I’d say it’s no stretch to call AT&T (NYSE: T) one of the more reliable dividend-growth and income investment stocks on the market. The large telecom has continually paid dividends for 100 years, and has consistently raised that dividend annually for the past 28 years.
Dividend growth is unlikely to abate, because AT&T dominates its market. It operates the largest 4G network – covering 275 million users. It also offers the largest international and domestic WI-FI coverage of any U.S. wireless carrier.
[ad#Google Adsense 336×280-IA]AT&T is, as you’d expect, big. It generates $130 billion in revenue annually.
Size confers a degree of safety and also an economy of scale that can produce tremendous amounts of cash.
In fact, AT&T generated record cash of $39.2 billion from its operations last year.
When you generate big cash, you can return big cash to your shareholders.
In 2012, AT&T repurchased 371 million shares, or roughly 6% of shares outstanding, for $12.8 billion.
This year, management expects to buy back another 300 million shares worth $11 billion.
Of course, AT&T also returns big cash to its shareholders through its dividend. In 2012, it returned over $10.2 billion to shareholders. This year, AT&T investors will receive a generous $1.80 dividend per share, which produces a 5.10% yield.
A 5.10% yield is exceptional in this market, particularly considering the S&P 500 yields around 2% and the 10-year Treasury notes yield around 2.6%. When AT&T’s size and safety are factored in, the yield becomes even more impressive because AT&T is such a low-risk income investment.
Even though it’s a safe, high-yield investment, AT&T still offers exceptional return potential. In the past two years, the blue-chip telecom has generated a 40% total return.
But what if I told you that you could increase your income and yield on AT&T by 75% or more each year? And what if I told you that you could collect this extra income every few months in addition to your regular quarterly dividend?
I’m referring to an option strategy known as a covered call, which allows you to collect extra income from a conservative dividend stock like AT&T.
When I mention “options” to many investors, they instantly think of risky investments that are only for speculators.
Nothing could be further from the truth.
An option is simply a contract to buy or sell shares of a stock at an agreed upon price (the strike price) at a future date. Options can be used to control large blocks of stock for a small price. But they also can be used to earn income or reduce risk. Best of all, options are traded as easily as any exchange-traded stock.
With a covered-call strategy, you buy shares of a specific stock and then sell a call option on that same stock. By doing so, you agree to sell the position at a future date and price to another investor. In exchange for giving the other investor the right to purchase the shares at a future date and price, you earn a premium in the form of a one-time upfront payment – the extra income.
So how does a covered-call strategy work with AT&T?
First, you need to own at least 100 shares of an AT&T. I say that because 100 shares of stock equal one option contract. Once you own the 100 shares, you’re ready to start generating extra income.
Now, let’s create the income-generating scenario: AT&T trades at roughly $35.50, which produces the 5.10% yield. By selling one covered call contract against 100 shares of AT&T, you can earn an extra $23 every two months.
So every 60 days, you give yourself the potential to collect $52 against 100 shares of AT&T. Annually that equates to $312 of extra income. This strategy safely doubles, in fact almost triples, the dividend of the stock.
So by implementing a covered-call strategy, you’ve taken an already high-yield income investment, AT&T, and boosted your potential income to $4.92 per share from $1.80 a share and your yield to 13.8% from 5.10%.
— Andy Crowder
Source: Wyatt Investment Research