Using covered calls is a smart way to increase your monthly earnings from dividend growth stocks. It’s a relatively safe method to add extra income from investments while also minimizing potential risks. Let’s explore the top stocks for employing a covered call strategy.
Over the past decade, the market has seen a significant upswing since the 2009 low point. However, there’s uncertainty about whether this trend will continue or if we’re headed for a period of stagnation or decline. Focusing on income generation instead of growth is one way to address this uncertainty. Covered calls offer a simple and effective strategy that works well in stable or slightly fluctuating markets.
Pairing covered calls with dividend stocks can yield impressive results. If you’re new to investing in dividend growth stocks, consider reviewing our guide to building a portfolio. Combining dividends with covered calls boosts portfolio income, as you earn both from the strategy and the dividends. It creates a compounding effect, enhancing overall returns.
Covered calls allow investors to earn income by selling options while owning the underlying stocks. This strategy provides a “cover” for shares if the options are exercised. Writing a call option generates income through the premium paid by the option buyer. If stock prices remain stable or increase, the seller keeps the income, though the profit may be reduced compared to not writing options. However, if prices fall, there is a risk of loss.
To find ideal stocks for covered call writing, look for dividend-paying stocks with suppressed valuations yet to unlock their potential. Historically undervalued stocks, like General Motors at one point, can be optimal candidates for this strategy.
Let’s explore two dividend stocks that are prime candidates for covered call writing:
1. **ExxonMobil (XOM)**: Trading between $72 and $88 over two years, with a dividend yield of 4.07%. Selling covered calls can boost your income potential. For example, you could sell an $82.50 call and earn a tidy return if the stock remains below this price at expiry, while also positioning for gains if the price exceeds it.
2. **Kraft Heinz (KHC)**: After a significant drop in share price, KHC offers a 4.32% dividend yield. Selling a covered call on KHC can enhance income. If the stock stays under the $60 call price, you still reap the premium benefit, with the opportunity for capital gains if the stock exceeds it.
In conclusion, options trading, including covered calls, can enhance portfolio income while carrying some risks. Incorporating covered calls can improve portfolio yields, provided one is comfortable with possible capital gains trade-offs. Adhering to a well-planned strategy is crucial for success in this approach.