henarl

Why Dividend Investors View Stocks Differently

Don Johnson: If you write your initial call at a strike price somewhat (say 10%) higher than you entry price and the price increases to slightly higher than the strike price, you simply buy back your call just before expiration and sell another call a couple of months out at the next higher strike price. You should be able to get more for the new call than you paid to close out your old position thus making a small profit on the difference and raising your strike price in the process. If the stock price gets away from you on the high side, just let it be exercised away and take the short term profit of capital gain plus call premium. The risk is that the stock price will crash but that is a risk you take with any stock purchase and selling covered calls actually reduces your loss in that case. Selling covered calls does limit your upside but lets you profit from the decreasing time value of the option.

Why Dividend Investors View Stocks Differently

Excellent article. Your minimum acceptable initial yield tho should be variable depending on the current interest rate structure. I don't believe it should be below the govt. 30 year bond yield or the current rate of inflation (whatever that really is). In the late 70s when interest rates were double digit. a 4% initial dividend yield would be totally unacceptable. With the present low bank and bond interest rates 4% looks okay.
Several MLPs, such as KMP, OKS, PAA, etc. have rock solid yields of 6 to 8% and have an excellent history of increasing dividends. As you state, the day to day stock price variation on these MLPs is not particularly important as long as they maintain and increase their dividends. If the price decreases, the yield will increase and create buying interest thereby bringing the price back up, depending again however on competitive interest rates at the time.
Another way to increase yields is thru selling covered calls. This works especially well with more volatile stocks since the option premiums are larger. For example; FRO with a dividend yield in the high teens is especially mercurial with daily swings in share price of 5% or more quite common. By selling covered calls one, two, or three months out with a strike price slightly more than my entry price, I have been able to realize a dividend + call premium yield of 34% during the last year. My experience with BPT has been similar. Granted, this takes a certain kind of mindset as watching your positions move wildly can be pretty exciting at times. However, if you can realize a 34% yield it will only take three years to get all of your investment back.
Disclosure: Long KMP, OKS, PAA, FRO, BPT. Short calls on FRO & BPT.