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In the endless search for yield, a covered-call strategy can be an effective tool to supplement portfolio performance. In addition to finding returns from call premium, I'll try to incorporate higher quality dividend stocks for a little something extra. The guidelines for the covered-call strategy are:

  • Generating more than 7% per year from the calls and dividends combined is the overall goal.

  • Call should be at least 8% out of the money (OTM) to avoid being called away and to give room for underlying movement.

  • Targeted expirations will be within four months. Optimally, calls will be written on the same underlying stock 3-4 times per year.

  • Buying back calls to close before expirations takes place will be taken into account; yields are calculated bid-$0.05.

The picks should be looked upon as yield generators to supplement longer-term equity holdings. The above are only guidelines, however, not rules. Before utilizing the strategy, make sure to study it and know the potential hiccups that may occur.

Annualized Call Yield performance can be calculated as such:

= (Call premium - 0.05 /Stock price)/Days to expiration*365

Prices current as of December 17, 2012 market close

Summary on selection:

High dividend stocks that are also high quality seem to be the only logical investment lately and going into the next couple years. Paired with the covered call strategy, you should be able to generate solid income while being less stressed about the risk involved.

Lower Beta + High Dividend + Additional Call Income = Win.

Central bank easing and political sloth (concerning the Fiscal Cliff) are steering my portfolio to lean towards solid companies with solid dividends (no financials!). IBM, Caterpillar, Deere and DuPont are great additions to any portfolio. Their products have displayed consistent demand through tough economies and should continue to do so, making them viable candidates for long-term investors. With the exception of Google, all of these companies also deliver a strong dividend. The lowest of the group is IBM at 1.8% and highest is DuPont's massive 3.9%, which is still great when paired with the call strategy.

The tried and true advice of "stick to the basics" is more and more relevant in today's turbulent markets. I personally like all of these companies mentioned below for their exposure to either Federal easing opportunities or plain old global economic conditions improving. As always, I'm not recommending equity buys and sells, I'm spotlighting calls to help generate income.

DuPont (DD) April 48 call

TickerDD
Strike48
Exp MonthApril
Stock Price$44.63
Call Bid$0.65
Days to Expiration124
OTM7.55%
Call Yield1.34%
Annualized Call Yield3.96%
Annual Dividend Yield3.90%
Total Annual Yield7.86%

Deere (DE) March 95 call

TickerDE
Strike95
Exp MonthMarch
Stock Price$86.37
Call Bid$0.75
Days to Expiration89
OTM9.99%
Call Yield0.81%
Annualized Call Yield3.32%
Annual Dividend Yield2.10%
Total Annual Yield5.42%

Caterpillar (CAT) January 95 call

TickerCAT
Strike95
Exp MonthJanuary
Stock Price$89.64
Call Bid$0.55
Days to Expiration33
OTM5.98%
Call Yield0.56%
Annualized Call Yield6.17%
Annual Dividend Yield2.30%
Total Annual Yield8.47%

Google (GOOG) January 765 call

TickerGOOG
Strike765
Exp MonthJanuary
Stock Price$720.78
Call Bid$7.00
Days to Expiration33
OTM6.14%
Call Yield0.96%
Annualized Call Yield10.67%
Annual Dividend Yield0.00%
Total Annual Yield10.67%

IBM (IBM) April 205 call

TickerIBM
Strike205
Exp MonthApril
Stock Price$193.62
Call Bid$3.00
Days to Expiration124
OTM5.88%
Call Yield1.52%
Annualized Call Yield4.48%
Annual Dividend Yield1.80%
Total Annual Yield6.28%

Source: 5 Blue Chip Covered Calls