*Fundamental Options Dividend Strategy
Why the F.O.D. Strategy?
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I wanted a way to generate monthly income from my portfolio while being very conservative
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I understood the power of dividend compounding but I didn’t want to be exposed to +20% drawdowns while being 100% invested in dividend stocks
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I knew that the best investors of all time used fundamental analysis and value investing principles to beat the market over the long run
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I wanted to benefit from high interest rates on cash deposits while also extracting monthly income from markets
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I knew that financial markets provided the quickest path to a new income stream. Without having to sell products or have customers.
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I wanted to be as conservative as possible and protect my hard-earned money, while still putting it to work for me.
How Does The F.O.D. Strategy Work?
1) Sit 100% in cash and earn interest
I want to start by sitting 100% in cash and start earning interest on my cash balance. Short-term interest rates have risen substantially over the last 12 months, now there are plenty of brokers and accounts that offer +4% yield on cash.
2) Create a watchlist of dividend stocks
Then I want to create a watchlist of dividend-paying stocks (between 30 and 50 names). I want to filter for companies with a strong dividend track record and sustainable payout ratios. I want to include in my watchlist only companies that I understand and I would be comfortable owning for the long term
3) Perform fundamental analysis + estimate the intrinsic value
Now that I have my watchlist, I perform fundamental analysis on each name to see if there are any red flags. Then I proceed to use a version of the discounted cash flow model to estimate the intrinsic value of each company.
4) Sell cash secured puts at or below the intrinsic value
Once I estimated the intrinsic value for each company in my watchlist, I wait until at least a company is trading near its intrinsic value. Then I proceed to sell a cash-secured put with a strike price at or below my intrinsic value estimate. After selling the put option, two things can happen:
1) The option expires worthless: So I just repeat step 4 for the following month and continue collecting premium while sitting 100% in cash
2) The option expires in the money: I get assigned the stock and proceed to step 5
5) Get assigned the stock and start collecting dividends
If I get assigned the stock, I am happy because I know I bought it at or below my intrinsic value estimate. Additionally, now that I own the stock, I will start collecting dividends every quarter.
6) Sell covered calls on the dividend stocks
As soon as I get assigned the stock, I will sell a covered call with strike price at or above my break-even price. This way, I collect instant premium and lower my cost basis. After I sell a covered call two things can happen:
1) The option expires in the money: I bank the profits and start again from step 4
2) The option expires worthless: I repeat step 6 and sell another covered call for the following month. This way, I continue to collect premium and lower my cost basis, and at the same time I continue collecting dividends.
You only have 2 options:
Option 1: The hard way
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You could try the strategy on your own
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You would need to build the watchlist
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You would need to learn how to do fundamental analysis
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You would need to find the best formula to estimate the intrinsic value
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Understand option contracts and the best ways to diversify between several positions to avoid getting assigned your entire portfolio at once
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You would need to understand how to roll options if you want to avoid assignment.
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You can do it. It is going to take time and cost you money to learn from mistakes along the way
Option 2: Joining the F.O.D. Course
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Full online video lessons
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MODULE 1: Why dividend investing is a superior strategy
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MODULE 2: The 10 golden metrics for dividend stocks + intrinsic value estimate
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MODULE 3: Portfolio and watchlist creation
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MODULE 4: The power of options
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MODULE 5: F.O.D. in action
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My personal watchlist of dividend stocks
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My spreadsheets (intrinsic value estimate & cagr)
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Final checklist for the whole strategy
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