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Two Dividend Picks With Over 7% Yields: Boost Income to 15% with Options

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For income investors seeking reliable dividend securities, we have identified two picks that offer great potential. These selections provide a yield of nearly 8%, making them attractive options for investors looking to generate income. However, we also recommend utilizing a strategy to maximize returns by reinvesting a portion of the income and using the power of compounding for long-term growth.

Additionally, we will introduce an alternative choice for investors seeking even higher yields. By implementing a buy-write call options strategy, it is possible to increase income by 10% to 15%. This approach not only boosts income but also mitigates risk in case of market downturns. Note that this method requires some knowledge of trading options and active management.

First Dividend Play: Enterprise Products Partners L.P. (EPD)

Enterprise Products Partners L.P. (EPD) is structured as a partnership rather than a typical corporation. In the mid-stream energy sector, it is one of only two companies that have consistently increased distributions for more than 25 years. EPD has a solid track record, supported by a vast energy infrastructure in the US that is difficult to replicate. While it is not a growth company, it appeals to income investors due to its consistent performance and favorable distribution growth prospects.

Key Points:

  • EPD has increased its distribution by 5.3% in 2023 compared to the previous year, demonstrating its commitment to rewarding investors.
  • The company’s financial results for the last quarter show strong performance, with distributable cash flow (DCF) and adjusted cash flow from operations exceeding expectations.
  • EPD has consistently funded its growth internally through retained cash, minimizing reliance on external financing.
  • The company maintains a solid balance sheet and has reduced its debt leverage, resulting in an A- credit rating from S&P.
  • Insider holdings indicate that management and company insiders have a significant stake in EPD, showcasing their alignment with common unit holders.
  • EPD’s future growth is supported by several ongoing development projects that are primarily self-funded, ensuring continued distribution growth.

Second Dividend Play: JPMorgan Equity Premium Income ETF (JEPI)

JPMorgan Equity Premium Income ETF (JEPI) is an attractive fund for retirees and income-focused investors. While it provides several benefits, it is essential to consider its limitations as well.

Key Points:

  1. JEPI is a highly diversified ETF with approximately 138 positions, making it a well-rounded investment option. The fund’s top 10 holdings account for only 15% of the overall portfolio.
  2. With a significant allocation to the technology sector, JEPI offers exposure to various industries and market segments.
  3. The fund employs a covered-call option strategy, generating income primarily from about 15% of its portfolio. Despite recent declines in monthly payouts, JEPI has historically offered an attractive yield.
  4. JEPI focuses on low-beta stocks, meaning it is less volatile than the S&P 500. This conservative approach aims to outperform in bear markets while potentially lagging during bull markets.

Income Boost with Deep In-The-Money Covered-Call Options:

For investors looking to enhance income further, we present an options strategy utilizing deep in-the-money covered-call options for both EPD and JEPI.

EPD: Income Boost

The strategy involves simultaneously buying shares of EPD and selling a deep-in-the-money call option with a strike price below the current market price. This approach allows investors to potentially earn income while limiting downside risk.

Scenario 1: Market Price Stays Above Strike Price

  • If the market price remains above the strike price until the option’s expiration date, the shares will be called away, resulting in a modest profit. However, investors will also receive quarterly dividend payments during this period, enhancing overall returns.

Scenario 2: Market Price Falls Below Strike Price

  • In the unlikely event that the market price falls below the strike price, the shares will not be called away. However, the deep-in-the-money call option helps limit potential losses, as the buying cost is lower than the market price at the time of purchase.

JEPI: Income Boost

A similar buy-write strategy can be applied to JEPI by purchasing shares of the ETF and selling deep-in-the-money call options. This approach aims to generate income while protecting against downside risk.

Scenario 1: Market Price Stays Above Strike Price

  • If the market price remains above the strike price, the shares will be called away, resulting in a small profit. Similar to EPD, investors will also receive monthly dividend payments during the holding period.

Scenario 2: Market Price Falls Below Strike Price

  • While it is highly unlikely that the market price will fall below the strike price, this scenario would protect investors from significant downside risk. The buying cost of JEPI shares will be lower than the market price at the time of purchase.

Concluding Remarks:

This article provides options for both passive and active income investors. The initial recommendations offer attractive yields of approximately 7.5% for those seeking stable income. For those willing to engage in active management and aim for higher yields, the use of deep in-the-money buy-write call options with EPD and JEPI presents an opportunity to generate income ranging from 10% to 15% while minimizing risk.

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