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Posts Tagged ‘Call Yield’

How to Get a 40% Annual Yield for Monthly Income

As income investors, we are constantly seeking investments to secure income for our portfolios. The majority seek dividend through income stocks. At Get Rich Investments, we suggest a healthy dose of stocks that pay monthly dividends. In such a low yield world, these investments offering monthly dividends can prove to diversify your income opportunities. There is also an opportunity to earn a high call yield to produce a significant amount of monthly income.

What is call yield and how does it differ from a dividend yield. In typical income investing, an investor may purchase a stock that pays an annual dividend such as a 3-5% yield. In comparison, the income investor may enter a trade using a covered call strategy. This trade is based on the investor owning 100 shares of stock for each call option sold. The investor receives a premium (income) for each option sold against their stock. The premium income forms the call yield based on the premium divided by the cost of stock.

Let’s look at an example subscribers to our Monthly Income Newsletter invested in during 2019. The stock was Starbucks Coffee (SBUX) that was purchased in January 2019 at $61.30 per share. The total investment for 100 shares would have cost the investor $6,130; and is the denominator of the call yield. Then, each month January through November expiration a front month call option was sold for income. The total amount of call premium income during this period is $2,350 or $214 per month. To calculate the call yield, you divided the $2,350 in call premium by the total cost ($6,130) for 38.3%!

Now hold the farm, this strategy created a 38% call yield! Where can you achieve this amount of dividend yield in such a low yield market without something like a startup-type risk?

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In comparison, if you were just a stockholder you would have received $144 in dividends for a 2.3% dividend yield. By using the covered call strategy, you achieved a 40.6% yield combining the call yield (38.3%) and the dividend yield (2.3%). You should keep in mind this is over 11 months of a covered call strategy.

As a covered call investor, you can place this type of trade on most stocks in the market. I suggest focusing on blue chip type of stocks. Subscribers are engaged with around 10 of these trades and also trade other covered calls on a monthly basis.

There are additional benefits to using this strategy beyond the high call yield. Recently, SBUX was trading at $86.00 per share that created a capital appreciation of a little over $2,400 for this investment.

The covered call strategy creates some downside protection if the stock price has a temporary pull back based on market trading.

In conclusion, income investors should add the covered call strategy to their portfolio to supplement other income investments. It is prudent to not only create multiple streams of income but also diversify your investing strategies across your total portfolio. If low yield have you down, look to a consistent covered call strategy to create a high call yield. Here’s to the next 40% or better income yield.

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