NEW YORK (TheStreet) -- For several reasons, current market conditions are ideal for writing covered call options on "Dividend Aristocrat" stocks such as Coca-Cola (KO), ExxonMobil (XOM), Home Depot (HD) and PepsiCo (PEP).
Dividend Aristocrats are those publicly traded companies that have increased the dividend annually for at least the past 25 years. Stock owners write covered call options when they sell options to buy the shares within a set period of time. For the owners of the shares, there are three ways to make money from writing covered call options: the actual selling of the option, the capital gains from selling the stock if the option is exercised and continuing to collect the dividend income during the period of the option.
Coca-Cola, ExxonMobil, Home Depot and PepsiCo have all done well in the current bull market.
Over the last year of trading, Coca-Cola is up nearly 8%, very close to its 52-week high. ExxonMobil has surged nearly 16%. It, too, is close to its year high. Over that time period, Home Depot has jumped almost 10%. PepsiCo has risen more than 12%.
What makes each ideal for writing covered call options is that lower growth is projected. For Home Depot, earnings per share growth is expected to drop by around one-third over the next five years. For Coca-Cola, earnings per share over the next five years is estimated to be lower than the last half-decade. There is an expected decline in earnings of about one-third for PepsiCo. Earnings for ExxonMobil are expected to continue to fall next year. With bearish outlooks like that, selling covered call options is a good way to generate income from stocks whose EPS growth is not predicted to rise. (All data is from Finviz.)