Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) has disappointed many income investors over the last couple of years.
Much of the company’s decline wasn’t management’s fault, of course. They made the decision to hedge production, which was a very wise thing to do when oil was higher. Then, as the price of crude fell, the company bought cheap assets. These assets will likely be very attractive once the commodity recovers.
In short, most of the company’s recent problems stem from the price of oil, which is hardly management’s fault.
But management also screwed up in one major way, at least in this writer’s mind. Crescent Point consistently paid a dividend that exceeded free cash flow when times were good. Investors enjoyed the fat payout for years, but the decision made the dividend stand on precarious ground.
In fact, Crescent Point ended up cutting the payout twice. The first was from $0.23 per share each month to $0.10. These days, the payout is a mere $0.03 monthly — good enough for a yield of 2.8%.
That isn’t enough for some dividend investors. Fortunately, there’s a solution. Here’s how investors can supercharge their yields from Crescent Point. Such a strategy yields 13.9% today.
Using covered calls
Many investors avoid the option market completely, convinced it’s a place where only speculators hang out. But there’s a place for income investors in the option market, too.
Investors have been using an options strategy to goose their income for years. Here’s how one such strategy, covered calls, work.
First, an investor must take a position in the underlying stock. They then go into the option market and sell a call option, which creates an obligation to sell the stock if the price exceeds a certain level on a certain date. In exchange for taking on this obligation, an investor immediately receives an option premium.
It’s easier if we use a real-life example. Going back to Crescent Point, investors who sell the $14 May 19th call options will immediately get $0.12 per share for their trouble.
One of two scenarios will happen between now and May 19. If Crescent Point shares stay around where they trade today — which is $13 per share — then the covered call writer gets to keep the premium and their shares. Nothing happens past the initial transaction.
If Crescent Point shares are trading at $14 or above on May 19, the covered call writer would then be forced to sell their shares at the strike price. But this isn’t a terrible outcome. Remember, for Crescent Point shares to hit $14, they’d have to increase by 7.7% in just a couple of weeks. That’s not bad, especially for someone who buys today.
Income potential
Since Crescent Point has monthly options, investors can do this trade every month of the year. Doing so can generate some impressive yields.
Remember that Crescent Point shares already pay a $0.03 per share monthly dividend. Add in $0.12 per month in option premiums, and the total payout comes to $0.15 per share each month. That’s an annual yield of 13.9%.
In a world where GICs and government bonds pay less than 2%, this strategy is incredibly enticing.
There are risks, of course. There’s no guarantee Crescent Point shares won’t go down. Covered calls also limit one’s upside potential. Still, there are few better options for generating fat yields than covered calls.
The bottom line
It’s time for investors who are disappointed with Crescent Point’s dividend cuts to do something about it. Writing covered calls on the company is a great way to generate massive yields today. Where else can you get a 13.9% payout in today’s market?
