Combining covered call writing premiums with high dividend yields can be an enticing investment approach. In October 2019, Gerry wrote to me about using LP (NYSE: ) in her option-selling portfolio and pointed to the generous and real-estate component as the reasons for this consideration. In the BCI methodology, we use fundamental analysis, technical analysis and common-sense principles (like minimum trading volume) to select our underlying securities. I would consider dividend yield as a secondary consideration or “icing on the cake” This article will evaluate the pros and cons of including this security in our portfolios as of October 2019.

 

Annual dividend yield as of October 2019

MLPX Dividend Yield from www.dividendinvestor.com

 

An annual yield of nearly 10% can be quite appealing but we haven’t looked into the 3 screening factors so important in our BCI methodology. Let’s focus in on the price-performance of this security over the past year.

 

Comparison chart of MPLX with the S&P 500

MLPX and S&P 500 6- Month Comparison Chart

 

With the S&P 500 virtually flat over the past year +0.,6%), MPLX was down nearly 20%. In this context, the dividend yield no longer seems attractive. One of the reasons a stock may have an unusually high dividend yield is that the share price has declined substantially. A $2.00 dividend on a $50.00 stock has an annualized yield of 4%. If share price drops to $25.00, that $2.00 dividend now represents an annualized yield of 8% 

 

Discussion

Covered call writing is a strategy that generates a monthly (or weekly) cash-flow from option premium. The quality of the underlying security is critical to our overall success. Using dividend yield only will cause us to lose focus on the critical screening factors that will guide us to the highest level of success. One way to include dividend yield into our portfolios in a safer manner would be to consider the best-performing Select Sector SPDRs (in our Premium ETF reports) and the best-performing Dow 30 stocks (in our Premium Blue-Chip Reports).  Our premium stock reports also show dividend information.

Overall, I consider dividend yield “icing on the cake” and not a primary consideration in security selection for our covered call portfolios.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

Thanks for your wonderful program and recent OIC presentation. I learnt from it and some follow up at your site- CC and CSP presentations. I’m very impressed with the BCI methodology, your presentations and advice.

Ashok

 

Upcoming event

Money Show Vegas Online Virtual Webinar

Tuesday May 12th

3:20 PM – 3:50 PM

Details to follow.

Alan speaking at a Money Show event

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Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.

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