This year’s outsized volatility took Verizon (NYSE:VZ) shareholders on a ride. But it wasn’t near as raucous a trip as what we saw elsewhere. Credit goes largely to the stabilizing dividend stream that gives the telecom titan everlasting appeal into all downturns. Today we’re looking at how VZ stock has fared during the global pandemic. Then I’ll show you how to use options to supercharge your returns.
If you fell asleep on the first of January, Rip Van Winkle style, and just awoke, you’d find Verizon shares virtually unchanged on the year. You might even conclude that all you missed was a garden-variety, minimal-volatility drift in a stock known for its low-beta behavior. But you would be wrong. Though Verizon fared far better than others, it still participated in the March meltdown and subsequent rebound.
Let’s take a closer look at the chart.
Verizon Stock Charts
Verizon stock closed out 2019 at $60.40 and a dividend yield of 4.07%. During the novel coronavirus-induced crash, its price fell as low as $48.84 before buyers finally returned. The nearly 20% price decline boosted the yield commensurately to 5%. Such is the gift of falling prices. And it’s why the size and scope of Verizon’s downturn are destined to be both shallower and shorter-lived than most other stocks.
The consistency of the sizeable quarterly cash flow in a world of zero interest rates will forever beckon to bargain hunters and income seekers during a bear market. They responded this year the same way they’ve reacted during previous corrective episodes.
The weekly time frame shows the severity of the first-quarter plunge, as well as the speed of the snap-back. After chopping sideways through the summer, Verizon finally scored an upside breakout in August and turned its weekly trend higher. We’re now flying high above all major moving averages.
Given the slower-moving tone of Verizon over the years, moving averages haven’t proven all that helpful as potential support and resistance zones. Nonetheless, reclaiming the high side of these smoothing mechanisms does confirm bulls have regained the upper hand, and the path of least resistance is no longer down.
On the daily view, you can see VZ has broken the 20-day moving average but is still holding the 50-day. To maintain the integrity of its newfound uptrend, we’d like to see it remain above the 50-day. If you want a silver lining to the recent dip, however, it is providing a better entry point to scoop up shares for the dividend.
How to Amplify the Dividend
There’s no denying the sexiness of a virtually guaranteed 4% annual income stream. But if you’re willing to venture into the options market, you can multiply the cash flow potential. The strategy is known as a covered call. By selling call options against your stock, you can get paid for your willingness to sell shares at a higher price. That payment is yours to keep and will augment the quarterly dividends you’re already getting paid.
For example, you can currently sell the Nov $62.50 call option for 46 cents per share. On 100 shares, you’re capturing another $46 over the next 52 days. If Verizon sits below $62.50 at expiration, the call will expire worthless. Then, you can sell a December call option to repeat the process. Alternatively, if Verizon stock rises above $62.50, then you’ll be obligated to sell your shares. But you still get to keep the $46 you were paid. Plus, you’ll make a nice $3 gain in the stock along the way.
The real drawback to selling calls against your stock is you limit the upside profit potential. But you still make a tidy sum! When selling the Nov $62.50 call for 55 cents, you restrict your gain in the stock to $3 over the next month. Add in the 46 cents, and the max reward comes out to $3.46. On a $59.50 stock, that works out to a 6% return. I can’t see how that’s a bad thing for 50 days.
On the date of publication, Tyler Craig held a LONG position in VZ.
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