Create Your Own 15.6% Yield With Altagas Ltd. (TSX:ALA)

Disappointed with Altagas Ltd’s (TSX:ALA) recent dividend cut? Here’s how you can generate your own eye-popping 15.6% annual distribution from the stock.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Many dividend investors crowded into Altagas Ltd. (TSX:ALA) stock over the past couple of years, enticed by the fantastic dividend.

Alas, it was not to be. After paying what analysts agree was too much to acquire WGL Holdings, a Washington D.C.-based natural gas utility, Altagas’ management team was forced to take drastic cuts to improve the company’s bloated balance sheet. This included spinning out some of the best Canadian assets into a different company, selling different non-core assets, and slashing the dividend to something a little less generous. Shares currently pay $0.08 per month or $0.96 annually, good enough for a 5.7% yield.

There are now thousands of Altagas shareholders who are left with a company that is in financial difficulties paying a decreased dividend. These folks don’t want to sell because then they’d be forced to take a loss on their shares.

I can’t do anything about the stock price, but I can show these investors how to use a special trick to really juice their income from this stock. Here’s how you can generate a 15.6% income on distressed Altagas shares.

Covered calls

We’re going to use something called a covered call strategy, which is far less complicated than it would first appear.

First, an investor has to own the underlying stock. This is because a covered call strategy creates an obligation to sell the underlying stock if the trade doesn’t quite go to plan.

The next step is to go into the options market and sell a call option, which generates income immediately in exchange for agreeing to sell at an agreed-upon price.

Let’s look at a real-life example. Altagas shares currently trade at $17.75 each. If we go into the option market and sell the April 15 $19 call options, we’d generate income of $0.15 per share. That premium is compensation for agreeing to sell shares at the $19 level during the middle of April.

This trade can end in two ways, neither of which is the end of the world. If shares stay under $19 each, then the investor gets to keep the $0.15 per share option premium without having to sell their underlying stock. This is the ideal outcome.

If shares rise above $19 each, then the investor must sell their shares at the agreed upon price. But they’ve immediately booked a capital gain of 7%, plus the income generated by the option strategy. And since Altagas pays a monthly dividend, they’d also receive that. In total, it would be close to an 8.5% gain in just over a month, which is a nice result.

Earn 15.6% annually

Ideally, at least for this strategy, is Altagas shares rising very slowly over the course of the month. This allows an investor to get solid gains without triggering the forced sale.

In total, a covered call strategy for Altagas would generate the following, guaranteed: $0.15 per share for the option premium, and $0.08 per share for the monthly dividend, which works out to $0.23 per month for each share. Repeat this strategy 12 times a year and you’re looking at $2.76 per share in income, which works out to an eye-popping 15.6% yield.

In fact, this strategy would generate even more income than an investment in the stock before the dividend cut.

The bottom line

With the TSX Composite Index up 12.5% thus far in 2019, many investors feel like the rest of the year might turn out to be a little lackluster. This is exactly the time to implement a covered call strategy on some of your holdings. As you can see with today’s Altagas example, it’s a very lucrative income generation tool.

Should you invest $1,000 in Taiwan Semiconductor Manufacturing right now?

Before you buy stock in Taiwan Semiconductor Manufacturing, 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 now… and Taiwan Semiconductor Manufacturing wasn’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 “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

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 – 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 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — 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 owns shares of ALTAGAS LTD. Altagas is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Canadian dollars are printed
Dividend Stocks

How I’d Turn $12,000 in My TFSA Into a Money-Making Machine for Long-Term Growth

With $12,000 spread across high-quality dividend stocks like CNQ and goeasy, you could build a TFSA portfolio that does more…

Read more »

stocks climbing green bull market
Dividend Stocks

A 9% Dividend Stock Paying Cash Every Month, and Perfect in a Volatile Market

It's a volatile time, but this dividend stock can help you through it.

Read more »

Canada day banner background design of flag
Dividend Stocks

Top Canadian Stocks for a $7,000 Investment Today

These Canadian stocks are trading in the green year-to-date and have consistently outperformed the broader markets with their returns.

Read more »

Car, EV, electric vehicle
Dividend Stocks

Carney Cuts the Carbon Tax: What to Do With Your Savings

You can invest in stocks like Alimentation Couche-Tard Inc (TSX:ATD) with your carbon tax savings.

Read more »

dividend growth for passive income
Dividend Stocks

Boost Your 2025 Returns: 4 High-Yield Canadian Dividend Champions

These high-yield dividend stocks have reliable operations and generate significant passive income, making them four of the best to buy…

Read more »

Data center servers IT workers
Dividend Stocks

1 Magnificent Canadian Stock Down 44% as AI Investing Heats up

This Canadian stock not only has growth, but in one of the best growth areas right now.

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Tariff-Resilient Income: 2 Canadian Dividend Stocks to Weather Economic Uncertainty

Emera (TSX:EMA) and another dividend stock are worth buying despite tariff threats.

Read more »

Dam of hydroelectric power plant in Canadian Rockies
Dividend Stocks

Is Brookfield Renewable Stock a Buy for its 6.7% Dividend Yield?

Brookfield Renewable is a TSX dividend stock that offers shareholders a dividend yield of almost 7% in April 2025.

Read more »