Income Investors: Get a 32% Yield From Crescent Point Energy Corp (TSX:CPG)

Crescent Point Energy Corp (TSX:CPG)(NYSE:CPG) and a covered call strategy can generate some eye-popping income.

| More on:

After years of dependable dividends, many income investors swore off the energy sector for good in 2015 after just about every oil producer cut their payout.

I often advocate something similar, telling investors that the best choice for energy sector dividends are Canadaโ€™s largest pipeline stocks, not our energy producers. The price of oil simply fluctuates too much.

But that doesnโ€™t mean there arenโ€™t some fantastic income opportunities in the energy sector today, however. Youโ€™ll just have to do a little work to uncover them. Hereโ€™s how you can earn a 32% yield on Crescent Point Energy Corp (TSX:CPG)(NYSE:CPG) today.

Yes, really. Thatโ€™s not a typo.

Using options to your advantage

Options and derivatives get often get a bad rap, as traders use them to take big levered bets on companies. Remember, it was derivatives that nearly bankrupted the U.S. economy in 2008 and 2009.

Most investors ignore the option market completely.

But there are ways that even small-time investors can use options to goose their returns. Today Iโ€™m going to introduce you to a concept called covered calls, which can really increase your income.

A covered call is relatively simple. First, you buy a stock. This is an important part; you must own the underlying security to do a covered call.

Next, youโ€™ll sell a call option, which will generate an obligation to sell your stock at a specific price on a specific day. Youโ€™ll get income in exchange for taking on this responsibility.

At this point it becomes easier to explain using a real-life example. As I write this, the December 21 $5 call option for Crescent Point currently trades at $0.08/share. This means that an investor who sells this call collects $0.08 today in exchange for agreeing to sell their underlying shares at $5 each on December 21st.

One of two things will happen between now and then. Crescent Point shares will either remain under $5 each โ€” theyโ€™re trading for $4.14 each on the TSX as I write this, which means that the options will expire, worthless. But if Crescent Point trades above $5 at the close of trading on next Friday, then the covered call holder must sell their shares for exactly $5.

The worst case scenario is Crescent Point shares fall between now and December 21. Sure, youโ€™d still collect your option premium โ€” and your dividend, since shares pay a $0.03 monthly payout โ€” but anything more than a $0.11 drop and youโ€™re losing money.

The ideal outcome to this strategy is Crescent Point shares stay pretty much where they are, which would entitle the investor to the $0.08 option premium while having no capital loss. A move up in shares from $4.14 to $4.50, say, would be quite fine too.

Finally, shares could end above $5 each on December 21. This isnโ€™t such a bad solution either, as youโ€™ll end up with a nice capital gain. The only problem is that potential capital gain is capped and youโ€™d have to buy the shares back to do this strategy again. Still, a 23% return in a week and a half is nothing to scoff at.

32% annual yield

Now that weโ€™ve got the basics of a covered call down, the only thing left for investors to do is to execute it. Remember, a stock like Crescent Point has monthly options (heck, it even has weekly options, but we wonโ€™t delve into those), meaning you can execute this strategy 12 times a year.

If you do this trade each month, youโ€™ll generate $0.96/share in option premiums annually. Add in Crescent Pointโ€™s dividend, which currently sits at $0.03 per share each month, and weโ€™re looking at 2.66% return each and every month.

Itโ€™ll take you a whole year to earn an equivalent return from a GIC or government bond.

Annualize that return and we get a 32% yield.

I wonโ€™t sugarcoat it: the reason why this opportunity exists is because Crescent Point shares are volatile. But if youโ€™re willing to tolerate some ups and downs, thereโ€™s a lot of income that can be generated from the stock.

Should you invest $1,000 in Dollarama right now?

Before you buy stock in Dollarama, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy nowโ€ฆ and Dollarama wasnโ€™t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the โ€œeBay of Latin Americaโ€ at the time of our recommendation, youโ€™d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month โ€“ one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the โ€œofficialโ€ recommendation position of a Motley Fool premium service or advisor. Weโ€™re Motley! Questioning an investing thesis โ€” even one of our own โ€” helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.   

More on Dividend Stocks

Forklift in a warehouse
Dividend Stocks

Why Mullen Group is a Must Buy With $5,000 in May 2025

This top Canadian stock continues to be a top choice from analysts, and more growth could be on the way.

Read more ยป

Investor wonders if it's safe to buy stocks now
Dividend Stocks

BCE Finally Cut its Dividend: Is This a Turning Point for the Stock?

BCE (TSX:BCE) stock has finally done it, but the path ahead may still be met with great volatility.

Read more ยป

3 colorful arrows racing straight up on a black background.
Dividend Stocks

Why Chemtrade Stock Jumped 10% This Week

Chemtrade stock remains one of the top and safest dividend stocks out there. Here's why.

Read more ยป

Canadian dollars are printed
Dividend Stocks

How Iโ€™d Use $7,000 to Build a Dividend-Growth Machine in My TFSA

These TSX dividend stocks have resilient payouts and can help generate a tax-free passive income of about $455 per year.

Read more ยป

calculate and analyze stock
Dividend Stocks

Iโ€™d Put $7,000 in This Canadian Dividend Legend Immediately

There are great dividend stocks to buy, and then there's this Canadian dividend legend that every investor needs to buy.

Read more ยป

Hand Protecting Senior Couple
Dividend Stocks

How Iโ€™d Build a $30,000 Retirement Portfolio With 3 Top Dividend Stocks

These three dividend stocks have to be some of the best options. Not just for now, but decades to come.

Read more ยป

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

2 Canadian Dividend Knights Set to Boost Payouts in 2025

Blue-chip TSX dividend stocks such as Enbridge and TC Energy are positioned to grow their payouts again in 2025.

Read more ยป

think thought consider
Dividend Stocks

2 Top TSX Dividend All-Stars to Buy Now

These two Canadian dividend giants are the sort of dividend all-stars long-term investors want to own to create viable passive-incomeโ€ฆ

Read more ยป