Dividends

Creating a new Income Stream - General Electric

Recently, I have been looking to create a new income stream by purchasing an asset which will generate monthly cash flow. I decided to purchase 100 shares of GE (General Electric) earlier this week near the stock’s 52-week low. I have always admired General Electric as a company and found a great buying opportunity. While I believe there are several rough quarters in front of GE, I still think it is an excellent company and will be fine for years to come. As part of this purchase, I followed my strategy for Combining high dividend yields with covered call options. The stock purchase met the following criteria that I use in this strategy -

• The stock purchased must be one that I don’t mind owning over the long term. As I stated earlier, I have always wanted to own GE and found an opportunity this week to make the purchase.
• The stock needs to pay a steady dividend. At the time of the purchase, GE was yielding around 4.5% and has had a strong history of raising it’s dividend.
• The Options activity on the stock needs to be attractive.
• I must have enough resources to purchase a minimum of 100 shares required to sell 1 Covered Call Options contract.

Details of the Trade
The follow list details the trading activity -

• Purchased 100 shares of GE for an average share price of $27.55 (commission included).
• Sold 1 July 29.00 Covered Call contract for net proceeds of $31.99

Risks
As always, there is risk involved in trading stocks and options. I have identified the following 2 potential risks in making this transaction.

• Stock Jumps - One possible risk is losing out on the stock. In the event that GE jumps past $29.00 per share before the 3rd Friday in July, I would probably lose out on the stock. Now, I don’t really view this as a risk but more as a lost opportunity. If I were to lose out on the stock with a jump in the price, I would still profit - $168.99 in less than one month for a 6% gain. If I could raise 6% per month for the entire year, I could retire early.
• Stock Drops - The other scenario and risk is if the stock has a major drop along with the rest of the market. This is a definite possibility, but one that I can live with. As I stated above, GE is a stock that I don’t mind holding long term. I would continue to sell Covered Call Options when applicable against the stock to generate the monthly income. In addition, assuming that they don’t completely cut their dividend, I can also collect each quarter and increase my net shares.

Opportunities
I believe that this transaction provides an excellent opportunity to generate monthly cash flow which can be reinvested into purchasing more and more assets. This fits with my long term strategy of becoming financially independent. I will plan on using following the steps listed below assuming the stock does not have a huge jump past $29 per share over the next several weeks.

• Sell Covered Calls - If the July 29 Contract expires, I will then look out to August to find an opportunity to sell another Covered Call contract against GE which will bring in monthly cash flow. The plan is to continue to do this each and every month depending on the current market situation.
• Reinvest Dividend - I will plan on reinvesting the quarterly dividend directly back into the stock which will increase my total shares and help to generate additional income down the road.

What do you think about the trade? Do you think this is a good way to generate monthly cash flow?

Disclaimer - I am not recommending the purchase of General Electric stock in regards to this post. Instead, I am detailing my strategy for generating monthly income by using this stock as a catalyst. Please do your own Due Diligence before making any purchases. Thanks!

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