3 Ways to Collect Extra Income on Dividend Stocks

Dividends aren't the only income you can receive, so don't leave money on the table

   

Income investors are here, there and everywhere. Part of your portfolio is probably made up of some high-yield names – and few income investors use these stocks as platforms for options strategies to boost their income. That is a mistake. If you do not sell options against your high-yield names, you are leaving a lot of money on the table.

The most well known high-yield stock – and one that sees tens of thousands of contracts traded – is the mortgage REIT Annaly Capital Management (NYSE:NLY). It is a very good company with an 11.4% yield and a quarterly dividend of $0.45 for an annual payout of $1.80 per year. It went ex-dividend last week. But you can do better.

If you bought it now, it would cost you around $15.75 per share. You would then turn around and sell the July $16 call for around $0.30, or $30 a contract. Why a July call? Expiration is after the stock goes ex-dividend. You start life in the stock with some cash in hand – and here is what can happen.

Scenario One (30% probability): You get called out before you collect the dividend. You net $0.55 on a purchase price of $15.75, a 3.5% gain in less than three months and an annualized gain of roughly 14%, which is better than the dividend yield.

Scenario Two (60% probability): You don’t get called out and collect the dividend. You net $0.75 on your purchase price of $15.75, a 4.8% gain in less than three months and an annualized gain of roughly 20%. Much better than the dividend yield.

Scenario Three (10% probability): You collect the dividend AND you get called out.  You net $1.00 on a purchase of $15.75, a gain of 6.35% in less than three months and an annualized gain of more than 25%. Yup, much, much better than the dividend yield.

I own NLY shares and sell calls. You should consider doing the same.

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