How One Retiree Combines Dividends and Options for Steady Retirement Income
Covered calls can sound complicated—especially if you’ve never traded options before. But when used carefully and conservatively, they can be a powerful income tool for retirees looking to boost the cash flow from their portfolios.
In this post, we’ll walk through a real-life example of a retiree using covered calls with dividend-paying stocks—and how this simple strategy provides double income from stocks he already owns.
No fancy trading platforms. No risky bets. Just a smart way to get more out of a steady, long-term portfolio.
🧾 Quick Refresher: What Is a Covered Call?
A covered call is a conservative options strategy where you:
- Own a stock (or ETF) and
- Sell a call option on that same stock.
By selling the call, you receive cash upfront (called a premium), which you keep no matter what. In return, you agree to sell your stock at a set price (called the strike price) if it reaches that level before the option expires.
This strategy is “covered” because you already own the stock—so there’s no downside risk from selling a call against it.
The key benefit? Extra income on top of your regular dividends.
👴 Real-Life Example: Bob, a 70-Year-Old Retiree Using Covered Calls
Bob is a retired school administrator with a conservative investment style. He owns about $300,000 in dividend-paying stocks spread across several sectors, and he relies on the dividends for part of his monthly income.
One of his favorite holdings is 100 shares of Verizon (VZ), which he bought for $37 per share.
💰 Step 1: Dividend Income
Verizon pays a $0.665 dividend per share each quarter, or $2.66 annually. On 100 shares, that’s:
- $266 in annual dividend income, no matter what the stock price does (as long as the dividend is maintained).
💸 Step 2: Selling a Covered Call
Bob notices that a 1-month call option with a strike price of $40 is trading for $0.35 per share.
He sells one call option contract (which covers 100 shares) and receives:
- $35 in premium income (100 shares × $0.35)
If Verizon stays below $40 by the time the option expires, Bob keeps his shares and the $35 premium.
If the stock goes above $40, he’ll have to sell his shares at $40—but he still keeps the $35 premium and the $3-per-share gain from his original $37 cost.
🧮 Let’s Do the Math
➕ Scenario 1: Stock Stays Below $40
- Dividend Income: $266
- Call Premium: $35
- Capital Gain: $0 (he keeps the stock)
Total Annualized Income (if he repeats this monthly):
- 12 months × $35 = $420 in options income
- $420 + $266 = $686 total income on 100 shares
That’s an effective yield of 6.86% on a $10,000 position (not including taxes).
➕ Scenario 2: Stock Rises Above $40
- Call Premium: $35
- Capital Gain: $3 × 100 shares = $300
- Dividend Income: He’ll lose future dividends if the stock is called away, but he may have earned 1 quarter’s worth beforehand.
Total return =
- $35 (premium) + $300 (gain) + ~$66 (1 quarter’s dividend) = $401 in one month
That’s a 4% return in just 30 days.
Not bad for a slow-moving dividend stock!
📈 Why This Works for Bob
Bob likes the strategy because:
- He doesn’t mind selling at a higher price
- He gets paid while he waits
- He adds safe, repeatable income on top of his dividends
- He only uses it on stocks he already owns and is willing to sell
It gives him more control and a little extra cash every month—without making big bets.
“I’m not chasing home runs,” Bob says. “I just want steady base hits.”
⚠️ Important Considerations
Covered calls are relatively low-risk, but there are still a few things retirees should know:
🟡 You Might Miss Out on Big Gains
If the stock suddenly jumps well above your strike price, you’ll have to sell at the lower agreed-upon price—and miss out on further upside.
🟡 You Might Have to Sell a Stock You Wanted to Keep
Make sure you’re comfortable parting with the stock if the price rises above the strike.
🟡 It Works Best in Sideways Markets
Covered calls shine when a stock trades in a range. If markets soar, you may feel left behind. If they crash, the premium won’t protect you much.
💡 Tips for Retirees Using Covered Calls
- Stick with stable, dividend-paying stocks.
- Choose strike prices slightly above your cost basis or your desired sale price.
- Use short time frames (monthly or even weekly) for greater control and more flexibility.
- Avoid selling calls on stocks you want to keep long-term, no matter what.
- Use retirement accounts (like IRAs) to avoid triggering capital gains taxes if you’re not ready to sell yet.
🧩 Final Thought: A Simple Way to Boost Income
Covered calls are a practical, low-risk way for retirees to generate extra income—especially when used with solid dividend-paying stocks you already own.
It’s not about timing the market or guessing where stocks will go. It’s about getting paid to wait and creating smoother, more predictable returns from a conservative portfolio.
Just like Bob, you don’t have to be a Wall Street expert to make covered calls work for you. A little patience, the right tools, and a willingness to learn can turn your retirement portfolio into a steady income machine.
Disclaimer: This article is for informational purposes only and does not constitute financial, investment, or tax advice. Covered call strategies involve risk and may not be suitable for all investors. Consult a qualified financial advisor before implementing any investment strategy.