AT&T Covered Calls? We Prefer These 5 Big Dividends Instead

Wells Fargo (WFC): We like Wells Fargo covered calls more than AT&T covered calls for a variety of reasons. For starters, the following table shows a variety of Wells Fargo call options as well as AT&T call options.

Similar to AT&T, Wells Fargo offers decent call premiums, however Wells Fargo also offers a much more attractive valuation than AT&T. Specifically, while AT&T’s price and valuation have been climbing sharply this year, Wells Fargo has become more attractive. The driver behind Wells Fargo’s attractive valuation has been the market’s inclination to sell down all big banks (including Wells Fargo) as interest rate have remained low (low interest rates put downward pressure on bank’s net interest margins and their profits). However, nearly 50% of Wells Fargo revenue is fee based (this is higher than many other banks) and it helps Wells Fargo remain profitable regardless of interest rates. Also worth noting, Wells Fargo offers an attractive 3.2% dividend yield, and its volatility is very low (almost as low as AT&T’s). Many investors still give big banks (such as Wells Fargo) a bad rap since the financial crisis, but recent stress tests have proved one again most big banks (including Wells Fargo) are far less risks (and less volatile) than they used to be. And given the divergent valuations, we believe owning Wells Fargo and collecting additional income by writing covered calls is more attractive than doing the same with AT&T.

Energy Sector ETF (XLE): The energy sector exchange traded fund presents another relatively attractive opportunity to write covered calls. Given this ETF’s low idiosyncratic risks (it diversifies away stock specific risks within the energy sector), its big dividend payments (3.6% yield), its recent relative performance, and it call premiums, we believe it is worth considering. For the following table show the recent call premiums available for XLE versus its ETF peers sorted by “standard deviations out of the money.”

And as the table shows, XLE stands out for its high risk-adjusted premiums. Certainly, the energy sector has been volatile and faces unique challenges, but even after adjusting for volatility we believe XLE covered calls are a compelling opportunity to collect attractive income payments. If you are going to have exposure to the energy sector, the diversified XLE ETF (along with covered calls) is a decent way to do it.

Oaktree Capital (OAK): Oaktree Capital is global investment manager managing assets across corporate debt, convertible securities, distressed debt, control investing, real estate and listed equities. It also offers an attractive valuation, a big dividend (4.7%) and the premiums on its call options are compelling. For example, you can collect a $0.25 premium (0.5% return) on the September 16th $50 calls (this amounts to an additional 3.65% return annualized). And if your shares do get called you end up earning a 6.9% return in under 50 days (plus you receive the upcoming 8/12 dividend payment as long as your shares aren’t called first).

For some added background, Oaktree manages around $100 billion in assets mostly for pension fund and endowment type clients. They have a very strong reputation (the author of this article hired Oaktree for a $500 million emerging market equity mandate in 2014), and they collect healthy fees on the assets they manage.

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Disclosure: None.

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