When it comes to safely boosting income, a “10% Trade” continues to be my preferred vehicle.
If youâ€™re not familiar, a â€ś10% Tradeâ€ť isÂ a conservative income-oriented trade that involves selling either a covered call or a cash-secured put on a reasonably-priced, high-quality dividend growth stock.
These trades typically last just six to 10 weeks — and they can be a relatively safe way to double… triple… or even quadruple your annualized yield.
Consider the “10% Trade” I made with Dividend ChampionÂ Aflac (AFL) on Friday…
At the time I made my trade, AFL was selling forÂ $61.21Â per share and theÂ August 16, $60.00 putsÂ were going forÂ $1.33Â per share.
My â€ś10% Tradeâ€ť involved sellingÂ twoÂ of these putsâ€¦ and there areÂ only two possible ways this trade will work out.
On one hand, I’d get to generate a 10.0% annualized yield from AFL without even owning the stock.
That’sÂ quadrupleÂ the stock’s “regular” dividend yield of 2.4%.
On the other hand, I’d get paid $266.00Â to buy AFL — an already attractively-priced stock — for even cheaper than what it was selling for on Friday.
That said, I’ll be happy however this trade works out.
Let’s take a closer look at each scenario…
Scenario 1: AFL falls below $60.00 by August 16
If AFL falls below $60.00 by August 16, Iâ€™ll be obligated to buy 200 shares at $60.00 per share.
This money was deposited into my account immediately.
Taking this income into consideration â€“ and subtracting out the commissions â€“ my cost-basis will drop to $58.77 per share.
Thatâ€™s a 4.0%Â discount to the $61.21 share price that AFL was selling for at the time I made this trade.
Considering how the stock already looks attractive at current levels, the opportunity to pick up shares at an additional discount is particularly appealing to me.
Scenario 2: AFL stays above $60.00 by August 16
If AFL stays above $60.00 by August 16, the contract expires worthless and I get to keep the $266.00 in income (before commissions).
After commissions, this works out to a 2.1% return on what my purchase obligation would have been ($1.33 / $60.00) in 78 days.
If I can repeat these results over the period of a year I could generate a 10.0% yield from AFL without even buying shares.
This is just one more example of why when it comes to safely boosting income, a â€ś10% Tradeâ€ť continues to be my vehicle of choice.
Please note:Â The reason I’ve gone public with many of myÂ real-life, real-money “10% Trades”Â isÂ so you can see for yourself how it’s possible to double… triple… or even quadruple your annualized yield on high-quality dividend growth stocks.
Just keep in mind that these trades aren’t intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
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