Kiplingers: Dividends are not the only way to get something out of stocks

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By: Michael J, Oyster, CFA, CAIA

Chief Investment Officer at Options Solutions

John Burr Williams, one of the fathers of fundamental stock analysis, long ago made an observation about stocks and dividends that have aged extremely well. In the 1930s, Williams said: “A stock is worth only what you can get out of it.”  

He wanted investors to understand that they should not expect a stock price to rise. Instead, they should only expect to receive the dividend. His thinking ultimately led to the dividend discount model, or DDM, that is widely used to evaluate stocks. 

Burr’s praise of the humble dividend will strike many modern investors as anachronistic as stocks have gotten a turbo boost for the past 40 years, but four decades of extraordinary performance might be ending. Why? Interest rates are no longer declining, perhaps ending one of the most historic tailwinds to ever push stocks higher.  

Declining interest rates are like rocket fuel for stocks, a fact many investors are now learning as the Federal Reserve, and many other global central banks, are aggressively raising rates to battle surging inflation. 

Stock investors are anxious, but there is time to reconsider Williams’ wisdom about dividends. But dividends are not the only way to “get something” out of stocks.. The covered call strategy, which essentially pays investors for agreeing to sell stocks at higher prices, can create conditional dividends that are often even larger than the common stock dividend. What’s the condition of the conditional dividend? A willingness to sell higher, or to manage the call to avoid selling the stock. If Williams were still around, he just might amend his famous pronouncement on stocks to include a conservative options strategy that investors can use to get even more out of a stock than just the dividend.  

The covered call strategy can enhance dividend-paying stocks, and even create a different kind of payout structure for the many stocks that do not pay dividends. 

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