Supercharge Your Dividend Portfolio By Selling Covered Calls

Ok FINE, I’ll bite. Selling covered calls on dividend paying stocks is a great strategy you SHOULD be using to enhance your portfolio returns.

By combining the benefits of dividend income with option premiums, you can generate extra income, passively, while mitigating the downside risks associated with equity investments.

This approach, when executed well, can help you achieve your long-term financial goals by boosting the overall performance of your dividend-focused portfolio.

sell covered calls on your dividend portfolio

If you’re not familiar with options, covered call writing involves a strategy where you sell call options. A call option give the buyer the right to purchase your shares at a set price, known as the strike price, by a specific date, known as the expiration date. In return for this, you receive a premium which is yours to keep and is usually paid instantly via your broker.

By writing covered calls, since you own the shares at the time, you are still entitled to collect your dividend payments too.

Key Takeaways
- Selling covered calls on dividend stocks can enhance portfolio returns by generating additional income.

- The strategy consists of writing call options on stocks you own, receiving options premiums while retaining dividends.

- Properly executing the covered call strategy can mitigate downside risks and boost the performance of your dividend-focused portfolio.

Why Sell Covered Calls On Your Dividend Stocks?

Juicing Portfolio Returns

Honestly, why wouldn’t you sell covered calls on your dividend portfolio? It’s a win win count me in strategy, in my opinion, that every dividend investor SHOULD be doing.

Up until a couple years ago, I didn’t even know we could trade and sell options based in the UK. It’s very taboo here, it seems, and we are not a nation that is highly advanced when it comes to finance and investing (only around 11% of the population have Stocks and Shares ISAs).

However, once I learned this valuable skill (and you can too), selling options and covered calls on my long term portfolio of dividend paying stocks has been a real game changer.

If you want to earn more income, then you should be layering on a covered call strategy on top of your dividend portfolio.

From experience, by following this strategy, you can take a 5% annual dividend paying portfolio and juice it up by 3-4x giving you a 20% return per year.

Just think about this for a minute. Can you imagine now a life that gives you extra income every month from your existing portfolio that you didn’t know was previously possible? What sort of impact will this have on your life? What will this extra income now allow you to accomplish?

Envision the possibilities. Your monthly income isn’t confined to a paycheque. Suddenly, you’re not just a spectator in the game of finance. You’re an active player, making decisions that shape your financial future. You’re now in control!

The impact of this newfound income impacts every facet of your life. That dream vacation you’ve been postponing? It’s now well within reach. The college fund you’re building for your children? It’s growing faster and stronger. And those little indulgences, the ones that bring a smile to your face—a special dinner, a weekend getaway—they become spontaneous moments of joy.

Oh, and by the way, if you want to learn more about selling options in greater detail than this article provides, my small but mighty Options Selling Roadmap is FREE to download and read on your kindle.

covered calls

The Covered Call Strategy

Selecting the Right Stock

I am going to assume you already have a portfolio of dividend paying stocks so you know what stocks you like already.

I like the Dividend Aristocrats as these have a proven track record of paying out and increasing their dividends for at least the past 25 years.

Let’s run through an example of how you can make extra returns on your dividend stocks.

Covered Call Example On A Dividend Stock:

Let's say you own 100 shares of ABC Nutrition, which is currently trading at $100/share share. 

ABC pays an annual dividend of $5/share, giving you a 5% dividend yield ($5 / $100).

So, on a $10,000 investment, you want to generate an extra $1500 per year in options income to juice your total returns on this dividend stock to 20% per year. 

Here's how you can do this: 

You look to sell covered calls that pay around 1.25% per month in options premium (15% annualised return). 

Let's say you pull up an options chain and notice that in 30 days time you can sell a $105 covered call on ABC Nutrition. For writing this covered call you are paid $1.25/share ($125 total). 

This is money paid directly in to your brokerage and if you live in the UK you can do this from a SIPP (US folks can do this in an Roth IRA).

Outcome Scenarios: 

Scenario A - Call Option Not Exercised:

The stock price remains below $105 until the expiration date.

You keep the premium of $125 and you are happy because now you earned yourself a special dividend from selling a covered call. 

You then get to repeat this process all over again the next month, and the next month, and the month after that. 

Scenario B - Call Option Exercised:

The stock price rises above $105 before expiration, and the call option is exercised by the buyer of the option (remember we are the option sellers). This means you sell your 100 shares at $105/share.

$105/share means you realised a capital gain of $5/share. 

You also still keep the premium of $125 ($1.25/share)

Your total gain in one month is now $625, which is a 6.25% return on a $10,000 out of pocket investment (625 / 10000). 

Now, for the purpose of this example, I have kept it very straightforward. There are times when the stock might shoot up way above your strike price. When this happens your upside is capped at $105/share.

However, as the saying goes, options gives us options and there are ways we can help mitigate this happening by walking up an option. This is a bit more advanced but covered in other parts of this website.

Managing Risks

Downside Protection

When using covered call writing to enhance returns in your dividend portfolio, you need to be aware of the potential risks. One key aspect you should consider is downside protection.

By generating additional income from selling the call options, you can decrease the overall cost basis of your shares and potentially offset losses if the stock price drops. However, if the stock price drops significantly, the income from the call might not be enough to fully protect me from the loss.


One of the keys to long-term investment success is compounding, and selling covered calls can play a significant role in this process. By consistently writing covered calls, you can generate a steady stream of cash flow. I know 1.25% return a month might not sound like much but over 12 months it’s a nice 15% annualised return.

You can also use this premium income to purchase more shares of the stocks you love, further increasing your overall dividend income.

In fact, this is a popular strategy among many options sellers.

Many that still hold down a full time job and sell options for extra extra income typically use the premium to buy more dividend paying stocks further increasing their projected annual dividend income (PADI).

As both dividend income and option premiums increase, you can compound your wealth over time by continually reinvesting the additional income streams. The combination of dividends and option premiums helps you accelerate the growth of your portfolio.

Selling Cash Secured Puts on Dividend Stocks

In my dividend portfolio, I find using options strategies not only helps to increase the portfolio’s returns but also offers additional layers of protection.

In this final section, I will discuss another aspect of options selling which is to write (sell) cash secured puts.

Cash-Secured Puts

A cash-secured put involves selling a put option while simultaneously setting aside the cash needed to purchase the underlying stock if the option is exercised. By selling cash-secured puts on dividend-paying stocks, you can effectively get paid a premium for the obligation to buy shares at a lower price than the current market price. If the stock price remains above the strike price of the put option, you get to keep the options premium as profit.

To implement this strategy in your dividend portfolio, you choose stocks with long-term stability and strong dividend histories.

You then sell out-of-the-money put options with strike prices below the current stock price (check out my article Selling Puts To Buy A Stock).

If the stock price remains above the strike price, the option expires worthless, and you retain the premium as profit, further enhancing your portfolio returns. If the stock price drops below the strike price and the option is exercised, you are am obligated to buy the stock at the strike price, which is lower than the initial trading price.

This provides an opportunity to acquire quality dividend stocks at a discounted price while still receiving the premium income.

So let’s say you had some capital spare to buy 100 shares of another dividend stock you like the look of.

Instead of just buying it outright like most other retail investors would do. You, the smart savvy options seller, can get paid to enter the position at a price that is lower than where it is trading at today. Pretty neat I am sure you agree.

Until next time, happy investing!

P.S. If you want to learn more about selling options grab a FREE copy of my small but mighty ebook: Options Selling Roadmap

PPS. I think you might enjoy this interview I did: How Options Selling With Christian Makes Well Over 6-Figures From Trading Stock Options

Frequently Asked Questions

Pros of covered calls?

The main advantage of selling covered calls is the potential for additional income. You receive option premiums up front, which can help to improve your overall returns. Additionally, by selling options with a strike price higher than your purchase price, you can potentially target a selling price for the stock that is higher than the current market price.

Risks involved?

While selling covered calls can be a source of additional income, there are risks involved. If the stock price rises significantly above the strike price of the options, your shares could be called away, forcing you to sell them at a potentially lower price than the market value. This could result in missed opportunities for greater gains. It’s also important to be aware of tax implications, as selling covered calls can affect your tax situation.

Impact on dividends?

Selling covered calls generally doesn’t have a direct impact on the dividends you receive from the stocks. However, if the call options are exercised and you are forced to sell your shares before the stock goes ex dividend, you will no longer receive dividend payments from those shares. That said, the income received from selling the call option can help offset the loss of dividends to some extent.

Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!
Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!


Welcome to Dividend On Fire, we are a site dedicated to options trading! We specialize in helping investors generate passive weekly or monthly income through selling cash secured puts and covered calls.

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