Want a Little More Income Out of ExxonMobil Stock? Don't Outsmart Yourself.
One of ExxonMobil's (NYSE: XOM) defining features is its dividend -- specifically, the company's ability to increase the dividend year in and year out for 42 consecutive years despite the inherent volatility of the energy sector. But for some investors, the 3.2% dividend yield might not be compelling enough to make the integrated energy giant a buy.
Selling covered calls could be a way to overcome that issue, or you might buy YieldMax XOM Option Income Strategy ETF (NYSEMKT: XOMO) and its 26% yield. Don't get too excited; there's more you need to know before you buy this exchange-traded fund (ETF).
A quick look at ExxonMobil
ExxonMobil is one of the world's largest oil and natural gas companies, with a $500 billion market cap and an average trading volume of nearly 14 million shares per day. The company's business spans from the upstream (energy production) through the midstream (pipelines) and all the way to the downstream (chemicals and refining). It also has a global footprint. The company's size and diversification -- along with a strong balance sheet -- make it a very resilient business.
As noted, the dividend has been increased annually for over four decades, which is pretty incredible, given the swift and dramatic swings that can take place in energy prices. There are very good reasons investors might want to own ExxonMobil if they are looking to add some energy exposure to their portfolios.
The best time to buy it, meanwhile, is likely when oil prices are low because Wall Street will probably be pretty pessimistic about the stock at that point. The yield can rise up closer toward 10% during deep energy downturns.
However, there's another way to boost the income you generate from a stock investment -- selling covered calls. Essentially, you are selling another person the right (or option) to buy your ExxonMobil stock at some point in the future at a preset price. For that privilege, you get paid a small amount of money, but you have to sell the stock if the option gets exercised (or you have to close the position by buying options yourself).
This sounds easy, but in truth, selling covered calls (they are "covered" because you own the stock) is a pretty advanced investment technique. Learning to do it well takes time and requires more frequent monitoring than simply collecting quarterly dividends from ExxonMobil.
YieldMax XOM Option Income Strategy ETF will do the hard work for you
Here's the thing: You don't actually have to do all that work. You can simply buy YieldMax XOM Option Income Strategy ETF. The company highlights that the yield on this ETF is a huge 26%. If you own ExxonMobil, would like more income, don't want to risk losing it, and don't want to learn to trade options, this sounds like a great opportunity! Not so fast -- there are some very big negatives to consider.
First, that 26% dividend yield is the most recent monthly dividend multiplied by 12, which is an unrealistic view of the dividend situation. Over the past year, the quarterly dividend has been as high as about $0.36 per share and as low as roughly $0.19. That's a very big swing. If you are looking for income consistency, YieldMax XOM Option Income Strategy ETF isn't going to provide that for you.
Second, YieldMax XOM Option Income Strategy ETF's income appears to be coming at the expense of capital. Look closely at the chart below. The ETF's share price has trended steadily lower over time. That means your capital is declining, even as you collect a large stream of income. That's not a win, with the total return level highlighting the problem. Even if you reinvest the dividends, your return on this ETF would be only about 2.5%. Basically, all that income is coming from your capital.
This is a basic problem when a pooled investment vehicle pays out a large dividend. The return from the investments in the portfolio often isn't enough to keep up with the money being pushed out to investors. And with less capital in the ETF or fund, the risk of a dividend cut materially increases.
Most investors will be better off with a less aggressive approach
The story behind YieldMax XOM Option Income Strategy ETF seems compelling until you dig a little deeper into the results. And that's even before considering the actual investment approach of the ETF, which is complicated and involves both buying and selling calls.
Simply put, there's no free lunch on Wall Street, and what you end up giving up for what the income YieldMax XOM Option Income Strategy ETF provides probably won't be worth the income you generate unless you have a very short time horizon. You'll be better off learning to trade options yourself, or better yet, just make a plan to buy ExxonMobil while it is deeply out of favor so the yield you collect will be more to your liking.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Want a Little More Income Out of ExxonMobil Stock? Don't Outsmart Yourself. was originally published by The Motley Fool