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

Main Street Capital (MAIN): We view simply owning Main Street Capital (without writing covered calls) to be a more attractive investment opportunity for income-hungry investors than owning AT&T (or owning AT&T and writing covered calls on it). For starters, Main Street offers a significantly bigger dividend (6.5%) than AT&T, and if you factor in MAIN’s supplemental dividend then the yield rises to nearly 9%. The dividend is so large because it has elected to be treated as a Regulated Investment Company (RIC) and a Business Development Company (BDC). This means Main Street generally pays no federal income tax on any ordinary income (or capital gains) that it pays out as dividends to its shareholders. Main Street’s business is basically to provide financing (mostly debt and some equity) to smaller and mid-sized companies. Main Street also offers low volatility and a more attractive valuation than AT&T, in our view. Main Street is attractive because its Distributable Net Investment Income consistently exceeds its dividend payments, and because its Net Asset Value continues to enable supplemental dividend payments. If you are a long-term income-focused investor, Main Street is worth considering. We prefer it over AT&T (even if you’re writing covered calls on AT&T).

AT&T’s price has rallied significantly, and its valuation looks expensive. However, that doesn’t mean the price can’t still go much higher (it can). For the many investors that will never sell AT&T, writing covered calls is a decent way to eke out a little extra income. However, we believe there are far more attractive opportunities for income-focused investors and we’ve highlighted five of them in his article. It’s critically important to consider the risks and total return opportunities when engaging in a covered calls strategy, and we’ve provided a wider assessment of these in our recent article titled Covered Calls Roadmap: 5 Big Income Opportunities. In the case of AT&T, investors should focus on their personal investment goals, and not let the small potential income bump from a covered calls strategy distract them from the much bigger total return relative underperformance that may lie ahead. 

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Disclosure: None.

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