Generate More Income From Dividend Stocks

Option strategies can act as a complementary method for boosting your portfolio returns. The best dividend stocks in the market yield approximately 2-3% and the dividend growers growers tend to increase their dividends year after year giving you a pay raise for simply holding the stock. Some dividend stocks may yield higher (3-6%) but may not necessarily increase their dividends year after year. To generate a high revenue stream to live off the dividends from your holdings requires a huge portfolio when high quality stocks pay 2-3%. Lucky for us, there are simple options strategies that we can use to supplement our income and boost our returns. This post requires a basic knowledge of options trading. The strategy covered are writing out-of-the-money (OTM) put and call options.

Using these simple options strategies, you can generate more income in your portfolio leveraging the dividend stocks. The option strategies discussed here are not limited to dividend stocks and can be applied to any optionable security. Note that options trading is extremely risky and because these are leveraged trades, the losses can be substantial. Always make sure you fully understand the trade and how it works before you start trading.

Writing out-of-the-money put contracts

If you want to initiate or add positions on a stock, write OTM put contract. You collect the premium for the option that you wrote; and If the stock stays above the strike price, you simply keep the premium and it expires with no obligations. If the stock price drops below the strike price and the option is called, you buy the stock at the contract price and add to your position of the dividend stock. Your average stock price goes down below the strike price when you factor the collected premium.

Writing out-of-the-money covered calls

If you own the stock, you could write OTM calls on the dividend stocks you own. If the stock price stays below the strike price, you simply collected the premium and have thus generated income in your portfolio without any other obligations. If the stock rises above the strike price and is called, you sell the stock at a profit. Of course, you should be willing to sell these shares of the stock from your portfolio if the option is called.
These are short positions and these trades are called sell-to-open (STO). So, you are opening a trade by selling and when you intend to close the trade, you buy-to-close (BTC) or wait for the options to expire.

ETFs

There are plenty of ETFs which uses this strategy to generate monthly income with yields as high as 8%. For a detailed look at this category, check coveredcalletfs.com

A note for Canadian residents

The government of Canada, in its infinite wisdom, allows its residents to only trade long positions (BTO and STC) and shorting covered calls (STO) in registered accounts such as RRSP and TFSA. If you want to STO puts, you will need a non-registered account. How the government justifies this, is beyond me!
Have you tried these trades to boost your income? What are your thoughts?Image Credit: Stuart Miles/freedigitalphotos.net

 
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.
 
 
 

Quotes from John C Bogle

John C Bogle is the founder and retired CEO of The Vanguard Group. Bogle is famous for his insistence, in numerous media appearances and in writing, on the superiority of index funds over traditional actively managed mutual funds. He contends that it is folly to attempt to pick actively managed mutual funds and expect their performance to beat a well-run index fund over a long period of time, after accounting for the fees that actively managed funds charge. Investors who follow this low-maintenance, low-cost index fund strategy have been termed bogleheads in the media. 

I decided to put together some of the best inspirational and insightful quotes from John Bogle.


  1. “Time is your friend; impulse is your enemy.”
  2. “Buy right and hold tight.”
  3. “Forget the needle, buy the haystack.”
  4. “There’s no escaping risk.”
  5. “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
  6. “When reward is at its pinnacle, risk is near at hand.”
  7. “Beware of market forecasts, even by experts.”
  8. “Never underrate the importance of asset allocation.”
  9. “Mutual funds with superior performance records often falter.”
  10. “[Mutual funds] don’t last as long as you would expect; for example in the 1990s over 50 percent of all the mutual funds that have been in business during the decade are no longer here, … If you invest in a firm you want to hold it long-term, but if the fund doesn’t exist your option is nil.”
  11. “Owning the market remains the strategy of choice.”
  12. “Stock options have failed abjectly to do what they were ballyhooed to do.”
  13. “Look before you leap into alternative asset classes.”
  14. “Beware of financial innovation.”
  15. “Learn every day, but especially from the experiences of others. It’s cheaper!”

Chatter Around the World – 16

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

New blog posts

Let dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

 

Omega Healthcare (OHI) Dividend Increase

Omega Healthcare Investors Inc (OHI) announced that its quarterly dividend will be raised by 2.1% to $0.48 per share from $0.47 paid in the last quarter. This dividend increase is the company’s 26th dividend hike since first quarter of 2004. The new dividend is scheduled to be paid on Nov 15, 2013 to shareholders on record as of Oct 31, 2013. The new dividend rate results in an annualized yield of 5.80% based on OHI’s closing price as of yesterday – Oct 16. This increase in dividend payout demonstrates the magic of passive income and the regular pay raises that investors see for investing in solid dividend growth companies.

 

My portfolio consists of 50 shares of Omega Healthcare, which increases my quarterly dividends from $23.50 to $24.00 and an annual dividend raise from $94 to $96.