Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Investors Can Use Options for Extra Income in 2026
Transcript
- Lucas: So, dividend investing is usually a buy and hold game. You buy the stock, you collect the dividend, you reinvest. But there is a way to generate additional income on top of those dividends using options — specifically covered calls. Luna: Covered calls — that's where you own the stock and sell someone else the right to buy it from you at a certain price, right? Lucas: Exactly. You collect a premium upfront, and in exchange, you cap your upside if the stock rallies above the strike price. But for dividend-focused investors, especially in a flat-rate environment like we're in right now — the Fed funds rate is at 3.64 percent and the 10-year Treasury is at 4.45 percent — that extra premium can meaningfully boost total return. Luna: Before we dive deep — you know, if you find conversations like this helpful, there's a simple way to support the show and keep it ad-free. Just head to buymeacoffee.com/fexingo. Lucas: Yeah, listener support is what keeps us independent and able to talk about specific strategies like this without worrying about advertisers. And even a small contribution goes a long way. So, check it out if you're inclined. Luna: Alright, back to covered calls. Why does this strategy make particular sense in May 2026? Lucas: Well, let's look at some numbers. Verizon, ticker V-Z, is trading around $47.81, down about one percent over the past five days. Its dividend yield is a hair over five percent. That's already a solid income stream. But now imagine you also sell a covered call with a strike price of, say, $50, expiring in a month. The premium might be around $0.30 to $0.50 per share, depending on implied volatility. Luna: So on top of the quarterly dividend of about $0.66 per share, you're collecting an extra $0.30 to $0.50 every month just from the option? Lucas: Right. And here's the key — the strike is above the current price. So if Verizon stays below $50, you keep the stock, you keep collecting dividends, and you keep selling new calls each month. The premium effectively adds one to two percent to your annual return, on top of the five percent yield. Luna: That's a meaningful boost. But what if Verizon rallies above $50? Then you have to sell your shares at $50, even if the stock is trading higher. Lucas: That's the trade-off. You cap your upside. But for an income-focused investor, that might be acceptable. If Verizon goes to $52, you sell at $50 plus you keep the premium and the dividend you collected along the way. Your total return is still solid. And you can always buy back the shares if you want to reestablish the position. Luna: So it's not for someone who expects huge capital appreciation. It's more for the steady-income crowd. Lucas: Exactly. And the current environment supports it. The 10-year Treasury yield has been drifting down from 4.48 to 4.45 percent over the past couple days. That suggests rates are stabilizing, not spiking. That's good for dividend stocks because they become more attractive relative to bonds. But it also means volatility is low — the VIX is probably around 13 or 14. Low volatility means options premiums are smaller, but they're still additive. Luna: I noticed Coca-Cola is down three percent over the past five days, trading around $79.01. That's a classic dividend stock. Would you sell covered calls on KO? Lucas: You could. KO has a dividend yield around three percent. If you sell a covered call with a strike at $82, say, you might collect $0.20 to $0.30 in premium. That's less than Verizon because KO is less volatile. But it's still extra income. The key is to pick stocks you're happy to hold long term. Because if the stock drops, you still own it, and you still get the dividend. Luna: Right. And if the stock drops significantly, the covered call premium doesn't really offset the loss. So you need to be comfortable with the downside. Lucas: Precisely. That's why I'd focus on stocks like Verizon, Coca-Cola, Procter & Gamble — names with strong balance sheets and long dividend histories. Avoid high-beta names like some of the tech stocks that have been volatile. A covered call on a stock that could swing 10 percent in a week is risky because the stock could get called away at an inopportune time, or the premium might not compensate for the risk. Luna: And what about dividend ETFs like VYM or SCHD? You can sell covered calls on those too, right? Lucas: You can, but the options markets on ETFs are less liquid — wider bid-ask spreads. So you might not get as good a price. The most liquid single-stock options are on names like Apple, Microsoft, but those are growth stocks with lower yields. For pure dividend plays, Verizon is probably the sweet spot. Luna: Let's walk through a concrete example with Verizon. Say you buy 100 shares at $47.81. That costs about $4,781. You sell one call option with a $50 strike expiring in 30 days for $0.40. You collect $40 in premium. Over the next month, you also earn the dividend — Verizon's quarterly dividend is $0.6625 per share, so about $0.22 per share per month if you pro-rate. That's another $22. So total income for the month is $62 on a $4,781 investment. That's about a 1.3 percent monthly return — over 15 percent annualized. Lucas: That math is compelling, but remember: the dividend is paid quarterly, not monthly. So you don't get that $22 every month. And if the stock stays flat, you can sell another call the next month. But if the stock drops, your capital is at risk. The income helps cushion the blow, but it doesn't eliminate it. Luna: So it's a yield enhancement strategy, not a risk-free arbitrage. Lucas: Exactly. And one more nuance: when you sell a covered call, you want to choose a strike that's above your cost basis. If you bought VZ at $47.81 and sell a $50 call, you're fine. But if you bought at $52 a few months ago, a $50 call would lock in a loss if assigned. So you need to manage your strikes relative to your entry price. Luna: Good point. What about tax implications? The premium is considered a short-term capital gain, while dividends may be qualified. So the option income is taxed at ordinary income rates. Lucas: Right. That's an important consideration for investors in high tax brackets. The strategy still works, but the after-tax return is lower. For tax-advantaged accounts like IRAs, it's less of an issue. Luna: So to sum up: covered calls can add one to two percent to your annual return on top of dividends, but you need to pick stable stocks, choose strikes above your cost basis, and be comfortable with capped upside. Lucas: And ideally, do it in an environment like the one we have now — steady rates, moderate volatility, and dividend yields that are competitive with bonds. The 30-year Treasury is yielding 4.98 percent, but that's fixed income. With a dividend stock plus covered calls, you can get six to seven percent total yield with some equity upside potential, albeit capped. Luna: That's a strong risk-reward profile for income investors. Lucas, thanks for walking through that. Lucas: My pleasure. Next time, maybe we'll look at how to use put options to buy dividend stocks at a discount. Luna: That sounds like a good follow-up. Until then, happy investing.