Michael Thomsett’s article on covered calls (“The Covered Call: An Income-Generating Options Strategy,” August 2010 AAII Journal) clearly explained the process and benefits but I think he minimized the income possibilities by shying away from stocks one wants to retain long term and by not restricting purchases to lower-cost stocks. An option at $0.50 on a $10.00 stock is a 5% return (not including dividends, when applicable). If that can be replicated quarterly, then that is 20% annually. Assuming 50% for taxes, that still nets 10% per year.
Sometimes one sells at a strike price above one’s cost, so if the option is exercised one benefits from additional return. If the stock seems to be fundamentally meeting one’s criteria, then it can be repurchased again at the new (higher) cost basis and the process repeated.
In fairness, it should be pointed out that the share price can drop so that either the option premium is minimal or one must risk having the stock called away at a loss.
Thanks for this article and screening of high relative dividend stocks. I have been thinking about this topic actively for over a year and never quite gained a sense of confidence in choosing a safe stock. My lifetime experience with any high-yielding investment has been: Watch out, it’s too good to be true. This approach appears to reduce the risk and narrow the research field.
Edward from Utah
Great article and idea for a stock screen. It is also important to note that the dividend yield you receive is based on the price you paid for the stock. In other words, as stock prices and dividend amounts paid change, your personal dividend yield may no longer match the reported current dividend yield. So trading out of your current dividend-paying stock for another with a higher reported current dividend yield may not be a wise decision.
Richard from Florida
Just want to mention that the article in the September 2010 AAII Journal by John Stephenson [“Vehicles for Investing: Commodities or Commodity Companies?”] missed an extremely attractive option of commodity investing. As a growing number of investors are learning, silver is a significantly undervalued commodity (also a precious metal) compared to gold. Any investor can participate in silver simply by buying U. S. Silver Eagle coins in any quantity that can be stored securely. It has the obvious advantage of not being a “paper” investment subject to manipulation and an excellent hedge against inflation. Silver is also a growth play due to growing industrial uses, unlike gold.
A nice and informative article. It brings practicality to a confusing investment arena. I have been debating how to get some commodity representation into my portfolio and now have a practical method of initiating it.
Walter from Texas
The key to most successful commodities investing involves the use of ETFs [exchange-traded funds]. The article was sorely lacking in not discussing the available commodity ETFs, their components and performance.
Lary from Colorado
This year’s ETF guide includes commodity ETFs and ETNs. You can find a list of such funds here.