Unlocking a 10%+ Yield with Realty Income: A Dividend and Covered Call Strategy

In an era of historically low bond yields and volatile equity markets, income-seeking investors face a tough balancing act: generating sufficient cash flow while preserving capital. Realty Income Corporation (NYSE: O), the “Monthly Dividend Company,” offers a compelling starting point. By combining its reliable dividend stream with strategic covered call writing, investors can potentially achieve an annualized yield exceeding 10%—a rare opportunity in today's environment. Let's explore how.

The Dividend Engine: Realty Income's Foundation

Realty Income's track record is unmatched. With a 30-year streak of consecutive dividend increases and over 660 monthly payouts since its 1969 founding, it has earned its place among the S&P 500 Dividend Aristocrats. As of June 2025, its stock price stands at $53.09, and its forward dividend yield—calculated using its latest $0.2690/month payout—is 6.16%. This baseline income alone makes it a standout income play, particularly for retirees or conservative investors.

Adding Alpha with Covered Calls

A covered call strategy involves selling call options on shares you own, agreeing to sell them at a pre-set price (the strike price) in exchange for a premium. This approach boosts income while capping upside potential. The key is selecting strikes that balance premium income against the risk of being “called away” from the stock.

Using Realty Income's July 18, 2025, options data, let's analyze two scenarios:

Scenario 1: The $55 Strike Call

• Strike Price: $55
• Last Premium: $2.10 per share (as of June 27, 2025)
• Risk/Reward:
• The stock must rise above $55 by expiration for the option to be exercised. Given its current price of $53.09, this requires a 3.6% monthly gain, which is possible but not guaranteed.
• If not exercised, you keep the $2.10 premium and the dividend.

Scenario 2: The $57.5 Strike Call

• Strike Price: $57.5
• Last Premium: $0.49 per share
• Risk/Reward:
• A more conservative choice, requiring a 8.3% monthly gain to trigger a sale. The lower premium reduces income but lowers the chance of losing the stock.

Calculating the Total Yield

To achieve a 10%+ annualized yield, we need to combine dividend income with covered call premiums. Let's assume you sell the $55 strike call every month (a high-risk, high-reward approach):

• Monthly Dividend: $0.2690
• Monthly Call Premium: $2.10 (assuming consistent premiums)
• Total Monthly Income per Share: $2.369
• Annualized Yield:
  [ \left( \frac{2.369 \times 12}{53.09} \right) \times 100 \approx 53.5\%
  ]

This is unrealistic, as premiums would likely decline if the stock stagnates. A more realistic assumption is averaging $0.80/month in premiums (e.g., using the $57.5 strike or rotating strikes based on market conditions):

• Total Monthly Income: $0.2690 (dividend) + $0.80 (premium) = $1.069
• Annualized Yield:
  [ \left( \frac{1.069 \times 12}{53.09} \right) \times 100 \approx 24.5\%
  ]

Even a conservative $0.40/month premium brings the yield to 14.5%, well above the 10% threshold.

Risks and Considerations

1. Volatility and Earnings Risks: Realty Income's next earnings report on August 6, 2025, could impact its stock price and option premiums.
2. Call Risk: If the stock surpasses the strike price, you lose potential upside.
3. Dividend Sustainability: While Realty Income's payout ratio remains healthy, rising interest rates or tenant defaults could pressure future hikes.
4. Premium Variability: Implied volatility (14–17% for mid-strike calls) affects premiums. Unexpected events (e.g., economic downturns) could widen this.

Actionable Strategy: A Balanced Approach

To mitigate risks while targeting a 10%+ yield:
- Diversify Strikes: Use a mix of $55 and $57.5 strikes to balance premium income and capital preservation.
- Monitor Volatility: Track implied volatility and only write calls when premiums are attractive relative to risk.
- Reinvest Dividends: Plow dividends back into more shares to amplify the effect of compounding.

Conclusion: A Worthwhile Trade-off?

Realty Income's combination of dividend reliability and option liquidity creates a unique income engine. While the 10%+ yield requires careful strike selection and risk management, it's achievable for disciplined investors. Just ensure you're prepared for the trade-offs: capped upside potential and the need to monitor market dynamics.

In a world hungry for yield, this strategy—rooted in Realty Income's fundamentals and options market mechanics—deserves serious consideration.

Disclaimer: Past performance does not guarantee future results. Investors should conduct their own research or consult a financial advisor before implementing this strategy.