How To Generate A 10% Yield On Chevron Stock

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The price of crude oil has been on a tear recently with a barrel of crude almost topping $40 in recent days. We may have had a temporary top at this point though (with a barrel of crude resting at $37.75) but I still maintain we printed a firm bottom at under $28 a barrel last month. Why? Well, a common hallmark of permanent intermediate bottoms is the rally after the potential bottom has formed. The chart below shows the violent rally the energy sector has had since the 10th of February (up almost $10 a barrel) which makes me believe it is very unlikely that we will see break through the lows once more.

So in terms of investing in the energy sector at present and if one were bullish on oil prices, one could invest in a strict upstream company like Hess (NYSE:HES) which is up more than 32% in the above mentioned time-frame. However in this article, I want to discuss the income investor or the yield hunter whose fixed income returns have been obliterated over the past few years by central bank interventions.

Europe and Japan are now supporting negative interest rates and many analysts are now stating that the US will not be able to raise interest rates four times in 2016 as was originally predicted. Fixed income investors are being forced to turn to equities and Chevron (NYSE:CVX) is a good pick for a 10%+ yield in less than 12 months. In fact, we are going to more than double the prevailing dividend rate (which is 4.52%) by selling an out of the money covered call which will expire 10 months from now.

However let’s first go through why I feel Chevron is a worthwhile candidate. The company recently held its annual analyst day which many investors were watching with keen interest, especially on matters concerning the dividend. Here is the crux of the problem. In 2015, Chevron reported net income earnings of $4.59 billion which pales in significance to the company’s 2011 figure of $26.9 billion. Furthermore, the dividend has gone the other direction with payouts soaring from $6.14 billion in 2011 to almost $8 billion last year.