Consolidated Edison stock is one of the highest yielding Dividend Aristocrat stocks, with an annualized yield around 3.4%.
ED stock boasts 46 straight years of dividend increases, meaning it may soon join the Dividend Kings list.
Investors searching for yield can further enhance the yield on Edison by using a covered call strategy.
When selling a covered call, the investor receives a premium and must sell the shares at the strike price if called upon to do so.
One call option contract represents 100 shares, so investors can sell multiple call options if they have a particularly large stock holding.
Over time, covered calls can increase returns while also decreasing the volatility of a portfolio.
On ED stock, an August-expiry, 92.50 call option was trading on Friday around $2, generating $200 in premium per contract. That increases the annualized yield by 2.21%, or 32.29% on an annualized basis.
Covered Call Enhances Stock's Dividend
ED currently pays around $3.16 in annual dividends, so generating another $2 from covered call writing in less than four weeks is quite attractive.
The $2 in premium received also gives a small buffer on the downside of 2.21%. That means ED stock could trade 2.21% lower between now and Aug. 19, and the covered-call trade would still break even.
The total capital at risk in the trade would be $9,044, and if Consolidated Edison stock went to zero, that's how much the trade would lose.
Covered calls are a fantastic way to generate extra income from a stock holding while also providing some downside protection.
Investors would need to weigh the pros and cons of the stock before initiating a bullish trade like a covered call.
According to the IBD Stock Checkup, ED stock is ranked No. 11 in its industry group and has a Composite Rating of 85, an EPS Rating of 72 and a Relative Strength Rating of 93.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setup is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
