Income Lovers: Use This Weird Trick to Collect a 10.9% Dividend From AltaGas (TSX:ALA)

This strategy combined with a solid dividend stock like AltaGas Ltd. (TSX:ALA) could skyrocket your monthly income.

| 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

After years as one of Canada’s top dividend stocks, AltaGas (TSX:ALA) did the unthinkable in December and cut its generous payout. The distribution was slashed from $0.1825 per share each month to today’s level of $0.08 per share on a monthly basis.

Outraged investors dumped their shares aggressively, creating a huge buying opportunity for those of us who were brave enough to take the plunge when the future looked darkest.

Even though shares have rallied nicely from those lows set in the early part of 2019, I think the stock is still a good long-term buy. Management has done a nice job shedding debt and securing the balance sheet. Non-core assets have been sold for good prices. And the main utility business is still a good one that should deliver plenty of predictable cash flow.

Perhaps most importantly, the stock is still very cheap. Guidance for 2019 remains at approximately $900 million in funds from operations (FFO), while the company’s market cap is just over $5 billion. That gives the stock a price-to-FFO ratio of just above five times, which is incredibly cheap.

Perhaps the only problem with an AltaGas investment at this point is the dividend yield. Shares still yield a generous 5.1%, but investors used to higher payouts might not like today’s yield so much.

The good news is by using a simple trick you can more than double your income from AltaGas. Let’s take a closer look.

Use covered calls

Astute investors use a covered call strategy to really juice their income. In fact, there are funds that use the strategy to consistently spin off double-digit yields.

Here’s how it works.

First you need to own the underlying stock. Next, you’ll go into the options market and write a covered call option. You do this by selling a call option, which creates an obligation to sell a stock at a certain price on a certain day. In exchange for creating this obligation, an investor receives the market price for the call.

It’s easier if we look at a real-life example. The AltaGas September 20th $20 call option currently has a price of $0.09 per share. If an investor sells that call option, they’d immediately pocket the premium.

The trade would then have one of two outcomes. If AltaGas shares — which currently trade at $18.72 as I write this — end up below $20 at the end of the trading day next Friday, then the option expires worthless and you’d keep the $0.09 per share premium. If AltaGas shares rally between now and then, you’d be forced to sell at $20. This rule applies no matter the price; it would apply even if the stock somehow hit $30 in the next week and a half.

Even if the stock rises to above $20 by the deadline, it’s not really the worst thing in the world. You’d still lock in a profit of $1.28 per share on the sale of the stock and an extra $0.09 per share from the covered call premium. That’s a profit of 7.3% in just over a week.

A fantastic annualized yield

A covered call strategy works really well if a stock stays in a tight trading range for a while. It can produce some eye-popping annualized yields.

This AltaGas trading strategy would generate $0.17 per share in monthly income on a stock trading for under $19 per share. Annualized, that works out to a 10.9% yield. That’s quite exciting, especially in today’s interest rate environment.

Or, to put it another way, this strategy could create more than $1,000 in annual income from an investment of just 500 AltaGas shares.

The bottom line

A covered call strategy isn’t for everyone. It does require a little work, and investors are trading some upside potential for income today.

But for retirees who crave more income, I can think of few more effective ways to really juice your yields. If you’re in that boat, this strategy is for you.

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

Before you buy stock in Altagas, 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 Altagas 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

A meter measures energy use.
Dividend Stocks

Fortis Stock: Buy, Sell, or Hold Now?

Fortis is up 11% in 2025. Are more gains on the way?

Read more »

protect, safe, trust
Dividend Stocks

3 Defensive Sectors Every Canadian Investor Should Consider Today

With volatility rising due to a potential global trade war, here are three defensive sectors to invest in today.

Read more »

A plant grows from coins.
Dividend Stocks

2 Canadian Dividend-Growth Stocks to Buy on the Cheap

TD Bank (TSX:TD) and another fantastic TSX dividend stock could surge high in summer.

Read more »

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

This 6.3% Dividend Stock Is a Must-Buy as Trump Tariffs Hit Canada

This dividend stock is a winner, especially amidst Trump tariffs that could send energy companies for a whirl.

Read more »

A worker gives a business presentation.
Dividend Stocks

3 Stocks I’d Buy With $10,000 Whenever They Dip in Price

Buying the dip in the right TSX stocks can help you leverage a market downturn and accelerate your long-term wealth…

Read more »

Hourglass and stock price chart
Dividend Stocks

Where I’d Put $50,000 Right Away in Top Canadian Stocks for Growth and Income

TSX dividend stocks such as Savaria and CNQ are top choices for investors looking for growth and income in 2025.

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Dividend Stocks

Invest $25,000 in This Dividend Stock for $536.90 in Annual Passive Income

This dividend stock is one of the best options for those looking to create income long term.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

Where I’d Put $10,000 in Top Canadian Energy Stocks This April for Dividend Income

These three energy stocks are ideal for income-seeking investors, given their solid cash flows and consistent dividend growth.

Read more »