Verizon (VZ) is considered one of the best stocks to own for retirement… it appears 14% undervalued at current prices… and it’s going ex-dividend tomorrow, October 7.
If you’ve been thinking about buying this 5G Buffett stock, and you want to maximize your dividend income from it, then you may want to consider buying shares today… before they go ex-dividend. If you buy a stock before its ex-dividend date, you’ll collect its next payout.
With this in mind, I just bought 100 shares of Verizon to lock in its next payout. At the same time I bought shares, I also sold a covered call option against them to generate even more income.
With that move I locked in a 9.5% to 13.6% annualized yield… from options income alone — so that doesn’t even count the upcoming dividend, which will just boost that yield even higher.
I’ll get to the details of my covered call just ahead, but first, check out the following chart. It shows the rate at which Verizon’s yield has risen as its share price has fallen.
As someone who invests for income, all else equal, I get excited when a high-quality dividend growth stock falls in price. In short, it gives me the opportunity to collect more income by locking in a higher dividend yield on entry.
In the case of Verizon, thanks to its roughly 7% drop in stock price — along with a token increase in its dividend — the yield has shot up nearly 9% year-to-date.
As a result, the dividend yield is currently sitting at 4.6%… which clobbers the market average.
Of course, just because a stock’s price drops doesn’t necessarily mean that it’s a good deal. We don’t want to get caught in a value trap. That said, Verizon is far from a value trap… and Dave Van Knapp recently showed us why.
Verizon is High-Quality AND Undervalued Right Now
In case you missed it, DVK featured Verizon as his Dividend Growth Stock of the Month for September 2021.
Dave analyzed the company’s dividend record …
… its business quality…
… its financials …
… and, of course, its valuation…
He valued Verizon using his typical four valuation models, and he came to the conclusion that Verizon’s fair value price is $63 per share with a max buy up to $69 per share.
At current prices of around $54.55, that would indicate Verizon is roughly 14% undervalued… making it a “strong buy” right now, in my opinion.
Verizon Goes Ex-Dividend TOMORROW, October 7
Adding to the timeliness of this opportunity, Verizon goes ex-dividend on October 7 with a pay date of November 1. If you want to collect that next big payout, then make sure you buy shares today.
As for me, I’ll be cashing in on the shares I already own. I currently own 594 shares of Verizon in my private long-term, buy-and-hold dividend growth portfolio. Considering the stock is paying $0.64 per share per quarter in dividends, those shares will be paying me $380.16 on November 1.
That’s what is happening in my buy-and-hold portfolio. In my retirement account, as I mentioned earlier, I just sold a covered call on Verizon that offers a relatively safe way to double … and possibly even triple … the stock’s annualized yield. Here’s what I did…
I Just Bought Another 100 Shares of Verizon and Sold the December 17 $55 Call Option for $1.05 per Share
On October 4th, I bought 100 shares of Verizon at a price of $54.55 … and simultaneously sold one December 17, 2021 $55 call option for $1.05 per share. By selling a call option on Verizon, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $55 per share (the “strike” price) anytime before December 17 (the “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $1.05 per share, which is known as the “premium”.
Because I collected immediate income when the trade opened, I immediately lowered my cost basis from $54.55 per share to $53.50 per share ($54.55 – $1.05).
The ability to immediately lower cost-basis like this is precisely what makes these kinds of trades safer than simply purchasing shares of the underlying stock the traditional way, which is buying them outright at market price.
Yes, I’m limiting my potential upside: if Verizon shares climb to $60, for example, I’ll be forced to sell at “just” $55… but I’d still be selling shares for more than what I bought them for AND generating high income in the process.
It’s a trade-off… and one I’m willing to make, because this strategy, by its very nature of SELLING a call option instead of BUYING one — is designed to be conservative and generate income.
There are two likely scenarios for how this will all play out… and they both spell double-digit annualized yields.
Scenario #1: Verizon stays under $55 by December 17, 2021
If Verizon stays under $55 by December 17, I’ll get to keep my 100 shares.
In the process, I’ll also have received $105 in call income ($1.05 x 100 shares).
The call income was collected as soon as the order was filled on October 4.
It was deposited in the account where I made the trade, which is my 401k retirement account.
On a percentage basis, I received a 1.9% return in income ($1.05 / $54.55) for selling the call option in 74 days.
That works out to a 9.5% annualized yield from options income alone. Because I jumped on this opportunity before the stock’s October 7 ex-dividend date though, I’ll also be collecting the company’s next dividend from the 100 shares I just bought.
Accounting for the dividend income, my annualized yield would jump to over 10%.
Scenario #2: Verizon climbs above $55 by December 17, 2021
If Verizon climbs over $55 by December 17, my 100 shares will get sold — or “called away” — at $55 per share.
In Scenario 2, like Scenario 1, I get to keep the $105 in call income. I’ll also generate a $45 capital gain ($0.45 x 100) because I bought at $54.55 and will be selling at $55.
In this scenario, I’ll be looking at a total profit of $150, not including any dividends.
From a percentage standpoint, I’d be getting a 1.9% instead return in the form of income for selling the call option and a 0.8% capital gain. That doesn’t sound like a lot, but if I can repeat these results over the period of a year, that works out to a 13.6% yield from Verizon. And again, that yield gets boosted ever further when you consider the dividend I’ll collect.
As I’ve mentioned several times before, selling covered options like this is one of my favorite ways to generate relatively safe, high income from some of the best companies in the world.
-Greg Patrick
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