Tuesday, April 29, 2008

Covered calls VS Dividends

There are 2 great ways to pull out monthly income from the stocks you own. These are covered calls and dividends. If you are going to hold a stock for a long period of time you would like to be pulling money from your stock both ways.

If you can’t pull out money both ways which way would be considered the better income? Let’s look at that for a second.

A dividend is when the companies pay you out money for owning their stock. They are relatively easy to obtain. The only thing you have to do is buy a stock that has dividends. The only problem with this is that in order to make a good income out of dividends you need to have a huge account.

Covered calls take a little more effort. Your money comes from other investors who are willing to buy your stock at a certain strike price in the future. For this right they pay you a premium. This can be a little trickier because you want to sell a strike price that you do not believe your stock will reach by expiration, but close enough to the stock’s price that you will get a good premium.

Some traders who do not care about the long term growth of their stock may actually choose to sell a strike price that they believe a stock will be at by expiration. This way they can pull out a profit from the premium and a profit from the stock.

This can be worth the extra effort. Between the two covered calls have a higher return rate. Where as a dividend may pay you 3-5% annually a covered call may pay you 3-5% monthly.

Many traders will prefer to trade covered calls because they are relatively consistent. Like dividends Covered calls can bring monthly cash flow on a consistent rate if you do them right.

For more information on how to trade the stock market visit http://www.stocks-simplified.com

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