Investors have gotten increasingly frustrated with companies that hoard their cash instead of putting it to better use -- like paying dividends to shareholders. But if you like a particular stock as an investment, but also need to draw income from it, there's still a way to turn you shares into a stream of income.
Hanging onto their money
It's not hard to understand why companies want cash on hand. After 2008's financial crisis, it became nearly impossible to raise capital. Many companies had to resort to secondary offerings of stocks at bargain-basement prices just to stay in operation. AIG (NYSE: AIG) and Fannie Mae and Freddie Mac took deals from the U.S. government that nearly wiped out existing shareholders. Others, including Manulife Financial (NYSE: MFC) and DryShips (Nasdaq: DRYS), got more conventional equity financing through private underwriting. No corporate executives ever want to be in that position again if they can help it.
Still, the amounts of cash some companies are keeping has gotten ridiculous. Apple's (Nasdaq: AAPL) Steve Jobs may want to keep cash on hand for "bold investments," but does he really need $23 billion in cash and short-term assets to get the job done? Google (Nasdaq: GOOG) and Cisco Systems (Nasdaq: CSCO) have taken similar criticism, since both are highly profitable, yet don't share their tens of billions in cash with investors. And even with Warren Buffett's long-term success, some pine for Berkshire Hathaway (NYSE: BRK-B) to start paying a dividend.
Do it yourself
Dividend-paying stocks offer a great way to generate income from your investment portfolio. But if you want to own stocks that don't pay dividends, you can still reap some income from your investment. By using a strategy involving options, you can create regular income from your share holdings.
The strategy is known as a covered call position. For every 100 shares of a certain stock you own, you can write one call option, which entitles whomever buys that option from you to purchase your shares at a certain price, within a particular timeframe. In exchange for that right, you get paid what's known as a premium in cold, hard cash. The premium is yours to keep, no matter what happens.
How much cash are we talking about?
The income you receive depends on which call option you decide to write. There are a couple of important variables: how long the option has until it expires, and the price at which you're willing to let someone buy your shares from you.
To give you a general idea, though, here are some examples involving those non-dividend stocks we talked about above:
|
Stock |
Recent Price |
Option |
What You Receive for Covered Call |
|---|---|---|---|
|
Apple |
$259.62 |
October $300 |
$7.25 |
|
Cisco Systems |
$22.70 |
October $24 |
$0.77 |
|
|
$467.49 |
September $500 |
$11.60 |
|
Berkshire Hathaway (B shares) |
$79.75 |
December $90 |
$1.89 |
Source: Yahoo! Finance. Covered call proceeds are per share.
Now, wait a minute!
Your first thought might be that you have no desire to sell shares in these great companies. It's certainly true that unlike a dividend payment, which comes with no strings attached, covered calls involve a big trade-off.
But because you get to pick the price at which the option you write will be exercised, also known as the strike price, you can control the risk of having to sell your shares. The higher the strike price, the less you'll get in income, but the smaller your chances that the option will get exercised.
Weigh your options
Covered calls are just one way to use options to make your investments do what you want them to. By turning stingy stocks into income-producing ones, you'll never need to complain about not getting a dividend again.
Find out all about using options more efficiently by checking out our options tutorial.
Fool contributor Dan Caplinger believes in keeping all his options open. He owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Apple and Berkshire Hathaway are Motley Fool Stock Advisor picks. The Fool owns shares of Berkshire Hathaway and Google. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is gonna ride up to your front door one day and tell you to your face to pay back the two dollars you owe it.
