Earn Double-Digit “Bonus Dividends” From World’s Safest Stocks
Today, I want to tell you about one of my favorite strategies for volatile markets. I’ve touched on it before, but it’s worth repeating. In fact, I’m going to take things a step further to show you how you can begin using it right away to put cash in your pocket.
More on that in a second.
But first, you know how the supposed “experts” are always throwing around cliches when markets are volatile? Take right now, for example. The coronavirus pandemic has sent markets into a free-fall, leaving investors wondering what they should be doing right now. One common saying you’ll hear is that investors should be taking a “long-term” approach with their core holdings and not sell. Others, meanwhile, will say things like “cash is king.”
What if you could do both? What if you can hold onto your blue-chip names (or better yet, buy some of these names on the dip) yet still raise cash as a cushion for your portfolio?
It’s entirely possible, and I’m going to show you how. When you see how it all works, you’ll see why I can’t think of a better strategy for investors right now.
Let me explain…
Earn Huge “Bonus Dividends” From Quality Stocks
Right now you can earn big, double-digit “Bonus Dividends” from some of the safest stocks in the world.
In the past, we’ve found yields as high as 9.9% from Coca-Cola (NYSE: KO)… 12.4% from AT&T (NYSE: T)… and even as much as 17.5% from software giant Microsoft (Nasdaq: MSFT).
This isn’t some investment gimmick, either. The payouts I’m talking about are settled in cash. That is, every time you get one of these payments, the money is added to your brokerage account immediately.
At first glance, these payouts may seem impossible. After all, a quick look at Yahoo Finance tells us that all of the stocks listed above pay dividend yields ranging from 1% to 6%.
So how have we earned so much income from giant brand name stocks like Coca-Cola, AT&T and Microsoft?
It’s easy. By selling covered calls.
On the surface, selling covered calls may seem like a complex concept. It’s not. Yes, it involves options. That’s an investing tool most investors don’t know much about to begin with. But we’re here to change that.
When used properly, selling covered calls can be one of the most lucrative investment strategies — especially for income investors. That’s because covered calls allow investors to take advantage of the regular dividends from their holdings — while also collecting extra “bonus dividend” checks on the side.
Our resident options expert Amber Hestla, Chief Strategist of Maximum Income, explains how:
When we write a call option contract, we create a contract that says we will sell the underlying shares to the option owner at the specified price (called the “strike price”), if it is met.
In return, we receive a cash payment upfront from the option buyer. Depending on how many of these contracts you sell, the payments you receive can reach well into thousands of dollars.
A “covered” call is when you personally own the underlying shares for the option you write. This helps reduce your risk, while making it easier to access the huge payments available from writing call options.
Best of all, if the stock stays below the “strike price” you specify in the option contract (you get to choose the strike price), then the option is said to expire worthless. That’s good for us.
To see how covered calls work, let’s take Microsoft as an example.
The Case For Microsoft
Just about every person on the planet has heard of Microsoft. The company’s legacy product line, the Windows operating system, is just the tip of the iceberg. The company is much, much more than that these days.
Even amid the coronavirus selloff, the company still sports a market cap of more than $1 trillion. That’s thanks to an aggressive expansion over the years into multiple offerings. There’s gaming (Microsoft Xbox), search (Bing), productivity software (Microsoft Office, 365, Microsoft Teams, Skype, etc.), virtual reality, and much, much more.
Perhaps most notable has been the company’s efforts in the cloud. With tools like GitHub, for example, coders can collaborate and host their work. And then, of course, there’s Microsoft’s Azure platform, which competes with Amazon for the lion’s share of cloud-related “as a service” business (software, platform, infrastructure, etc.). No other company even comes close to these two.
In other words, MSFT is exactly the kind of solid stock you want to be owning at a time like this.
Of course, you wouldn’t expect Microsoft to offer investors much of an opportunity to snag big yields. By itself, the company only pays $2.04 a year in dividends — giving the stock a 1.3% annual yield.
Now, 1.3% isn’t bad, especially when you consider MSFT’s $134 billion cash pile. That means the company will not only survive the current market, but it will likely increase that payout substantially down the road.
But we can do even better with covered calls. In fact, I’ll show you how to collect as much as $550 in cash — equal to a 28.7% annualized yield — by selling covered calls on it.
How To Earn “Bonus Dividends” From Microsoft
Here’s a step-by-step breakdown of how that trade would look…
The first step to executing any covered call strategy is to make sure you first own 100 shares of the underlying security (that’s what the “covered” means). For Microsoft, if you don’t already own it, you would need to buy the stock at today’s recent prices. As I write this, the stock is at $153, so we’ll use that for our example.
Once you’ve bought the shares, now you’re ready to write one call option on your position. While that may sound like a difficult process, it’s really not. Just tell your broker that you would like to sell a covered call. They’ll be happy to execute the trade for you. A lot of online discount brokerages offer this service, too. (There may be some paperwork involved, but it’s not that difficult.) You can even use this strategy with most retirement accounts.
The amount of money you receive in “instant income” from selling the option depends on how high you set the strike price away from the stock’s current price. The closer the strike price is to its current price, the more money you receive in premiums.
At the time of this writing, you can sell May 1 calls on Microsoft with a $160 strike price for $5.50. Since each contract represents 100 shares, we would collect roughly a $550 premium upfront on the day we sell the option ($5.50 x 100 shares). Think of this as a “bonus dividend” you receive for agreeing to enter the contract.
2 Win-Win Scenarios
If Microsoft is trading below $160 a share on May 1 (the day the option expires), then you keep the shares. And the money you collected from selling the option is yours to keep as pure profit. Considering the uncertainty around the whole market right now, I’d say that’s fairly likely.
The good news is that our premium can serve as a cushion, lowering our cost basis on MSFT to $147.50 ($153-$5.50). Another way to think about it is that we’re already up by about 3.6% as soon as we collect our premium ($5.5/$153).
See what I mean? But the best part about this scenario is you can continue selling covered calls — capturing big “bonus dividend” payments every time.
If you continue writing covered calls on a rolling six-week basis, you could potentially repeat this eight times over the course of a year. Assuming we receive a similar amount for each contract, the options would generate $4,400 (8 x $550) in additional income each year. Considering your initial investment of $15,300 (what we paid to buy 100 shares in the first place), you could generate a 28.7% annual yield on your investment.
And that’s not even factoring in MSFT’s regular dividend.
Now for scenario two. If Microsoft is trading above $160 the day the option expires, then you would still get to keep the $550. But you would also be required to sell the shares for $160 — $7 above where we purchased them (about 4.5% higher). If we factor in our premium, we end up with a gain of about 8.5% ($7 + $5.50 = $12.50; $12.50/$147.50 [our new cost basis] = 8.47%.)
Now, I realize option premiums may not stay this high throughout the year. But this is just to give you an idea of what’s possible.
The point is, covered calls are about as close as you can get to a win-win strategy when executed properly. Regardless of whether the option you sold expires worthless or not, you’re still going to make money on the trade.
Could you miss out on a bit of upside? Sure. But I’ll take the downside protection (plus the opportunity to get upfront cash) in the trade-off in this market especially.
Bottom line, if you think traditional investments alone are going to pay for your retirement… think again. If there’s one thing this crazy market has taught us, it’s that we need to be nimble and protect our core holdings no matter what. Yes, things will stabilize eventually. We will see another bull market. But in the meantime, selling covered calls can help keep you protected — and put cash in your account.