Daniel is a retired business executive who now devotes most of his free time to trading stocks and stock options in the stock market.
Hard to believe is it not? How can one get paid cash dividends if one does not own stocks?
Yes, it can be done and is, in fact, being done by thousands of people in the financial world. This article will describe the process of how it is done.
Of course, the easiest way to get cash dividends paid is to get into stocks that pay dividends on a regular frequency like quarterly, semi-annually or annually. But these dividend payments are small and unless you have millions of dollars invested in these stocks, you can hardly live on them.
What I will be talking about is how to generate regular, higher cash payments from companies with or without owning shares of stock in those companies.
By selling call and put options on stocks, if you own stocks, or cash if you don’t own stocks.
The cash derived from the sale of options is like receiving dividends from those companies as often as you like. You dictate the time you wish to be paid. The shorter-term options pay smaller amounts while the longer term ones offer larger payouts.
You may sell options on companies that are already paying regular dividends or companies that never pay dividends at all. By selling options against stocks it matters not if the underlying stock pays or does not pay dividends.
For those who rely heavily on dividends as a source of additional, or main income, selling options against the stocks they already own will most certainly augment their income substantially.
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in”
— John Rockeller
Here Is How It Works When You Own Stocks
The trading system of generating cash from stocks owned is well known in the stock investing world as covered call option selling. It is the trading technique of selling call options against stocks owned.
Let’s say you own stocks in some well-known, dividend-paying companies like Bank of America (BAC), Microsoft (MSFT) or AT&T (T). Presently, as this article is written in June, BAC stock is at $30. In the past four quarters, it has paid dividends of $0.12 per share per quarter or a total of $0.48 for a twelve month period.
Assuming an investor bought into BAC today at its current stock price of $30 with the expectation of earning some dividends from his investment. If BAC’s stock price stayed static, without moving much up or down for the next several months, the investor doesn’t mind and is happy that it pays a quarterly dividend of $0.12 per share. In one year the dividends would total $0.48 which translates into a return on investment of a measly 1.6 percent. Almost the same rate as one would get parking cash on a CD money fund. Not really all that great is it?
BAC Cash Dividends Paid; with Options vs Without Options
Now let’s explore what options selling can do to enhance the dividend return by using the covered call option selling system. Looking at the option chains on BAC there are numerous choices of options to sell at different expiration months. The shorter expirations offer lesser premiums (prices) than the longer expirations.
The BAC July options expire in just about a month. The July strike 31 call option has a bid price of $0.43 and the July strike 32 call is at $0.20. The July 31 call gives you a return of 1.4% while the July 32 at a lower return of 0.7%. These are monthly returns when the options expire on the third Friday of July.
If we go to the August expirations the premiums are much better. The August strike 31 call is at $0.65 and the strike 32 is at $0.35 for returns of 2.1% and 1.2% respectively. These are returns for a period of approximately sixty days.
Now let’s look at the worst case scenario where you elect the choice of going 60 days with a 32 strike instead of the 31 strike. Assuming BAC’s stock price maintains at the average level of around 30 and you sell call options every two months (60-day expirations) at around $0.35, this translates to approximately 8% per year in option cash income alone. Add to this the 1.6% cash dividends paid during the same 12 month period and you end up with a total of 9.6% cash return on the BAC stock. Isn’t this a lot better than just holding the stock and relying on the 1.6% cash dividend return?
The best case scenario of selling 60-day call options on the call strike price 31, which is nearer the BAC stock price of 30, would yield approximately 13% on options alone. Add the 1.6% dividend yield and this raises the ROI to 14.6%.
NOTE: When selling call options against stock owned, the nearer the strike price (31) is to the current stock price (30), the higher the yield but the greater the chance of the stock being exercised. The safer method against potential exercise is to sell strikes that are farther away from the current stock price, like the strike 32.
Read More From Toughnickel
AT&T Cash Dividends Paid; with Options vs Without Options
Here is another example of how selling options against a stock you own will enhance your cash dividend revenues.
AT&T (T) stock is currently quoted at $34 in June. It has been paying 49–50 cents quarterly cash dividends averaging around $2.00 per year for a nice yield of 5.8% based on its current price.
The July 35 call option has a bid premium of $0.69 while the strike 36 is at $0.41 for monthly returns of 2% and 1.2% respectively. To be safer from potential exercise, the farther August strikes of 36 and 37 are going for .69 and .47 yielding 60-day returns of approximately 2% and 1.4%. My personal choice would be to go with the August 37 call option at $0.47.
Annualizing the cash returns, the 60-day options of approximately $2.80 (.47 every 2 months) plus the regular cash dividends of $2.00 (.50 per quarter) gives us a total annual cash income of $4.80.
This is a 14% return on AT&T’s current price of $34 versus a lesser return of 5.8% without option selling.
Let’s look at Microsoft Corporation and see what the numbers are. At this writing in June, MSFT is trading at a current price of $101. Since I like the 60-day options because I’m able to select strikes that are farther away from the current price, I’ll go with the August 105 call option at 2.05 which if annualized could be something around $12.30
MSFT pays quarterly dividends of approximately .42 per share giving a total $1.68 per year or a yield of 1.6% on its current stock price of $101. The annual income from combined options and dividends amounts to around $13.98 yielding a nice combined rate of 13.8%. Here again, we are comparing a 1.6% yield from dividends alone against a 13.8% combined yield of dividends and options.
Of course, the stocks mentioned above don’t always stay at the same price level all throughout the year. In real life, stocks are constantly fluctuating and therefore the theoretical comparisons above may not always apply.
Okay, then let’s look at real case histories.
In January 2015 BAC stock was trading at around $16.98. During the next two years up to December 2016, the stock paid a total of $0.45 in cash dividends. Additionally, during this two year period the stock fluctuated up and down and in December of 2016 was priced at around $22.10.
The new price is $5.12 higher than two years ago and when $0.45 in dividends are added the stock delivered a total return of $5.57, translating to a yield of 33% from the original January 2015 price of $16.98.
Now take a look at this comparison. In the same two year period of BAC’s life, an investor could have sold call and put options as the stock gyrated up and down. The total revenues from sales of call and put options would have totaled $4.75. Adding the cash dividends of $0.45 and the price appreciation of $5.12 (from the Dec 2015 stock price) gives us a total gain of $10.32.
That is a return of 61% on the original January 2015 price of $16.98. Certainly much better than the 33% return without options.
Here’s another case example. AT&T (T) was trading at around $33.40 in January 2015. In the two year period to December 2016, it paid total cash dividends amounting to $3.86. In December 2015 the stock price was at $42.53 for a net stock price appreciation of $9.13. Adding cash dividends gave the stockholder a total gain of $12.99 at the December 2016 price.
This is a total return of 39% over the original price in January 2015.
The investor who also purchased AT&T stock in January and sold call and put options continuously all the way to December 2016 achieved a much better return of 52% computed as follows:
price gain of $9.13 + dividends of $3.86 + options sales of $4.50 = $17.49. The total gain is 52% of the original investment of $33.40
Here is How it Works When You Don’t Own Stocks
We now come to the part of this article that most likely is what has drawn many readers to this piece. How to get cash dividends paid without stock ownership.
There is no secret here. You can receive cash payments from stocks you don’t own by simply putting into practice the options trading system known as cash secured put options selling, also called covered put selling. If you have been following some of my articles you will have seen that this trading strategy is mentioned in many of my write-ups.
Let’s get to work with an example.
John Doe has $50,000 cash in his stock broker’s account. He is looking to invest this amount in several dividend-paying stocks to generate cash revenues from this unused cash fund.
Instead of buying several stocks to make up his dividend-paying portfolio he can, as an alternative, use the $50,000 to secure or cover put options on several stocks without actually buying any stocks. Here’s how it’s done.
It is early in the month of May. John looks at International Paper Company (IP) and see's that its stock is currently trading at a price of $52. The option chains for June show that he can sell the June 50 puts at a premium of $0.84 expiring in six weeks, the third Friday of June.
He sells 4 contracts (4 contracts = 400 shares) of the June 50 puts using $20,000 of his cash funds to secure the 4 put contracts. The sale generates a total cash inflow of $336 (.84 put premium x 400 shares).
Having used $20,000 of John’s $50,000 cash fund, he next looks at Walmart Stores (WMT) option chain and finds the June 82.5 put with a premium of $1.83 to his liking. WMT stock is at a price of $84 when he sells 2 contracts (equivalent to 200 shares) of the 82.5 put option, generating a total $366 on this transaction. This trade used $16,500 of John’s remaining cash balance to secure the 2 put contracts.
John still has $13,500 left of the original $50,000. He again makes another put option sale. This time he selects the XYZ Corporation June 67 puts at a premium of $1.30 when XYZ stock is at $67.50. He sells 2 contracts generating $260 secured by $13,400 of his remaining original capital.
Below is a summary showing John’s cash receipts and disbursements.
As the table above shows, John generated a total of $962 of cash revenues from the sale of options. The options expire in 6 weeks, after which time he can again write or sell new options for another 4 – 6 weeks.
The $962 income John produced represents a return of 1.92% on his capital of $50,000 in a six week period. Annualized, this translates into a return of about 16.6%.
If he owned the four stocks in the above example and received cash dividends every quarter, his total annual dividends from them would have amounted to approximately $1,000-$2,000. Without options sales, this is about 2-4% return on his $50,000 capital. A far cry from the approximately 16% return by selling puts without owning the stocks.
And best of all, since John did not lock his capital into owning shares of stocks, his cash stays liquid all the time. John can access his cash any time after each option expires. Or, if he wishes to access his cash before any of the stock options expire, he can just liquidate the position by buying back the put option and closing the trade.
Not Familiar with Options?
After seeing the awesome benefits afforded by options in generating better rates for your cash, it behooves you to learn options. There are many books, websites, blogs, and articles on the subject of stock options.
For the beginning option student, I would highly recommend the book "OptionsTrading: Strategy Guide for Beginners". This book is short enough to enable the newbie to get started in no time at all. One important feature is the section on how to avoid mistakes in the options business.
Once you have gotten a good understanding of how options work, you should go to an advanced level with the book “The Complete Guide to Option Selling”. I have read this book several times in my search for books and materials to recommend to those aspiring to learn how option selling works. This is one of the best books I've come across for simplicity and completeness.
Any and all information pertaining to trading stocks and options including examples using actual securities and price data are strictly for illustrative and educational purposes only and should not be construed as complete, precise or current. The writer is not a stockbroker or financial advisor and as such does not endorse, recommend or solicit to buy or sell securities. Consult the appropriate professional advisor for more complete and current information.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2018 Daniel Mollat