Smarty_Pants

The 10 Best U.S. Dividend Stocks

For investors with a large lump of cash still sitting around you can generate significant income by selling puts on these dividend paying stocks while you wait for a "good" price to buy in.

The secret is to pick a put option at a strike price below the current price which expires in the next month or so. Sell that put and keep enough cash on hand to buy the stock if the put is exercised at the strike price.

If the price doesn't go down, the put expires and you get to keep the premium (kind of a dividend). If the price does go down and the put is exercised, you own the stock at the put's strike price (and you keep the premium too). As long as you're happy to buy at the strike price, you're buying a good dividend paying stock at a discount to a price you're OK with.

Example:

WMT is trading at $49.97 as of the close on 10/9/09. There are November 09 options which expire in about 6 weeks. If you think that WMT is a good buy at $47.50, you can sell the Nov $47.50 puts for about $42 each (1 option per 100 shares) by setting aside $4750 in cash in your account.

If WMT doesn't drop below $47.50 before it expires on Nov 20, you get to keep that $42 premium for nearly a 1% return (in 6 weeks) on the $4750 you set aside. You can then repeat the exercise with December puts.

If WMT drops to $47 near expiration on Nov 20. Your put may be exercised and you will buy 100 shares of WMT for $4750, but you get to keep the $42 premium, so your net cost is actually $4708 for 100 shares of a stock you decided would be a good buy at $47.50.

It takes a bit more work, but if the stock price just waffles around the same price, you can collect significant premium income waiting for the price to decline to your buy point.

The difficulty is finding a broker who will let you sell puts backed by enough cash to purchase the shares at the strike price. They are out there if you look.