How to Create 3-Income Producing Portfolios Using Covered Call Writing and Dividend Generating Stocks – July 24, 2023
Covered call writing is a low-risk cash-flow strategy that can also create the potential of a 2nd income stream when using out-of-the-money (OTM) strikes which can also produce potential income from share appreciation. When incorporating underlying securities that offer dividend distributions, we now have a strategy with 3-income potential sources: option premium, share appreciation and dividend distribution.
Strategy analysis
- Purchase top-performing blue chip stocks
- Re-evaluate bullish assumption monthly (or weekly)
- Capture quarterly corporate dividends
- Sell out-of-the-money covered calls
–Call premium
–Share appreciation potential
- 3 potential income streams per stock
Stock selection (BCI Blue Chip Report as an example)
- The red and blue arrows show these securities outperforming the S&P 500 over the past 1- and 3-month time-frames
- The purple arrow shows the dividend annual yield
- The green circle shows key dates to avoid, earnings, and ex-dividend dates
30-day initial time-value returns with upside potential when using OTM call strikes
- The initial time value 30-day returns range from 1.56% to 2.14%
- Annualized returns range from 19.00% to 26.02%
- Upside share appreciation potential ranges from 1.75% to 3.67%
- These calculations do not include the dividend yield aspect of this 3-income strategy
Dates to avoid
- Earnings reports: Okay to own the stock through the report and write the call after the report passes
- Ex-dividend dates: Do not have an option in place that expires after the ex-date. Ex-dates are the most common reason for early exercise
- Use weekly options (when available) to circumnavigate around earnings and ex-dividend dates
Discussion
Covered call writing using OTM strikes on dividend-bearing stocks is a reasonable approach to developing portfolios with 3-income stream per trade potential. This article featured using the best-performing Dow 30 stocks with OTM monthly call strikes, one of many ways to structure such portfolios.
Author: Alan Ellman