Is it possible to pull in 10% on an investment considered a stodgy old fart? I say, “Yes, it is absolutely possible to garner 10% return on certain investments with very little risk or effort.”
How would I go about this? Well, it would require buying shares in AT&T at current level of $34 and selling the Jan. 2017, 35 covered calls. This process would reap a dividend payout of $1.92 and a $1.40 call premium. The total collected would be $3.32 which would result in a 9.7% return on the investment if nothing else was factored into the equation.
Since the calls were sold at 35, the 9.7% would be improved dramatically I’d the shares were to be called out. Then, the return would be 12.7%! It gets potentially better. These results do not factor in the compounding effect of the dividends or the premiums paid when the calls were sold.
I will use 1000 shares for the purpose of the example. So, if the stock was bought at 34, the initial outlay would be $34,000. The Jan. 2017 35 calls would result in a premium of roughly $1400.00. For arguments sake, let’s assume the money was reinvested back into T. This would result in an additional 41 shares that would pay $78.72 in dividends during the year. With just that small addition to the pot and with no dividend reinvestment, the total return would be 9.99% return.
If the dividend were reinvested over the period of the entire year at an average price of $34.00, then the return would be improved further. The first dividend would be $499.68. This would result in 14 more shares being purchased. The next dividend would be $506.40 which added to the left over dividend from the last quarter $513.60 and would result in 15 shares added to the pot. The third dividend would be $520.80 and add 15 shares to the pot, and the final dividend would add 16 shares to the pot. The final tally would be 1101 shares of T. The total return if the shares were called out would be 13.08% and 100 shares would still be held that had a value of $35/share. If those shares were sold, the return would be bumped to 13.37% At that point, all shares would be liquidated, but the initial investment would be worth $38545.80.
Although all of these numbers were calculated without fees applied, it is easy to see that the results could be impressive, but the numbers must be crunched for each investor, so that fees do not eat up the profits. However, when larger blocks of shares are utilized, the fees become progressively less per share.
There are so many ways that a stock like T can be used to increase total return. Selling puts is also very lucrative. It allows an investor to be paid to wait until the stock has moved to an entry point that the investor would like to initiate a position. These strategies when utilized in an IRA can result in very consistent returns that can continue to compound year after year.
I chose T because it has a tendency to trade sideways. It is absolutely amazing how a sideways trading stock can result in such a large % return when used with a covered call strategy. The initial outlay for my example is fairly large, but it shows the potential to use the call premium to buy more shares to add to the compounding effect. When compounding, everything counts.
Currently, I am trading T in my trading account, and I am following my strategy in order to try to push the returns higher. It is an endless cycle of ups and downs that can be exploited if an investor has the desire to do so. Of course, I could choose to just sit back and collect the dividends and reinvest them like I do in most of my accounts, but I want to try to see a better return for at least part of my portfolio. That better return just might have to incorporate selling covered calls or selling cash secured puts. The best part of the strategy is that options do exist to keep money coming in and increasing the overall return of the investment. I think that is something that every investor should take a deeper look into. Afterall, we should all look over our options to see if there are better opportunities out there.
Robert the DividendDreamer
AKA — Seeking Dividends
Follow me on Twitter– Seeking Dividends@DividendDreamer
AKA — DividendDreamer
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