In my book, I Heart Money, I have an income strategy where I buy large positions of Canadian blue chip companies and write (or sell) calls on the positions every few months. When I do this I collect the dividends each quarter and then get another stream of income from collecting the premiums from the sold calls. If you have no idea what an option is you have to buy my book!
There are many pluses to this strategy. Firstly, you increase your yield from only the dividend income by adding the income from the options. Secondly, the income is tax preferred. Compared to money from bond income, dividends and the option premiums are tax preferred. Thirdly, if the options aren’t exercised, the holder keeps the upside of the stock. Only 20% of options are exercised. Lastly, when markets are bearish the sold options will collect even more premium because of higher volatility levels. Win win for income investors like us!
It’s kind of like having a rental property and having two floors rented out. You gain the income from the dividends and then another stream from the selling of the options. I hold my stocks like the rental property and collect these two streams over the long term, just like how a rental property works.
This strategy takes time to manage. I constantly need to monitor my option positions and re-write them when the positions expire every few months. To my delight, BMO has come out with the BMO Covered Call Canadian Banks Exchange Traded Fund or ETF. It performs everything I described above on our 5 big banks, BMO, TD, ROYAL, NATIONAL, CIBC and SCOTIA, but it can be bought and sold as an Exchange Traded Fund, symbol ZWB.
Currently it has over a 9% yield and has still appreciated over $1 to $16 from it’s $15 launch price in Jan 2011. Being a common reader you know that I love yield and for a measly .65 Management Expense Ration it is very cheap to hold for a long time. Most mutual funds are over 1% Management Expense Ration and are half as sophisticated.
Check out the product at the link below. I don’t own it yet but It’ll be added shortly for sure.
BMO Covered Call Canadian Banks
Keep loving your money and it’ll love you back with a great yield,
Dave
BMO Covered Call Canadian Banks ETF Objective
BMO Covered Call Canadian Banks ETF seeks to provide Unitholders with exposure to the performance of a portfolio of Canadian banks and monthly distributions while mitigating downside risk. Currently, the investment strategy of BMO Covered Call Canadian Banks ETF is to invest in and hold the securities of Canadian banks, Units of BMO S&P/TSX Equal Weight Banks Index ETF or a combination of these. In addition, depending on market volatility and other factors, BMO Covered Call Canadian Banks ETF will write covered call options on these securities. Under such call options, the fund will sell to the buyer of the option, for a premium, either a right to buy the security from the fund at an exercise price or, if the option is cash settled, the right to a payment from the fund equal to the difference between the value of the security and the exercise price.
