Dividend Investors are Often Blind to Actual Returns

I read financial blogs a lot, too much even and I believe that Dividend Investors are Often Blind to Actual Returns. The biggest topic on financial blogs is “passive income.” Without getting too much into a debate (i.e. rental property) about what that term means, it basically means you do nothing and you receive income. The biggest discussed way to gain passive income is usually dividend income. Is dividend investing smart? It can be, in my opinion, but often times people are completely blind to actual return.

I read dozens of posts about “here are my annual dividends,” “here is free money through dividends”, etc., but they almost never talk about the actual securities! Nothing to me is more frustrating than the idea of ignoring the most important part of the investment. You bought Apple after they started dividends back up for the company (June 2012-ish) and held until now, receiving $14.05 of dividends over the last year? That’s super impressive, except for the fact you lost about $115 – $120 a share since that time.

I have the deepest respect for bloggers would show not only their dividends, but their net return on the dividend portfolio, but honestly most of the time when people disclose this information, it makes the strategy look very weak overall. Has there been some dividend stocks that have preformed amazingly over the last couple of years, of course (I’m looking at you Verizon Symbol: VZ). But overall, I stand by the fact that cover call strategies obtain more consistent returns, heck it’s like receiving a dividend each month (or sometimes even more frequent).

Let’s take Verizon for instances, if you were to sell a $47.50 call for Sept 27th (19 trading days away), you would receive about $1.36 an option. That’s a 2.87% return for 26 calendar days, which is a 48.78%! That’s over 1000% better than the dividend rate. That rate would also translates to a 118% return over the same time-frame the dividend investor received 65.09%, during the last 974 days, since Verizon started a long-term upward trend(on one of the best dividend stocks of the last 5 years). The cover-call strategy dwarfs both the appreciation, dividends, and potential dividend tax benefits of owning the stock outright for dividends by a long-shot. Not to mention this option is an additional $.14 out of the money, making the absolute maximum return for each year 54.0% annual (highly unlikely). Now these numbers are obviously not 100% accurate due to the fact of using current chains as an average premium, but the one can critically determine the return is substantially larger, regardless.

Cover Call Versus Dividend
Cover Call Versus Dividend

Argument: “But you participate in all of the downward movement of the stock”

You absolutely do, the same as the dividend investor collecting 4.35% a year instead of 48.4% a year.

Argument: “But you don’t participate in the upward movement with the cover-call strategy”

Funny, because a lot bloggers make it appear that the price of the stock doesn’t really matter. It is true that as a dividend investor you are actually betting long on the stock and not just holding the stock for dividends, but what is more conservative, taking a near guaranteed 48.4% or hoping that the stock appreciates more than 48.4%? To me, its a no brain-er.

The dividend is almost irrelevant

Man all of this talk of getting 48.4% return makes me feel like the dividend of 4.35% is not the real decision, the real decision is: “Am I long on the stock or do I want to write cover-calls to lock in much more material gains.” This is why reading dividend investing blog posts frustrates me to all ends. In my opinion, cover-call strategies destroy dividend investing strategies.

Also as a cover-call writer, you are much more flexible on how you approach your investment. You can write in the money, on the money, out of the money a little, out of the money a lot, it’s your call (or autopilot it on on the money and forget about it). You want to see why I think the cover-call strategy is substantially better than dividend investing, run the numbers assuming the stock stayed approximately even over the same 974 days or even depreciated slight, because then the cover-call strategy hilariously destroys dividend investing in this case.

Oh and I almost forgot, don’t forget that when you hold a security and write cover-calls on the security, you also collect those all so precious dividends (shown above). Bottom-line, if you want to be a “passive incomer,” why not be more conservative and write monthly cover-calls to increase your yield and offer premiums to help mitigate downward movement or increase overall profitability.

Finally, if you really think the stock is going to appreciate massively in value (and that is why you are actually investing), you really should look into LEAP options (arguably more conservative) and not dividend investing.

 

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