Wal-Mart Stores, Inc. (WMT), The Procter & Gamble Company (PG), Chevron Corporation (CVX): Using Options to Increase Your Dividends

The June $77.50 call option has a buffer of 3.5% above the current share price while offering a premium of $0.72/contract/share. This premium represents an annualized yield of 3.85%, or when added to the current dividend an effective total yield of 6.38%. This is 2.5 times higher than the dividend yield alone and higher than any of the cases considered above.

A larger buffer of 6.9% is offered by the September $80 call option. The premium here is $0.76/contract/share for an annualized yield of 1.94%. Added to the current dividend this gives an effective total yield of 4.47%.

The bottom line

By selling call options, one can greatly increase the income generated from a position. In many cases, even high-quality dividend stocks can have their effective yields doubled by selling call options.

The biggest risk with this strategy is that your shares can be called away if the stock price appreciates too much. Because of this, it is best to sell call options on stocks which have already appreciated since purchase and which are at a level at which you would be comfortable selling. This minimizes the negative effect of having your shares called away at less than the market price.

The article Using Options to Increase Your Dividends originally appeared on Fool.com and is written by Timothy Green.

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