Dividends are a wonderful way to create a steady source of income. Unfortunately, it costs a lot to use a diversified group of well-known dividend stocks, like the dividend aristocrats, as a source for income.
And by looking at the chart below even the capital for one stock, let alone a group of diversified stocks, could be an issue. Which is the exact reason why those in the know use options.
Basically, as you can see in the chart above, I would need as much as $200k to make a $1,000 yield in Apple (AAPL) and roughly $14k to make $1,000 if using Altria (MO) as your underlying. Either way, the dividends are paltry in comparison to what you could potentially make if you decided to include options in your income strategy.
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For instance, let’s say you forgo the dividends in the stocks above (maybe due to a lack of capital) and instead decide you would like to use an options strategy for income using the same stocks.
Let’s take a look at a few examples.
Create Your Own Dividend in Home Depot (HD)
According to the table above it would take $54,054 to make $1,000 in annual dividend income. Home Depot (HD) pays a 1.88% yield.
However, as an option trader, we know that there are far more efficient ways to make two to three times that amount while taking on far less risk in the way of capital costs.
For instance, let’s take a look at a poor man’s covered call. It’s one of the most efficient options strategies for making consistent income while simultaneously limiting risk through the reduction of capital costs.
When taking a look at the LEAPS for Home Depot going out 550 days, we could purchase the January 19, 2024 calls for roughly $95.00, or $9,500 per LEAPS contract.
So, in theory, we could buy upwards of 5 LEAPS, equivalent to 500 shares of HD for less than the $54,054 needed to make the $1,000 in annual dividend income. But, in my opinion, there is a far safer and more consistent approach.
Let’s see how much we could make by selling a call against 1 LEAPS contract, as my preference would be to diversify income among a basket of stocks instead of spending all of your allocation on one stock.
After looking at the August 19, 2022, expiration cycle (31 days left until expiration) it’s clear that we can sell calls at the 345 strike for a minimum of $4.30 per contract.
Basically, we can make $430 per contract every 31 days by selling a call at the 345 strike.
So, with an investment of $9,500, all things being equal we can make roughly $520 every 31 days. That’s a 5.5% return on capital.
And rather than making $1,000 annually with an investment in HD stock of just over $54k, we can realistically bring in over $5,000, if not more, in premium on an annual basis with an initial investment of $9,500. It’s a pretty easy choice.
But just think if we used the power of diversification.
Other Stocks for Dividend Creation
Altria (MO): A LEAPS contract, with a 0.80 delta, would cost roughly $10.50, or $1,050. We could reasonably sell $0.65, or $65, every 30 to 45 days for an annual premium of roughly $650.
Verizon (VZ): A LEAPS contract, with a 0.80 delta, would cost roughly $11.50, or $1,150. We could reasonably sell $0.60, or $60, every 30 to 45 days for an annual premium of roughly $600.
Walgreens Boots Alliance (WBA): A LEAPS contract, with a 0.80 delta, would cost roughly $11.60, or $1,160. We could reasonably sell $0.55, or $55, every 30 to 45 days for an annual premium of roughly $550.
United Parcel Service (UPS): A LEAPS contract, with a 0.80 delta, would cost roughly $57.00, or $5,700. We could reasonably sell $3.30, or $330, every 30 to 45 days for an annual premium of roughly $3,300.
Starbucks (SBUX): A LEAPS contract, with a 0.80 delta, would cost roughly $29.00, or $2,900. We could reasonably sell $1.40, or $140, every 30 to 45 days for an annual premium of roughly $1,400.
If we tallied the initial cost of buying the one LEAPS contract in the five lowest stocks (MO, VZ, WBA, UPS, SBUX) on the chart, it would total $11,960. Just from the purchase of one LEAPS contract in each of the aforementioned stocks we earn could an annual “dividend” income from our options of roughly $6,500. That’s over half the initial cost of our LEAPS for an annual return of 54.3% in just premium, and the main reason why you should consider mixing in a few different options strategies into your overall investment approach.
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