Income on Steroids: How to Get 17.1% Annually From Telus Corporation

Telus Corporation (TSX:T)(NYSE:TU) is one of Canada’s most popular dividend stocks.

It’s easy to see why. The company has a dominant position in wireless, a segment of the market that continues to grow nicely. Led by wireless data growth of 8.3% compared with the same period last year, Telus posted an overall wireless revenue gain of 2.5% in its latest quarter. That translated into an increase in EBITDA from the division of 3.1%.

Wireline data continues to perform well enough to more than offset weakness in the home phone market. Revenue from Internet customers rose 10% in the most recent quarter, buoyed by a combination of new customer signups and upgrades to faster connections.

Telus is even doing well in television, a medium every pundit says is dying. The company added 11,000 television subscribers in its most recent quarter, raising the total number of television subscribers to more than one million.

This success has translated into one of the fastest-growing dividends in Canada. Quarterly dividends have increased from $0.136 per share in 2006 to $0.46 per share today, a compound annual growth rate of approximately 13%. Management has already committed to increasing the dividend another $0.02 per share later this year.

Normally, the kinds of dividends that grow 13% a year are quite low. Telus bucks that trend, sporting a current yield of 4.5%. With GICs and other fixed-income options paying between 1% and 2% annually, it’s pretty obvious why so many retirees invest in Telus shares. Not only are they getting a sweet dividend, they’re also getting a stock that’s not very volatile.

There is a way Telus shareholders can really supercharge their dividends, earning 10% … 12% … even 17% annually. Here’s how.

Enter covered calls

Call options are used by speculators to make big bets on stocks without risking much of their own capital.

Say I was bullish on Telus shares, thinking the current price of $40.83 is too low. If I buy a $46 call option with an exercise date of November 18, 2016, I can lock in the right to buy at $46 for $0.63 per share. If shares go up to $50, I’ve made a lot of money compared to my original investment. But if shares only rise to $44, I’ll lose my entire original investment.

Dividend investors can take advantage of options too by taking the other side of that bet. An investor who owns Telus shares can sell a call option–pocketing the premium in the process–and create an obligation to sell at some point in the future at a profit.

This is referred to as selling a covered call.

Let’s look at a real-life example. Telus investors can collect $0.43 per share in option premiums by selling the July 15, 2016 $42 call options.

One of two things can happen. If Telus shares are below $42 each on July 15, the options expire worthless and the premium is gained as profit. If Telus shares are above $42, the investor is forced to sell out at a profit of $1.60 per share. A return of 4% in a month isn’t such a bad outcome.

As long as Telus’s share price cooperates, investors can do this trade multiple times per year. Collecting a year’s worth of option premiums plus Telus’s generous 4.5% dividend works out to an annualized yield of 17.1%. That’s a massive payout in today’s market.

There’s no guarantee this strategy will work for an entire year, of course. But if an investor can get it to work for a few months before being forced to sell out at a profit, I’d say that’s a pretty good result.

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

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