Income Investors: How to (Safely) Increase Your Yield From BCE Inc. by 40%

The option market doesn’t have to be scary. How smart investors can increase their yield from BCE Inc. (TSX:BCE)(NYSE:BCE) to an eye-popping 6.6%.

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BCE Inc. (TSX:BCE)(NYSE:BCE) is one of Canada’s most popular dividend stocks. It’s easy to see why.

Investors are very happy with the company’s competitive advantage, something legendary investor Warren Buffett refers to as a moat. Look at it this way: if I gave you $10 billion and told you to knock BCE off its pedestal, could you do it? I know I sure couldn’t. Companies with that kind of advantage tend to make pretty good investments.

BCE’s assets are second to none. Not only is the company a dominant provider of wireless, television, and Internet service in eastern Canada, it also owns what many think is Canada’s finest collection of media assets. Included in those assets is a stake in Maple Leaf Sports and Entertainment, the owner of the Toronto Maple Leafs and Raptors.

BCE’s terrific assets spin off pretty consistent earnings. Customers tend to be pretty sticky, so the company can safely increase prices to most of them each year. This pricing power plus slow population growth ensures steady gains in both revenue and profits. This culminates in the company’s dividend, which is among the best in Canada.

The current yield is 4.8%, which kills most fixed-income alternatives. BCE’s dividend has a nice history of growth, increasing nearly 40% over the last five years. There aren’t many companies in Canada that can offer a combination of a high current yield and a history of dividend growth much higher than inflation.

This payout makes BCE a very attractive choice for retirees and other investors who crave income. But what if there was a way an investor could really supercharge their dividends from the company, goosing them another 40%? That would boost the yield to 6.6% per year.

It’s possible, even without taking any additional risk. Here’s how.

Income … on steroids

The option market tends to be the domain of speculators, risk takers, and fancy Bay Street finance types. But there’s a way regular investors can use options to their advantage.

One way for investors to make a bet on a company is to buy call options. These securities give you the right to buy a certain stock at a certain price on a certain day at a fraction of the price of actually buying shares. With calls, investors are betting on the price of a stock to go up.

The way for income investors to profit from calls is to take the opposite side of that bet. The process is relatively simple.

First, an investor must own the stock. This investor would then sell a corresponding call, pocketing the premium. That action would lock them in an obligation to sell that security at the strike price of the option. Since the investor already owns the stock, they’re essentially entering a transaction where they agree to limit potential upside in exchange for income now.

Let’s look at a real life example using BCE shares. Investors can sell the $60 March 18th 2016 call option and receive $0.09 per share in exchange for agreeing to sell at $60 on March 18. BCE shares currently trade hands at $57.33, meaning the company would have to gain approximately 5% in two weeks for an investor to be forced to sell. If that doesn’t happen, the investor gets to keep the premium as income.

BCE has monthly options, which means an investor can pull off this trade 12 times per year. Assuming the same option premium as today, that translates into $1.08 per share in additional income. Add that to the $2.72 per share in planned 2016 dividends, and investors can collect an income yield of 6.6%.

The method isn’t foolproof, of course. Sometimes, BCE shares will surge and investors will be forced to sell. But since covered calls always use options that are higher than today’s share price, investors aren’t losing money. They’re just gaining less than what they would normally, which is usually more than offset by the additional income generated.

The option market doesn’t have to be complicated. Regular investors can use it to really supercharge their yield. It’s a great solution for a retiree who wants just a little extra income.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

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