4 Better Income Generating Options
For your consideration, here are four opportunities that we consider better options for generating income than writing covered calls on Cisco.
1. Verizon Communications Inc. (NYSE:VZ): Writing Covered Call Options
We consider Verizon covered call options more attractive than Cisco covered call options for a variety of reasons. For starters, we’d rather own Verizon Communications Inc. (NYSE:VZ) instead of Cisco. Not only is Verizon’s dividend bigger (4.4% dividend yield), but its business is more stable, predictable, and less likely to deliver negative surprises. Yes, Cisco has wider margins and high returns on capital, but we believe those may shrink causing the stock to potentially lose more value than you’d make by writing the calls. And even though the premium on Verizon calls is smaller than the premium on Cisco covered calls, we believe the combination of dividend, plus call premium, plus price safety makes Verizon Communications Inc. (NYSE:VZ) a more attractive covered call stock than Cisco. We like the November 18, 2016 calls with a $55 strike price because even if the shares get called you’ve still picked up 5.4% gains (premium plus price appreciation) in less than two months, and that doesn’t even included the $0.5775 dividend to be paid on November 1st.
Follow Verizon Communications Inc (NYSE:VZ)
Follow Verizon Communications Inc (NYSE:VZ)
2. Welltower Inc (NYSE:HCN): Selling Put Options
We consider selling Welltower Inc (NYSE:HCN) put options more attractive than selling Cisco call options. Selling put options gives someone else the right to sell a stock to you at a predetermined price. Welltower Inc (NYSE:HCN) is a stock we’d like to own (because of the relative safety of its big dividend), but we’re not anxious to buy at the current price (it’s significantly outperformed the S&P 500 on a total returns basis this year). The puts allow us to collect a premium now and it may result in us buying the stock later at a more attractive price. And not only are many put price premiums significantly larger than similarly out-of-the money call premiums, but we particularly like the November 18th, 2016 puts as shown in the following table because the put premium is nearly double the call premium for options that are a similar (but more conservative) number of standard deviations out of the money.
Follow Welltower Inc. (NYSE:WELL)
Follow Welltower Inc. (NYSE:WELL)
3. Utilities Select Sector SPDR ETF (XLU): Selling Put Options
The Utilities Select Sector SPDR ETF (XLU) has been on a tear this year, and now is a good time to consider selling puts on it. There is some concern that (because of the recent run) utilities are due for a pullback, and for this reason put buyers are willing to pay a healthy premium. For example, the following table shows you can collect an attractive premium for selling puts on safe boring utility stocks.
And if the shares do get put to you then you own a big dividend paying (4.0%), lower risk ETF, at a more attractive price. We consider selling Utilities Select Sector SPDR ETF (XLU) puts more attractive than writing CSCO calls.
4. Vanguard REIT ETF (VNQ): Selling Put Options
The Vanguard REIT ETF (VNQ) is an attractive way to pick up some extra income (it yields 3.8%) but we’re uncomfortable buying it after its very strong one-year rally. However, by writing puts on this ETF we can pick up some attractive income now, and we may end up owning it in the future at a more attractive price. The following table shows VNQ’s premium relative to volatility compared to CSCO covered call options, and we believe selling Vanguard REIT ETF (VNQ) puts is the more attractive option for income investors.
Conclusion
Writing covered calls on stocks you already own can be an attractive way to pick up extra income. However, we don’t recommend the strategy on stocks you wouldn’t want to own in the first place. For example, we believe Cisco Systems is a relatively unattractive dividend stock, and we are not interested in owning Cisco just so we can write covered calls on it. We believe there are more attractive options for increasing income, and we’ve described four of them in this article. More research on the stocks mentioned in this article is available in our recent report titled 12 Attractive Equity Options for Income Investors. And if you are frustrated with the Federal Reserve’s artificially low interest rates, you are not alone.
Note: This article was written by Blue Harbinger and was originally published on September 26. At Blue Harbinger, our mission is to help you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry. We offer additional free reports and a premium subscription service at BlueHarbinger.com. If you are ever in the Naperville, IL, USA area, our founder (Mark D. Hines) is happy to meet you at a local coffeehouse to talk about investments. Please feel free to get in touch.
