Module 14: Building Passive Income with Dividends & Covered Calls Flashcards
Question: What is passive income in trading?
Answer: Passive income in trading is income earned without active buying and selling, often through dividends, covered calls, or fixed-income investments.
Question: What are dividends?
Answer: Dividends are payments made by companies to shareholders, usually as a portion of profits, providing a steady income stream.
Question: What types of stocks pay dividends?
Answer:
Dividend Aristocrats: Companies that have increased dividends for 25+ years.
High-Yield Stocks: Companies that offer above-average dividend payments.
REITs (Real Estate Investment Trusts): Required to pay out 90% of taxable income as dividends.
Question: What is the dividend yield, and how is it calculated?
Answer:
Dividend Yield = (Annual Dividend / Stock Price) × 100%
It measures how much a stock pays in dividends relative to its price.
Question: What is a dividend reinvestment plan (DRIP)?
Answer: A DRIP automatically reinvests dividends into additional shares instead of paying out cash.
Question: What is a covered call strategy?
Answer: A covered call is when an investor owns a stock and sells a call option on it to generate additional income.
Question: How does a covered call generate income?
Answer: The trader receives a premium from selling the call option, which provides income whether or not the stock price changes.
Question: What is the risk of using covered calls?
Answer: If the stock price rises significantly, the trader may have to sell at the lower agreed-upon strike price, missing further upside gains.
Question: How do covered calls complement dividend stocks?
Answer: Investors can earn both dividend income and option premiums, boosting overall returns on the same stock.
Question: What is the best market condition for selling covered calls?
Answer: Covered calls work best in neutral to slightly bullish markets where stocks move slowly or trade sideways.
Question: What are the tax implications of dividend investing?
Answer:
Qualified dividends are taxed at lower capital gains rates.
Ordinary dividends are taxed as regular income.
Question: What is passive income in trading?
Answer: Passive income in trading is income earned without active buying and selling, often through dividends, covered calls, or fixed-income investments.
Question: What are dividends?
Answer: Dividends are payments made by companies to shareholders, usually as a portion of profits, providing a steady income stream.
Question: What are dividends?
Answer: Dividends are payments made by companies to shareholders, usually as a portion of profits, providing a steady income stream.
Flashcard 183Question: What types of stocks pay dividends?Answer:
Dividend Aristocrats: Companies that have increased dividends for 25+ years.
High-Yield Stocks: Companies that offer above-average dividend payments.
REITs (Real Estate Investment Trusts): Required to pay out 90% of taxable income as dividends.
Question: What is the dividend yield, and how is it calculated?
Answer:
Dividend Yield = (Annual Dividend / Stock Price) × 100%
It measures how much a stock pays in dividends relative to its price.
Question: What is a dividend reinvestment plan (DRIP)?
Answer: A DRIP automatically reinvests dividends into additional shares instead of paying out cash.
Question: What is a covered call strategy?
Answer: A covered call is when an investor owns a stock and sells a call option on it to generate additional income.
Question: How does a covered call generate income?
Answer: The trader receives a premium from selling the call option, which provides income whether or not the stock price changes.
Question: What is the risk of using covered calls?
Answer: If the stock price rises significantly, the trader may have to sell at the lower agreed-upon strike price, missing further upside gains.
Question: How do covered calls complement dividend stocks?
Answer: Investors can earn both dividend income and option premiums, boosting overall returns on the same stock.
Question: What is the best market condition for selling covered calls?
Answer: Covered calls work best in neutral to slightly bullish markets where stocks move slowly or trade sideways.
Question: What are the tax implications of dividend investing?
Answer:
Qualified dividends are taxed at lower capital gains rates.
Ordinary dividends are taxed as regular income.
Question: What are the tax implications of selling covered calls?
Answer: Profits from covered calls may be taxed as short-term capital gains if closed within a year.
Question: What is an ideal portfolio allocation for passive income?
Answer: A mix of dividend-paying stocks, REITs, and covered call strategies can provide steady income while managing risk.
