Dividends Vs Covered Calls
Covered calls and dividends are two different ways which allow an investor to make money off of a stock that they already own. But what method is better? What is the most profitable?
Almost always covered calls will be more profitable then dividends. However there is one big disadvantage to selling covered calls, it can limit the amount you can make off of your stock.
When you start writing covered calls you give someone else the right to buy the stock at a certain price. So if you own the stock which is trading at $35 and sell the $35 call on it you would be obligated to sell your stock at $35 if the buyer of that option should choose to do so.
What does this mean? It means that you may miss a large move in the stock. No matter how far up the stock goes you would be forced to sell it at $35, so the missed potential profits could be enormous.
On the other hand it can be very powerful. If the stockgoes down or even just stays at $35 chances are you will not get called out. Because of this you could sell calls month after month and make great incomes off of your investments.
Dividends on the other hand normally give you a much smaller return, but you are not risking anything by recieving them. Companies simply pay out a small portion of their earnings to their shareholders these dividends come regular and you are not risking missing a profit if the stock shoots up.
So which method is better? Is it better to look for covered call stocks or just buy a few dividend paying stocks. Well why not do both. Not everybody is actually comfortable with the covered calls strategy, but by combining them with dividends paying stocks you can potentially increase the return you can make through income investing.
Tags: Covered Calls and Dividends, Covered Calls Vs Dividends
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