Double My Dividend

You're nothing but a "cash cow". If those sound like fighting words, then perhaps this isn't a strategy for you. If however you find that label charming, then I have something for you.

A straightforward way to increase income and reduce risk is to sell call options against high dividend-yielding stocks. This provides the investor with three means to potentially profit from a stock investment: dividend income, call premium income and stock price appreciation.

It is no secret that high dividend-yielding stocks are favored in directionless markets. Both Kevin Matras and I prefer companies that have:

Zacks Rank less then or equal to 3
5 year historical growth rate greater then or equal to 10%
Projected next 3-5 year growth rate greater than or equal to 10%
5 year average dividend yield greater than or equal to the average of the S&P 500

Such companies generally provide solid earnings records and have a history of paying dividends. Take a look at the screening criteria below for the Research Wizard.

Discovering high dividends-yielding stocks is rather simple, but that's just the first step in the "double my dividends" strategy. Next, we must opt for stocks that have tradable options. It is essential to collect option premiums! The collection of premiums reduces the cost basis and thus minimizes the risk. Moreover, the options premium provides for a steady stream of monthly cash flows. Recall that dividend payment is the first stream of cash flows.

Let's look at the following example:

A static return of 17.9% is quite attractive. Keep in mind the static return is the returns on an investment assuming the stock were to move sideways.

You can learn more about different option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.

And be sure to check out our new Zacks Options Trader.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Read the full analyst report on DLR