Plus we can capture some additional upside, too. Which boosts OHI’s annual yield from 7.1% to 19.1%. The “instant payout” of $0.45 annualizes to about 12% because we can repeat this technique about ten times per year. If the stock rallies and closes above $38 in mid-May, we’ll keep the $1.11 plus an additional $0.86 in price upside (the difference between our call’s strike price and OHI’s current price).
If OHI trades sideways between now and May 17, we’ve found a way to collect $1.11 per share in cash (dividend plus call option premium) instead of “just” $0.66 (dividend alone). Also the April 27 ex-dividend date is my projection because the next dividend hasn’t officially been declared.) First, why’d I choose the May option expiration? Because it falls in the 60 day or less “sweet spot” of the options curve chart above, when prices decay fastest.
#COVERED CALL DIVIDEND CAPTURE STRATEGY FREE#
To capture more dividends, in other words!Īs always, there’s no free lunch in the markets. Selling (or writing) call options can be a great way to collect more income from your portfolio. They don’t have to worry about the clock. With each passing day, the sellers grow richer. That’s bad for buyers, but great for sellers like us. With each day that passes, call and put options (the rights to buy or sell a stock at a certain price) decay in value. Speaking of options, they are a better way to practice the dividend payout capture we’re seeking. If there is no major inefficiency in a dividend stock’s price at any given moment, how exactly are we supposed to exploit it? We should buy and sell puts and calls to magnify the price ticks that occur before and after the dividend date.īut again, we’re back to our original problem. “True believers” in the strategy will argue that the real way to employ it is with options. What’s in a Name? Underperformance in This CaseĪll right, let’s stop being so basic ourselves.
Misguided dividend capture investors would have been better off buying a high quality income fund such as the Vanguard High Dividend Yield Index: Supposedly they look for high quality dividend stocks and time their entries using “technical analysis to identify rates of change, trend input, cycle analysis and economic factors.” To be honest I’m not actually sure what the fund does. Then we have the Rational Dividend Capture A fund, which employs the name but not the strategy. Their net effect is the “market” pricing in the future dividend at any given moment. They’ve been bidding the price up slowly for weeks and even months. Well, again, we’re not the only investors who have this idea. Let’s buy the stock a week or two ahead of its dividend date. In fact, the stock is probably “overpriced” by the amount of the dividend it’s about to pay! They already own shares and they are selling at an inflated price. We’re just trying to capture the dividend without holding the stock for very long.īut can we really buy a stock the day before its dividend date and pull this off? Unfortunately for us other investors have thought of this. Money for nothing and our yield for free.
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