Why 3M is perfect for you to generate covered call income

Key Points

• 3M stock is checking off three significant income stock characteristics today, offering you a once-in-a-cycle opportunity to add a new stream of cash. 
• By being undervalued, offering a competitive dividend yield, and demonstrating low volatility, it quickly becomes a stock to sell covered calls on at low risk.
• Beat inflation and gain an edge on treasury yields by adding this stock to an income watchlist.

Warren Buffett once described gold as a useless investment; by that, he meant that it is an asset that doesn't do anything, it doesn't produce anything, and the only way for you to make money from it is to be able to sell it at a higher rate to the next buyer that comes along.

No wonder he is so fond of businesses. These little machines spit out profits each month (ideally). They are set to grow these profits faster than the pace of inflation so that your equity (investment) is stored in a better place than a commodity that just sits there and looks pretty.

If you are looking for an investment that can hit all three income measures: Appreciation, dividend income, and something called covered call income, then 3M NYSE: MMM could be the easiest choice to make in 2024 to make some extra income on the side and pay yourself a bonus every once in a while.

Goldmine 

Typically, you can only find one of the three kickers above; when a stock is set to appreciate at a faster pace than the S&P 500, also known as a 'value stock,' its growth potential will often scratch out the possibility of a dividend payout to shareholders.

With where 3M stock is trading today, shareholders can check two of the three income criteria, as there is a current annualized dividend yield of 5.6%. Considering that inflation in the United States is beginning to backtrack to the FED's 2.0% goal, this yield becomes all the more attractive.

Known for dividend income, the world of REITs (real estate investment trusts) and their benchmark, the Vanguard Real Estate ETF NYSEARCA: VNQ, is offering a 3.6% dividend yield today, making 3M a winner even against this asset class.

But wait, there's more. Now that the ten-year government bond yield has also backtracked to levels below 4.0%, this dividend alone compensates you for the added risk of investing in a stock rather than the safest perceived product out there from the government.

Considering that the company has also settled a few shrewd lawsuits regarding a few of its products and the financial component of the settlements not being as impactful as most people thought them to be, an increasingly bullish sentiment is forming around the stock and its future value.

Knowing what you know now, it shouldn't come as a surprise that analysts at Wells Fargo NYSE: WFC have placed a price target of $115.0 a share, implying a near 10.0% upside from today's prices.

The hidden benefits

When people think of options, two things typically come to mind, and the only common ground is the results they have experienced by buying them. You probably have experienced this: you buy a call or a put option, and you either double your money or lose 100.0% of its value in minutes.

What few understand it being on the other side of the table, being the casino passing out chips for players to fulfill their gambling itch. In plain English, you can become the seller of these options.

Now, there's a 'buy-in' to play this game: you need to own 100 shares of the stock to sell or 'write' a call contract and sell it in the market. With basic materials stocks, 3M stands out as a good one to write call options on; here's why:

The downside of writing call options is that you agree to sell your shares at a specific price (strike price) by a certain date (expiration date) if the stock rises to or beyond that price before or on the expiration date.

This means that when you own a volatile stock, chances are high that you will need to sell it if it moves up. Remember that you don't lose money by expiring 'in the money.'

You only make less money by having to sell below the market price. Still, you do keep the premium you collected when selling the option. Because 3M is part of low-beta stocks (ones that don't move so aggressively), you can reliably sell call options each month and keep your undervalued shares, too!

MarketBeat offers a great options chain section for each stock where you can see how much premium you can collect by selling them to the market. Here's one thing you should remember when choosing which contract to sell.

One of the Greeks, the delta of an option, tells you one of the most important things about a contract. First, it tells you how much the price of the contract will change by how much the underlying stock price moves. A 20.0 delta means that if 3M stock goes up by $1.0, then your option will go up by $20.0 and so on. 

Secondly, and most important to you, the seller. Delta is the probability percentage of a stock closing at or above the strike price by expiration. Hence, a 20.0 delta means there's a 20% chance you'll have to sell your stock by the expiration date, placing numbers (not emotions) on your income strategy.