutrient Dense and Delicious, but Watch for These Preventable Side Effects

Legumes: Good or bad for you? The answer is, a little of both. And at the end of the day, what really matters is how your unique body feels when

4 Keys to Successful Retirement Planning

Retirement planning gives you the freedom to live life to the fullest. You can afford to have all the necessary comforts and amenities of life, go on a vacation occasionally,

Do Seniors Need Life Insurance Coverage?

Do seniors need life insurance coverage? Your golden years should be about enjoying the memories of one’s lifetime. Yet the reality of life is that we struggle to pay our bills

Better Investment Than a Casino? Probably a Fitness Club

We all aspire to be healthier. Who doesn’t aspire to lose weight and exercise more as an annual New Year’s resolution? Yet well-intentioned aspirations and actions are not the same