Southern Company paid a .76 dividend Monday. I collected 1.46 in 5 days. Here’s the trade, the logic and the strategy:
I’ve always loved dividend stocks. Getting paid for simply owning shares of a company is the most passive income there is.
The ‘bad’ part of dividend stocks is the company usually isn’t growing anymore. So to keep investors the management knows they have to provide some kind of yield to keep people who want income from YOLOing into NVDA or GOOGL whose share price is going up month over month year after year.
The downside of not growing is most dividend stocks overall trend is not awesome. Yeah there are some exceptions out there, but for the most part if you park $5,000 in a divvy stock, in a year you’re going to have about $5,000 in a dividend stock, or maybe even less if the company isn’t doing as well as expected.
Think about opportunity cost of holding that boring company to collect your quarterly dividend…
As someone who’s main source of income is from the stock market I know the more times I can open and close a winning trade the higher my return is. If I can make 1% a month that’s 12% a year, but if I can get 1% return in a shorter time and find another trade I’m going to build my monthly yield to yield over 20% a year.
One of my favorite strategies is creating my own dividend by selling puts in a stock that has an upcoming ex-dividend date. If you don’t know, the ex dividend date is when everyone who is holding shares will be paid a dividend. The payment itself comes a few weeks later, but to collect a dividend you need shares on the ex-dividend date.
So if I sell a 30 delta put that expires the week before an ex-dividend date I’m going to get paid immediately for the obligation to own shares of the stock that I already don’t mind owning. This income is a lot like a dividend, the only clarification is dividends are taxed are normally taxed differently, but I’m not a professional so you should consult one if this is something that concerns you.
Let me show you an example of a trade I just closed this week on Southern Company (a company that provides electricity to Alabama, Georgia and Mississippi). This is the stock chart for the last 2 years.
Stock is actually in an uptrend which is nice. But it’s moved from 80 – 94 as I’m writing. Do you see at the bottom of the chart there are little blue circles with the letter D? those are ex dividend dates.
On May 18th Southern Company paid .76 per share:
I setup a trade on May 12th to create my own synthetic dividend by selling 93 puts and collecting .70.
This is what it looked like in my broker:
In non stock terms I entered an agreement to buy 100 shares of Southern Company at 93 a share, but only if the stock was below this price in 3 days..
A quick look at the daily chart on May 12th. The blue circles are where the stock bounced previously (this is known as support).
3 of the last 4 times SO hit this price level it dropped. Back in November it did take a dive down to 85, but it recovered over time… Afterall people still pay their power bills no matter what. So Southern Company should have pretty consistent performance even if they aren’t growing a lot.
You can see from my Discord that SO was actually barely above 93 Friday morning, but I also mentioned I didn’t plan on closing out my agreement to buy the shares, because I wanted to collect the entire $70 “dividend” from selling that put because I was JUST FINE owning some stock at 93.
On Friday SO closed at 92.55.
I was the proud owner of 100 shares for every put that I sold. Since I sold the 93 put, but I collected .70, my cost basis was 92.30 a share (93-.70). So I was already profitable (and yeah I could have closed this trade earlier but I actually wanted to buy shares before the ex dividend date)
STocks always gap down by the amount of the dividend, so it was no surprise to see SO was red on Monday morning. I could have sold some covered calls on this stock, but I was going to wait until Monday afternoon to see if I could sell my shares for more than $93.
I setup a good till cancel order to sell the shares for 93. That means I would collect a credit of 1.46 just for holding the shares over the weekend. That’s a nice quick win!
Sure enough less than an hour after market open, my profit target hit!
I can now look out at the calendar, find my next dividend stock that has an ex-dividend a week away and look to sell weekly puts there.
Now “worst case” scenario is this dividend stock didn’t rebound as quickly.. I would be holding shares of a dividend stock for a while. Yeah I can sell covered calls or call spreads to collect synthetic dividends while I’m holding the shares. But I think of it like I’d rather do this as many times as possible instead of just sitting on some shares of a ‘boring’ dividend stock.
This entire trade took me less than 5 minutes, there really is nothing more passive than trading the stock market.
I hope you enjoyed reading this, if you want to learn more you can checkout my inner circle, I’ll be back next Tuesday with a new blog.
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