Back in late April, Ian Wyatt and I introduced High Yield Trader to the masses.
The service was based on doubling the dividends in some of the most shareholder-friendly, blue-chip companies the market has to offer. One of the first picks we chose for the portfolio was tech stock Microsoft (Nasdaq: MSFT).
For over ten years, Microsoft has hiked its dividend at an impressive rate of 18.7% year over year. That alone makes it worth owning over the long term. But Ian and I knew we could do significantly better over the long term using a few simple steps.[ad#Google Adsense 336×280-IA]The idea was to buy shares of Microsoft… and then sell someone the right to buy our shares from us at a higher price.
The practice is better known as “covered calls” and it is a favorite strategy among professional income investors.
Again, our original goal was to double the dividends of each and every stock that we added to the High Yield Trader portfolio.
At the time we added Microsoft, the company was paying out a dividend of 2.3%… now it’s 3.1%.
Now nine months and 16.9% later we’ve more than fulfilled our initial goal. If you had purchased MSFT stock at the same time, you would only be up 13.6%. The difference in returns doesn’t sound like much, but you must remember that we have consistently locked in returns on a monthly basis using our covered-call strategy… unlike just holding the stock, which leaves you with complete exposure to market risk.
One thing is certain, if you are willing to learn the basics of our strategy, you can easily use MSFT to safely and consistently collect 6% to 8% annually.
Let me show you how it works…
In our original trade in late April 2013, we noted how you could buy shares of Microsoft for around $31.50 and simultaneously sell the June $33 calls for about $0.40.
In other words, we were buying shares for $31.50, then selling someone the right to buy them from us for $33 per share.
We earned a “premium” – also known as income – of $0.40. And that provided us with an immediate 1.3% yield on the original stock position. And the options had a lifespan of less than two months.
So the 1.3% return was an “annualized” gain of about 8%.
But by the time our June $33 calls were to expire, Microsoft was trading for over $33. So we were forced to sell our shares for $33. As a result, we pocketed a capital gain of 4.7%, plus our 1.3% in call premium for a total return of 6% in just two months.
To drive the point home, let me cover the trade in “real money” terms…
We bought 100 shares of Microsoft for $3,150. We collected $40 in super-low-risk premium for selling covered calls on Microsoft. And once those calls expired or called away, we do it all over again.
An 8% annual income stream on the $3,150 stake is $252. That’s an extraordinary amount of extra income coming from a great blue-chip tech stock like Microsoft. And remember that’s only based on the bare minimum of 100 shares.
Now… you might be thinking, “You’re not telling us the full story. You can’t repeat that trade all the time.”
But… two months later… in late June, I essentially made the same trade with the same tech stock. We were able to bring in another 1.5%. Not only that, but we did it once again in August for a 1.3% gain… and again in October, December and February.
So far we’ve managed to produce a total income of 16.9% over the past nine months.
Keep in mind, Microsoft shares didn’t have to “soar” for us to earn this extra income. We made money as the tech stock climbed, moved sideways, or even declined a little.
— Andy Crowder[ad#wyatt-income]
Source: Wyatt Investment Research