It’s been a tough year for all of us. Some more so than others! Those invested in speculative, high-growth, low free cash flow companies continue getting killed. These companies have dropped 80% or more in some cases. The Dow 30 held up much better with the index only down around 15% for the year. Dividend stocks have held up about the same. Down years like 2022 is where dividend investors shine. In essence, the objective of 2022 is to lose less money than everyone else. If the S&P is down 30% and you’re only down 20% you should feel good! After all, you are outperforming the market and have the ability to buy more shares at lower prices.
According to Kiplinger, S&P 500 dividend aristocrats averaged an annual return of 18.3% vs. the overall index of 17.1% over the past 10 years. Since 1926, 32% of total returns have been from dividends. This percentage increases in bad times like this when share prices decline or stagnate. Overall, dividend stocks outperform non-dividend payers by wide margins over long periods of time. Logically, this makes sense as these are typically stable businesses with long track records. They went through tough times and came back stronger. That being said, I continue to augment this dividend strategy with covered calls.
As mentioned a few months back, I started writing covered calls on my more “sleepy” positions. If you’re new to options, covered calls are contracts to buy a stock at a future (strike) price. The writer of the call receives money (premium) for giving another investor the right to buy. For example, VZ hangs out around $48-$52/share and pays a 5% dividend. Writing 1 call for 100 shares at $53-$55 strike yields, essentially, one extra dividend payment every 6-8 weeks. I write the calls “out of the money” so the stock doesn’t get called away. And I typically don’t write calls during crashes. After all, the best days in the market usually follow the worst. Writing a covered call at a 52-week low runs the risk of being called away. If a stock is called away investors lose any additional gains and face tax consequences on the sale.
So far, I’ve captured approximately $850 in realized gains from covered calls and the sale of my Disney shares. By the end of the year, I expect to have around $1500-$2000 in options income. This does not include payments from covered call ETFs NUSI and QYLD. As of June 2022 nothing has been called away. The history of covered call returns over long periods of time is hazy. That’s why I’m only writing calls on certain positions and keeping the strike price well out of the money. The goal for 2022 is to lose less. And covered calls, thus far, have helped raise cash to buy additional shares. As horrible as this market is, there’s still opportunity. I’ll continue documenting my experience with this sub-strategy. And hopefully, it will lead to greater long-term returns.
I am long on VZ, QYLD, and NUSI. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.