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Posts Tagged ‘enhanced stock yield’

The Safe Trade for a 15% Yield

As a reader of this blog, you know we focus on generating monthly income from investing.  A favorite and safe way to accomplish this goal is through writing calls on stocks.  Done correctly, you can achieve yirlds in the double digits without the worry of a dividend cut or significant price decline.  When you hear a suggestion to purchase a stock with a 15% yield you automatically go on code alert as there must be something wrong with a stock yielding this much money.  In most cases you are right to be alarmed but today I will show you a safe way to get a 15% yield.

In the current market, Microsoft seems to be a hated stock as it is large and its fast growth days are behind it.  However, you can use a stock like this to your advantage if traded properly.  Microsoft is trading at around 10 times earnings indicating it is relatively cheap at the current price of $27.25.   Microsoft is sitting on about $50 billion in cash equivalents and still has hugh profit margins.  This is a perfect setup for a safe stock to use for covered call trades.

The strategy is to buy 100 shares of Microsoft stock and use a monthly call trade to generate monthly income.  Microsoft pays an annual dividend of $0.64 per share of $0.16 per quarter.  This equals a yield of 2.4% in dividends.  So how do you get from a 2.4% yield to a safe 15% yield?  This is where you add the monthly covered call write.  On average, an at-the-money call will sell for $0.30 for MSFT.  Some months have higher premiums than others and vice versa.  By selling 1 ATM call each month for an average of $30 per month will generate a total of $360 over a one year period.  based on a total cost of $2,725 for 100 shares, the covered call will produce a yield of 13.2%.  By combining the covered call yield (13.2%) with the dividend yield (2.4%) you get an annual yield of 15.6%.

Microsoft stock has support around the $24 level so there is little downsize risk.   The stock has a typical volatility at around 25% or lower.  In the case the stock moves in the money, let it get called away and keep the premium.  If not called away, then continue to sell monthly calls ATM to generate more income.