Ottawa Investment Advisor John Bruce

Generating Income on Non Dividend Paying Stocks

August 25, 2009 · Print This Article

You don’t have to rely on dividend paying stocks to make dividend like income in your portfolio anymore.

Purchasing shares of high dividend paying companies is a great way to increase profits. The investor can stand to make an extra 5%, 10% or more over a one year time period. But there are many large companies out there that seem to never pay dividends, and may never do so. Instead, they use profits to fund acquisitions, aggressive research programs, or as rainy day reserves.

But what about investors who don’t want to sell their stock but would like to raise some cash? It’s probably the wrong time to sell these stocks but the cash would be nice.

Now it’s easier than ever to squeeze dividend-like income from your non-dividend paying stocks.

Here’s how it works…

Most stocks offer publicly traded options. You make these transactions with your broker, similar to buying and selling stocks. A call option gives another investor the right to buy shares from you at a price you set anytime before a certain date. You collect a premium by selling the call and you get the premium, in cash, on the day you sell the option. Just like a dividend.

One strategy is to sell “at-the-money” or “out-of-the-money” calls on your stocks (Covered Calls). This means the strike (expiration) price of the option is at or above the current stock price. If you set the strike price so high the stock doesn’t reach that price, then you pocket the premium while maintaining ownership of the stock.

Widely held, heavily-traded stocks like Microsoft , Google , and Ebay are perfect for this strategy. Option premiums fluctuate , so that is where you need the knowledge of your broker to determine when the option premium is high and has the most value when sold.

You can sell options each month, up to 12 times a year, after they expire . Keep in mind brokerage commissions and taxes will affect your actual returns.

Option trading strategies are not for everyone and may not be suitable for your portfolio. Please consult with me or your Financial Advisor prior to undertaking any Option strategy”

John S. Bruce
Investment Advisor
Mackie Research Capital
Direct Line- 613-425-3732
Toll Free- 866-860-4190

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