The best way to retire early is through dividend investing—hands down. But that doesn’t mean that dividend investing is the best way to generate income.
The goal is to create a Happy Cash Flow Retirement where new money comes in every day. Dividend investing can create lots of cash flow, but you will surrender much of your control.
That’s when you create an options trading strategy involving selling cash-secured puts. With options trading, you can choose your risk/reward profile, which lets you generate as much income as you need (sometimes at your own peril).
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What is dividend investing? Dividends are profits that a company pays you when you are a shareholder. The goal is to purchase more shares as the company slowly increases its dividend payments. We call this dividend growth investing.
When looking at your DGI portfolio, you should focus on total return. Much of your return will come from the company’s share price growth.
Over time, with the share price appreciation, increase in dividend payments, and dividend reinvestment, you will feel the full effect of the power of compounding.
Let’s look at one of my favorite DGI stocks, Abbvie (ABBV). I purchased ABBV in June 2019, when the share price was $72, and the quarterly dividend was $0.96.
Today (May 2024), the share price is $154, and it pays a quarterly dividend of $1.55. The growth in share price and dividend payments is impressive.
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The only problem with dividend growth investing is that you will need lots of time to compound your efforts. It will take at least ten years to create a robust DGI portfolio. So, how do you generate income fast?
What are Cash-Secured Puts? Selling cash-secured puts is a form of options trading. “Cash-secured” means you have the cash on hand to purchase the stocks from the buyer.
It may sound confusing, so let’s play out a scenario. Luckily, I just traded two cash-secured puts this week so that we can recount my situation now.
The goal of selling cash-secured puts is to give the buyer (you are the seller) insurance for their options plays. When you sell a put, you provide the buyer the choice to sell you their stocks if the price decreases below the strike price.
This week, I sold two puts against Rivian (RIVN) stocks. The share price at the time was $10.35, and I set the strike price at $9.00.
Income Investing vs. Inflation 2
This means that if RIVN’s stock price drops below $9.00 before the expiration date, the buyer can force me to purchase 200 shares of RIVN from them.
Each put represents 100 shares of RIVN, and I sold two puts. Thus, there are 200 shares of the underlying stock in play.
For my trouble, the buyer paid me a premium of $58 (or $29 per put). I keep the premium whether I have to purchase the shares or not.
Building a cash-secured put strategy. Why would anyone want to buy a put? There are many reasons to purchase puts, most involving complex options strategies.
However, at its basic level, it gives the buyer insurance or “a hedge.” Let’s say the buyer has a cost basis of $5 per share of RIVN. He wants to feel comfortable letting it run and wouldn’t mind taking profits at $9.00.
Inflation Ate My Paycheck 112
He can purchase a put from me at $9.00. If the price drops to $8.00, he can still sell me his shares for $9.00 and keep his profits (less the premium he paid me).
Understanding the overall strategy before trading options is important. You, too, will form an options trading strategy to complement your dividend investing portfolio.
Rule number one of selling cash-secured puts is only to trade stocks you won’t mind owning. No matter how cautious you are in setting the strike price, you will assume shares at some point.
The most important rule is never to get greedy. The closer you set the strike price to the current stock price, the higher the premium.
For example, if the RIVN’s current price is $10.35, I can set the strike price at $10.00 and collect a massive premium.
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However, I am much more likely to end up with shares of RIVN. The goal of my secured put strategy is to avoid assuming shares for as long as possible.
To sell my two RIVN puts, I need $1800 in cash on hand. Let’s do the math. I sold the two puts at the strike price of $9.00. Two puts equal 200 shares. Therefore, I would need to have the funds to purchase 200 shares at $9.00 each, which is a total of $1,800.
Now, let’s look at the return on our investment. We received $58 for leveraging $1,800, or 38.67% at an annualized rate (($58 x 12) = ($696/$1800)). You won’t find any safe stocks offering a 38% yield on investment.
What if I have to purchase stocks? Again, you want to avoid buying stocks as long as possible by setting a strike price much lower than the share price.
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However, you will eventually own shares through the magic of the stock market. At that point, you have 200 shares you can use to execute your covered call strategy.
You will simply alternate between selling covered calls and cash-secured puts, collecting premiums along the way. Some people call this the Options Wheel Strategy.
Selling cash-secured puts versus dividends. Putting it all together, you can add a cash-secured put strategy to your dividend growth investment portfolio to generate massive returns.
You can let your dividends build up enough to sell your first cash-secured put. From there, you are off to the races.
You can let your premiums accumulate until you can sell two puts, or you can funnel them back into your DGI portfolio to purchase more shares of Verizon (VZ), AT&T (T), Abbvie (ABBV), etc.
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You can even take your cash-secured put premiums as cash using your options trading debit card. The important thing is that you have multiple choices for your new money.
Conclusion. Very few people can use their money to make more money. To do this, you must become a capitalist.
I love being a dividend growth investor, but I wanted to learn more about money and capital markets. So, I became an options trader.
Most options traders will lose money because they become overly emotional. They cannot harness their “fear and greed” emotions.
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Always keep the goal of your cash-secured strategy in the front of your brain. You are not trading puts to make a fortune.
Your DGI portfolio will slowly make you quite wealthy. However, selling cash-secured puts gives you current income you can reinvest, grow, or spend.
I like to think of options trading as a side hustle compared to my DGI portfolio. Dividends are the main star of my show, but having some extra income is always nice.
As long as you have a plan and control your emotions, you can leverage cash-secured puts to generate 30% annual returns on top of your DGI investing. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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