Covered calls and dividends are two different ways which you can make consistent money off of a stock that you won. But which way is better? What is the most profitable?
Well, 9 times out of 10 a covered call will be immensely more profitable then dividends. However that does not mean there is not a price to pay, covered calls do come with some additional risk.
When you began writing covered calls you are giving another investor the right to buy the stock at a certain price. So if you have the stock and it is trading at $35 you could sell the $35 call on it and that would make you obligated to sell your stock at $35 if the buyer of that option should choose to exercise their right.
What does this mean? It means that you may miss a large move in the stock. No matter how far up the stock goes you would be forced to sell it at $35, so the missed potential profits could be enormous.
On the other hand it can be extremely profitable. If the stock falls down below $35 or even just stays at $35 chances are you are not going to get called out. Because of this you could sell calls month after month and make great incomes off of your investments.
On the other hand dividends usually pay out a much smaller percentage, but you are also not risking anything new from them. Companies simply pay out a small portion of their earnings to their shareholders these dividends come regular and you are not risking missing a profit if the stock shoots up.
So what is the verdict? Is it better to look for covered call stocks or just buy a few dividend paying stocks. Well what about combining them. Not everybody is actually comfortable with the covered calls strategy, but by combining them with dividends paying stocks you can increase the amount of money you can make through income investing.
