How To Earn 17.1% — From A Stock Yielding 6%
This week, I told my Maximum Income readers that I’m optimistic after seeing the earnings reports so far this quarter. There is room for upside in the current stock market, although there are also risks.
I laid out my reasoning for this in detail to my subscribers, but what’s important to know is that all this indicates to me that our focus needs to remain in safety.
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This is why I recommended a trade that is designed to generate high income with safety. If everything goes according to plan, we’ll earn 4.8% in income from AT&T (NYSE: T) in just 74 days.
What’s more, if we can repeat a similar trade every 74 days, we’d earn 17.1% in income from AT&T in a year.
#-ad_banner-#You heard that right. Keep in mind, AT&T yields 6% right now — which isn’t bad at all. But you’d have to own shares an entire year to generate that income.
I think our trade is a better proposition.
I’ll explain how this trade works in just a moment, but first, let me give my case for why AT&T looks like a good trade candidate right now.
The Case For AT&T
The consumer cell phone market accounts for the majority of AT&T’s business, generating 39.5% of the company’s revenue last quarter. The market is still growing, with the number of subscribers up 7.5% in the past year, but analysts are concerned that growth could be slow in the future.
Almost all of the growth in the past year came from connected devices, iPads and other tablets. AT&T is seeking to grow this business by acquiring more content and is hoping to buy Time Warner, which includes the Turner broadcasting assets.
AT&T’s second-largest division is its satellite television provider DirecTV, which accounts for about 30% of revenue. But DirecTV has been losing subscribers as more consumers cut the cord and opt for cheaper streaming services.
To boost the company’s revenue, AT&T bid $85 billion for Time Warner, the owner of cable channels like HBO and CNN, as a way to diversify its revenues and give itself a competitive edge in the wireless market through ownership of content.
But late last year, the U.S. Department of Justice sued to block the deal, arguing that it was anticompetitive. The case went to trial and is now in the hands of a judge who is expected to release a decision soon.
AT&T noted that it is ready to close the deal quickly, if allowed. I believe a favorable decision would boost the stock, while a loss would have little impact on share prices. AT&T is trading near two-year lows.
There appears to be significant fundamental support at this level. Analysts expect earnings per share (EPS) of $3.41 this year, $3.46 next year and $3.50 in 2020. Using $3.40 as a conservative estimate of average earnings, the stock is priced at less than 10 times earnings. Its dividend yield is about 6%, with dividend payments of about $0.50 each quarter.
With little downside, now is an ideal time to buy AT&T. And a 6% yield is nothing to sneeze at. But I think we can do better, thanks to covered calls.
Covered Calls: A Quick Primer
The first thing you should know about covered calls is that they are one of the most conservative ways around to generate extra income. (In fact, some have even described them “safe enough for widows and orphans.)
A call option is simply the right — but not the obligation — to buy a stock at a specified price before a specified date. Selling a covered call obligates us to sell that stock to the call buyer if it moves above a specified price (the option’s “strike price”).
As call sellers, when we accept that obligation, we receive instant income upfront (known as a “premium”). You can be asked to sell the stock at any time between the moment you collect the premium and the expiration of the option contract.
To minimize risk, we will only sell calls on stocks that we own 100 shares of — that’s what makes it a “covered” call.
Use Covered Calls To Trade AT&T For More Way More Income
Currently, T is trading around $31.75. I recommend buying 100 shares of T and then selling one Call option with a July 20 expiration at a strike price of $33 for every 100 shares of T you purchased (or already own).
Currently, the T Jul 33 Calls are trading around $0.60 per share. The goal is to enter this trade at a cost basis of $32 or less (not including the expected distribution).
Your cost basis is simply the price you purchase shares at minus the premium received when selling the call.
It’s possible that both the stock and the call option will be trading for slightly different prices than what you see in the trade example below; that’s OK. As long as you can enter this trade for a cost basis below $32, I recommend executing the covered call trade. To ensure you get the price you want, I recommend setting a limit order at this price.
This call will obligate you to sell T at $33 a share if the stock trades above that on July 20 (the last day these options can be traded).
This July, AT&T is expected to pay a quarterly dividend of at least $0.50 per share. While this dividend has not yet been officially declared, T has consistently set the record date for early July — usually between July 6-10 — and I have no doubt that we’ll see the same pattern this year. This would occur before our option expires later that month, on July 20.
Since we’ll already own 100 shares of T at that date, we’ll qualify to receive the distribution payment regardless of whether our call option eventually expires worthless. As such, I’m including it in the total income this trade will generate.
Here’s how the trade looks if the option expires worthless (which is a good thing):
Now here’s where this gets exciting for income lovers…
Assuming T trades for $33 or less on July 20, we’d keep the $110 we received from the premium and distribution. At a cost basis of $3,175, that means we’ll earn 3.5% in 74 days. If we can repeat a similar trade every 74 days, we’d earn a 17.1% return on our capital in 12 months.
If T trades above $33 on July 20, we’d keep the income we received from selling the call and collecting the dividend, but we’d have to sell T at $33 per share.
In this case, we’d realize a profit of $1.50 per share ($33 – $31.50 new cost basis), or $150 per 100 shares. This is a profit of 4.8% in 74 days. If we can repeat a similar trade every 74 days, we’d earn a 23.5% return on our cost basis in 12 months.
It’s that easy. With just a simple covered call trade, you can choose to either earn quick income from one of the most steady blue-chip names on the market or… use these trades to juice your income again and again — adding up to a yearly income far beyond what you would with a “buy and hold” strategy alone.
How You Can Make Trades Exactly Like This…
Look, I know there’s a little math involved in all of this, but it’s really not that complex. More importantly, if you pay attention, you’ll see that what I just laid out here is nothing short of the closest thing you can get to a win-win in investing.
I still remember the day I learned how to use covered calls. I didn’t waste any time using it, and before long I was using them to earn thousands of dollars in extra income each and every month.
I started sharing my insights with my Maximum Income subscribers a few years ago, and now they’re earning thousands in extra income every month, too.
Jim Q. from Canada gets about $800 every time he taps into his stock account.
John I. in Florida takes in about $1,000 per month this way.
And Stephen D. in Palm Beach is “projecting $25,000-$35,000 for the year…”
If you’d like to learn more about how covered calls work, then I invite you to check out this report. It explains how they work, and details just how powerful they can be for you — whether you’re looking to boost your yields or looking for additional income in retirement. Visit this link to learn more.