AllianceBernstein (NYSE: AB) is a New York-based investment management firm that currently manages around $450 billion in assets and caters to clients and institutions of all kinds. The company is structured as a limited partnership (LP), meaning it distributes most of its taxable income to its shareholders.

#-ad_banner-#In 2013, the payout ratio was 94%. Its high yield, which is currently close to 10%, is what initially drew me to the stock. And with a covered call strategy, we can turn this high yielder into an even greater income generator.

While the income is my main driver, I also like this stock because of the company’s expansion efforts, revenue growth and virtually no debt. With the recovery of economies around the globe, the banking sector is growing, but AB could likely sustain even a severe downturn.

As you can see in the chart below, AB has been lagging behind the sector, as measured by the Financial Select Sector SPDR (NYSE: XLF), since June, but caught up with it this month. I think AB should now be able to keep up with, if not surpass, its sector.

On the fundamental side, AB is estimated to earn $1.77 per share this year, giving the stock a price-to-earnings (P/E) ratio of 13.7, which is below the industry average of 16.3. It sports a price-to-book (P/B) ratio of 1.5, which is quite good.

AB had positive cash flow of $155.5 million at the end of 2013. It has a profit margin of 89%, return on assets of 7.5%, and return on equity of 10.7%. All in all, I’d say it’s a very healthy operation.

Best of all, AB pays a $0.60 quarterly dividend, for a current yield of 9.8%, compared with a 1.52% yield for XLF. And we can turbocharge the income on this high-yielding stock with a covered call strategy.

A call option gives the buyer the right (but not the obligation) to buy shares of the underlying stock at an agreed-upon price (the option’s strike price) within a certain period of time.

The seller of a call option (also known as the writer) sells the right to the buyer for a payment known as a premium. In doing so, the seller assumes the obligation to deliver the shares at the agreed-upon price should the buyer choose to exercise her or his right.

With AB trading at about $24 a share at the time of this writing, we can buy 100 shares and simultaneously sell an April call option with a $25 strike price, which is currently trading for about $0.40 ($40 per contract) and expires April 17. (These calls expire on the Thursday prior to the third Friday of April due to the market being closed for the Good Friday holiday.)

Since we receive $0.40 for selling the call, our net cost is lowered to $23.60 a share. Prices may be slightly different depending on when you read this, but I like this trade at a net cost of $23.75 or less.

Here’s how this covered call trade could work out:

If the shares trade above the $25 strike price, the options buyer will purchase the shares from us at $25, giving us a gain of at least $1.25 per share, or 5.3% in 50 days. This works out to an annualized rate of return of 38%.

If AB trades lower, we would not experience a loss unless it falls below our net cost of $23.75 or lower, giving us a cushion of about 1% at current levels.

If AB is below $25 at expiration, then the call option will expire worthless. We then have the ability to sell another call option against the shares to generate more income and lower our cost basis further, while still collecting dividends.

The current price of the option is about 1.7% of the stock’s price. Selling an option for that amount every 50 days would generate income of about 12.2% a year. Combined with the dividend yield of 9.8%, the income on this position could total 22% a year — a nearly 125% increase over the dividend alone. That means you could potentially bring in enough income in a year to more than double this stock’s already generous yield.

Action to Take –> Using a covered call strategy allows you to generate income as you wait for more upside in AB while protecting yourself on the downside and collecting a fat dividend.

This article was originally published at ProfitableTrading.com:
How to More Than Double Your Income From This 10% Yielder

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