TipSheet #1 - How to get dividend-like income from your stocks...
You don't have to rely on dividend paying stocks to make dividend like income in your portfolio anymore.
Purchasing shares of high dividend paying companies is a great way to increase profits. The investor can stand to make an extra 5%, 10% or more over a one year time period. But there are several large companies out there that seem to never pay dividends. Loyal shareholders stick with these stocks while the companies sit on billions of dollars in cash. Why not pay out some dividends to compensate the faithful?
Some companies NEVER pay dividends...
The reality is that certain companies may never pay dividends. Instead, they use profits to fund acquisitions, aggressive research programs, or as rainy day reserves.
But what about investors who don't want to sell their stock but would like to raise some cash? It's probably the wrong time to sell these stocks but the cash would be nice.
Leaving Money on the table...
I'm always amazed at how much money people, quite literally, leave on the table. Hundreds of shares of stock, maybe thousands, sit in investors' portfolios and those shares could be putting stacks of cash in their owners' pockets.
Now it's easier than ever to squeeze dividend-like income from your non-dividend paying stocks.
Here's how it works...
Most stocks offer publicly traded options. You make these transactions with your broker, similar to buying and selling stocks. A call option gives another investor the right to buy shares from you at a price you set anytime before a certain date. You collect a premium by selling the call and you get the premium, in cash, on the day you sell the option. Just like a dividend.
IBM Dividend Payments
One strategy is to sell "at-the-money" or "out-of-the-money" calls on your stocks (Covered Calls). This means the strike (expiration) price of the option is at or above the current stock price. If you set the strike price so high the stock doesn't reach that price, you keep your stock.
Widely held, heavily-traded stocks like Microsoft (MSFT), Google (GOOG), and Ebay (EBAY
) are perfect for this strategy. Option premiums fluctuate but the examples below illustrate returns you might expect over the period shown for every thousand shares of your stock.
You can sell options each month, up to 12 times a year, after they expire. It's not unusual to see return rates of 12% over sixty days, which works out to an astounding 72% annual return just on stocks you already have in your portfolio. Of course brokerage commissions and taxes will affect your actual returns.
Step-By-Step Procedure - Dividends on non-dividend Paying stocks
Use the steps below to find the type of returns you could receive from one of your stocks.
If you have not done so yet, go to http://www.poweropt.com/logon.asp. The Member/Trial Log On Display will appear.
Enter your User ID and password then click the [Log On] button.
When the MY HOME page appears, enter a stock symbol in the upper right side of the page next to "Symbol:", then click "chain".
If options are offered for the stock you entered, the option chain table will appear.
For more information on what the column headings mean, move your pointer over one of the underlined headings and in a few moments a definition will appear.
Scroll down the page to find an expiration month and price that is right for you. With this "Dividends" strategy you will want to pick a price that is out-of-the-money or much higher than the current stock price. (i.e. if the stock is now at $35 you might want to sell an options at a $45 or $50 strike price) The "Opt. Bid" column shows how much you could expect to receive per share of your stock. Multiply this by the number of shares you own and remember options are usually bought and sold in even 100 share contracts.
The last column in the table shows you the theoretical probability that the stock price will be above the strike price by the expiration date. The lower the %, the less likely your stock might be called away.
Introduction to Options - An Introduction to Options and Futures - Option Income