Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Investors Can Use Put Selling for Extra Income
Transcript
- Lucas: If you're a dividend investor who's been watching Realty Income — ticker O — the last week hasn't been pretty. Down about 0.8 percent in five days, sitting around 61 bucks. But that dip might actually open up a different kind of income opportunity, one that doesn't rely on the company raising its payout. Luna: You're talking about selling puts on it, right? Collecting premium instead of the dividend. Lucas: Exactly. The idea is pretty straightforward for anyone who's comfortable owning the stock anyway. You sell a put option — a cash-secured put — at a strike price where you'd be happy to buy O. Say, 60 dollars. In exchange for that obligation, someone pays you a premium upfront. Luna: So you're getting paid to place a limit order, effectively. Lucas: That's the cleanest way to think about it. And in the current rate environment — ten-year Treasury yield at 4.45 percent, still elevated — the premiums on puts for stable dividend payers like O are actually pretty attractive. For a 60 strike put expiring in, say, 30 to 45 days, you might collect 50 to 70 cents per share. That's roughly 1 percent of the notional value in a month. Luna: Which annualizes to what, 12 percent? That sounds almost too good for a stock yielding around 5.5 percent. Lucas: It does, but remember — that's not a yield you can lock in. You're taking on assignment risk. If O drops below 60 by expiration, you'll be forced to buy the stock at 60, even if the market price is 58 or lower. So you need to be willing to own it at that level. But if your analysis says O at 60 is a fair entry, then the premium is just gravy. Luna: Right. And you avoid the tax drag if you do it in an IRA. The premium is taxed as ordinary income in a taxable account, but in an IRA it's tax-deferred or tax-free. Lucas: That's a key point. In a traditional or Roth IRA, the premium adds to your account without current tax consequences. For high-income investors in taxable accounts, the premium is taxed at your marginal rate — which could be 30-plus percent for short-term gains. So the after-tax return matters. Luna: And you'd want to compare that to the qualified dividend rate, which is typically lower for long-term holders. So put selling makes more sense in tax-advantaged accounts for most people. Lucas: Exactly. Now let's talk about the current options environment. The VIX has been fairly low — around 14 or 15 — so implied volatility on a stock like O isn't elevated. That means premiums aren't as juicy as they were during a selloff. But that's actually fine for a disciplined seller. You don't want to sell puts when fear is high, because the stock could crash through your strike. Luna: Better to collect modest premiums consistently than chase high ones and get run over. Lucas: Precisely. And O is a good candidate because it's a triple-net lease REIT with a long history of paying dividends. It's not going to zero. The downside risk is real but bounded. Over the past five years, O has traded between roughly 50 and 70. So selling a 60 put is in the middle of that range. Luna: What about other dividend stocks? KO is down 3 percent in a week, JNJ down 3.3 percent. Would you sell puts on those too? Lucas: You could, but the premiums might be thinner because they're lower beta. And their dividend yields are lower — KO around 3 percent, JNJ about 3.2. So the put premium relative to the dividend yield might not be as compelling. For O, the yield is 5.5 percent, and the put premium adds maybe another 1 to 1.5 percent per month. That's a meaningful boost. Luna: So the math works best for stocks that already have a high yield and moderate volatility. Which makes sense — you're layering income on income. Lucas: Right. And you can also sell puts on dividend ETFs like VYM or SCHD. VYM is up a bit lately, but at 159, a 155 put might offer 30 to 40 cents. Less per share, but you get diversification. Luna: That's a good point for people who don't want single-stock risk. But the premium on an ETF put is usually lower because the volatility is lower. Lucas: True. But if your goal is to generate steady income without trying to time the market, selling puts on an index ETF can be a systematic way to get paid while you wait to deploy cash. Especially in a sideways market like we've seen for many dividend stocks this spring. Luna: Sideways with a downward bias for some. O was near 64 a month ago. Lucas: Right. So if you had sold a 62.5 put a month ago, you'd have collected premium and likely been assigned at a price above today's market. That's the risk — you end up owning the stock at a higher price than current. But if you're a long-term holder, a few percent difference isn't the end of the world, especially if the dividend keeps paying. Luna: And you can always sell covered calls later to lower your cost basis. Lucas: Exactly. That's the wheel strategy — sell puts until assigned, then sell calls against the shares. It's a popular income approach, but it requires active management. For a pure dividend investor, maybe just selling puts on cash you were going to deploy anyway is simpler. Luna: One thing I'd flag: margin requirements. In a cash account, you need enough cash to cover the purchase if assigned. So if you sell a put on 100 shares of O at 60, you need $6,000 sitting there. That cash isn't earning much in a money market fund at 3.6 percent, but the put premium might net you more. Lucas: Right. And in an IRA, you can't use margin, so you need the cash. But that's actually a discipline — it forces you to keep dry powder. And if you're not assigned, you just keep the premium and your cash is free to deploy elsewhere. Luna: So the strategy works best for patient investors with cash on the sidelines who are happy to buy the dip on a quality dividend stock. Lucas: That's the profile. And look, this isn't for everyone. If you're just buying and holding dividend stocks, you don't need to add options. But for those who want to wring a little extra income out of their portfolio without taking on a ton of extra risk, cash-secured puts are a tool worth understanding. Luna: And that's the kind of practical know-how that this show tries to deliver every episode. If you've found these conversations helpful — maybe you've tried a strategy, or just thought about your portfolio differently — a couple of dollars a month genuinely makes a difference in keeping the show ad-free and independent. Lucas: Yeah, it's small contributions that add up. You can support at buy me a coffee dot com slash fexingo. That's spelled fexingo with an x. Even a few bucks helps cover hosting and research time. Luna: And it lets us keep the focus on ideas, not ads. So if that resonates, we appreciate it. Lucas: Alright, back to putting it all together. A quick checklist if you're considering this: First, identify a stock you'd be happy to own at a lower price. Second, check the options chain for a strike that's at or slightly below the current price. Third, choose an expiration 30 to 60 days out — that's the sweet spot for premium decay. Fourth, ensure you have the cash to cover assignment. And fifth, be prepared to hold the stock if assigned. Luna: And avoid selling puts on stocks you wouldn't want to own in a downturn. That seems obvious, but people get tempted by high premiums on volatile names. Lucas: Absolutely. Don't sell puts on something just for the premium. If you wouldn't buy it at a 10 percent discount, don't sell the put. That's the golden rule. Luna: So for dividend investors, a name like O or maybe even a broad ETF like VYM — that fits the bill. Lower risk, steady income, and the option premium is a bonus. Lucas: Exactly. And with Treasury yields where they are, the competition for income is real. Dividends of 3 to 5 percent are decent, but adding 1 to 2 percent from options can bring your effective yield closer to 6 or 7 percent. That's meaningful for someone living off their portfolio. Luna: As long as you're not fooling yourself about the risk. It's not free money. Lucas: No, it's a trade-off. But for the disciplined investor, it's a valuable arrow in the quiver. And we'll keep bringing you more ways to think about income in the weeks ahead.