Cash Flow Investing: Options Trading vs Dividend Growth Investing

I have been a dividend growth investor for six years and an options trader for the last three years. Both strategies have been thoroughly enjoyable and lucrative, helping me buy a house, a car, and peace of mind along the way (it has a price tag). But which is better for cash flow investing?

At times I’ve contemplated selling my dividend growth stocks and going all in on options trading. Other times I’ve considered my dividend growth stocks to be the core of my portfolio, while options selling was generating extra cash to buy more stocks with.

I’ll see if I can compare options trading vs dividend growth investing across the following categories and find a hands-down winner for cash flow investing:

  • Cash Flow
  • Total Return
  • Passiveness
  • Volatility
  • Maximum Risk
  • Profitability of Leverage
  • Fun Factor

Each category will be ranked on a scale of 1-5. I’ll use the 2020 Dividend Aristocrats as a proxy for dividend growth investing. I’ll compare selling puts or covered calls against Dividend Aristocrats as a proxy for options trading.

Let’s get to it!

Cash Flow

Our most important metric in this comparison is cash flow. Many investors, myself included, like the psychological benefits of cash flow. I find it’s easier to stay the course when my investments are paying me to keep them.

The dividend aristocrats index maintained by S&P yields about 3% at the time of writing this. Simply put, a $100,000 portfolio would generate $3,000 in dividends per year. Another way of looking at it is that it would take a $1,200,000 portfolio to generate $100 per day in dividends.

Another strong benefit of dividend growth investing is that the dividends will automatically increase. For example, the S&P 500 dividend payment has grown at about 5% over the long run. I expect the dividend aristocrats grow slightly faster given those companies’ focus on dividends.

My personal options trading has consistently generated a remarkably consistent yield of 11% the last three years. The returns for April 2020 were well above my usual 11% due to increase volatility driving up options prices.

Furthermore, with options trading I was able to generate an extra 1% in interest from the cash covering my puts. I love making multiple income streams with every dollar.

Finally, some of the option trades were naked puts (puts backed by access to margin) so some of my actual cash in my portfolio was able to be invested in other stocks and work twice as hard for me.

Between option premium and interest, options trading consistently generates about 12% per year for me. Simply put, a $100,000 portfolio would generate $1,000 a month at a 12% return. Another way of looking at it is that it would take a $300,000 portfolio to generate $100 per day in dividends.

Ranking: Dividend Growth Investing: 2, Options Trading: 5.

Total Return

Compared to the broader U.S. stock market, Dividend Growth Investing easily holds its own. Dividend paying stocks tend to generate returns greater than non-dividend paying stocks, and the dividend aristocrats index has returns in-line with the S&P 500 with less volatility. The long term return of the S&P 500 is about 10%, which we’ll assume for the dividend aristocrats as well.

My experience with options trading has resulted in consistent returns of around 12%. In fact, income from selling puts rises as markets get more volatile, so short term returns are sometimes greater for options trading during recessions. My simple strategy of rolling puts means that I don’t lock in paper losses and I tend to generate consistent monthly cash flow. All of my returns come from that cash flow.

Ranking: Dividend Growth Investing: 4, Options Trading: 5.


Not many investments get more passive than a buy-and-hold dividend growth investment in a high quality blue chip. With each stock purchase, the money rolls in every three months for the rest of your life (or at least, that’s the dream).

Some DGI investors will trim a stock from a portfolio if a dividend is cut, but that’s more maintenance than some investors put in. In fact, one well known dividend growth investor never sells a stock once he has deemed it high quality enough for his portfolio.

Options trading requires more monitoring of stock prices and some dedicated time. A trader may need to carve out 30 minutes on a Monday morning to place their weekly trades, or perhaps 30 minutes a month (or a day) depending on their strategy. I personally mitigate the need to be able to trade at certain times by only selling puts on stocks I want to own at prices I would love to own them at. If a put executes, I roll the put at my leisure.

Sometimes I am able to sell a new put or roll a put at the same strike price multiple times in a year. My longest running options position is in MMM where I have been selling/rolling puts and “synthetically covered calls” against MMM at a $170 strike price. I initiated the position in July 2019 and it will be active at least through September 2020. In that time, I have sold five puts and five synthetically covered calls and received $2807 in premium.

All together, this $2807 required maybe 30 minutes total of my time….my strategy of investing for cash flow with options trading is mostly about passively waiting for a position to expire so I can rinse and repeat.

Ranking: Dividend Growth Investing: 5, Options Trading: 3.


Volatility for total returns will be similar for an index of dividend aristocrats and for options traders selling puts against individual stocks in the dividend aristocrats index. This is because at-the-money puts have the same risk profile (minus the premium received) as owning the actual stock.

Dividends received from stock ownership and premium received from options selling will both provide some cushion during a downturn. However, since I showed above that options selling generates more cash flow than dividends generate, there is more cushion provided by options selling.

Furthermore, options traders can sacrifice a little bit of premium in order to buy protective puts. This possibly reduces total returns but also decreases volatility.

Ranking: Dividend Growth Investing: 2, Options Trading: 3.

*As info, S&P 500 dividends were reduced by 23% during the great recession, compared to a 50%+ drop in the S&P 500 index price. The dividend aristocrats index presumably reduced dividends by a lesser amount, given the historic focus on dividends that these companies have.

Maximum Risk

Let’s keep in mind that the biggest risk to our wealth is to do nothing at all. To paraphrase the saying, if I don’t have a plan for how to achieve wealth then I plan to not become wealthy.

Furthermore, if I stuff cash under the mattress it will be eroded away by inflation.

Given the fact that I have to do something to grow my wealth and cash flow, let’s take a look at the maximum risk with dividend growth investing compared with the maximum risk of options trading.

With dividend growth investing, the risk an investor takes on is limited to the cash used to purchase stocks with. Realistically however, Charlie Munger recommends investors expect 50% stock price declines at least a handful of times in their investing career. And as long as investors stay the course and aren’t forced to sell, the market eventually recovers. An investor with an unlimited time horizon can weather any volatility.

Selling puts on stocks contained in the dividend aristocrats index should theoretically have the same risk profile as the owning the index as a whole. However, there are two factors that can lead to more risk with options trading.

First, depending on the size of the investor’s portfolio, they can wind up more concentrated in less stocks. If an investor has $100,000 to sell puts against stocks in the dividend aristocrats index, they won’t be able to simultaneously sell a put against each stock.

Second, selling puts can feel like free money. If an investor has $100,000 in a portfolio and sells a put, they might have $100,200. But they also have several thousand in exposure to a stock that will fluctuate in value. There is psychological risk (and reward) from seeing your cash balance always go up. As long as an investor sells cash secured puts they will largely have similar risk to owning dividend aristocrats, but if an investor starts selling naked puts (puts sold against margin), they risk margin calls.

Ranking: Dividend Growth Investing: 4, Options Trading: 3.

Profitability of Leverage

Leverage can amplify gains (or losses) and significantly increase cash flow. The question is, can we get the maximum advantage from leverage with the least cost and risk from dividend growth investing or from options trading?

Cash Flow Investing: Interactive Brokers Margin Rates
Ad from Interactive Brokers, the brokerage I use

As you can see, at the time of writing this article (June 2020) Interactive Brokers has pretty cheap margin. There are plenty of stocks in the dividend aristocrats list that have a higher yield. As long as rates don’t rise, an investor can purchase a stock with a higher yield than the margin interest rate and use the dividend to slowly pay down the margin debt.

The margin pay down will have a snowball effect similar to paying off a mortgage or car loan. The more the principle is reduced, the less total interest there is to pay.

Finally, any increase in the stock price above the original purchase price can be used as a lump some to pay down the margin principle.

However, all of these require excess cash flow to be directed towards the goal of reducing margin.

Options trading has a singular advantage. An investor can sell a put against margin (a naked put), and they potentially don’t have to pay any interest. If a naked put doesn’t get executed and expires worthless, the seller gets to keep the premium. If the naked put is in the money or executed, the investor can roll the put. This brings in more cash and avoids margin interest.

Furthermore, an options seller gets paid the day they sell a put. No waiting on dividends.

If the underlying stock price increases, the put seller doesn’t have the advantage to sell stock for a capital gain, but they can close the position and walk away with money earned simply by taking on risk for a period of time.

An options trader has additional tools beyond simply selling puts. If an options trader has a put execute and is assigned a stock, instead of rolling the put the seller can hold the stock and sell weekly or monthly calls against it. This is another way to cover margin interest and potentially allows for capital gains.

Ranking: Dividend Growth Investing: 3, Options Trading: 5.

Fun Factor

I would be remiss if I didn’t consider which strategy was more fun. Just as an investment should be passive if an investor doesn’t want to think about it and reliable if an investor wants to sleep well at night, a cash flow investment strategy should be fun if an investor wants to have a good time playing “the game”.

I have been in the dividend growth investor community long enough to know the two things that DGI types like: buying stocks at a discount and seeing big dividend increases.

I am also reminded of this J.D. Rockefeller quote, “The only thing that gives me pleasure is to see my dividends coming in“.

Options traders also have a long list of loves:

  • The thrill of selling a put when a stock is selling at a discount
  • Setting the buy order to close the position, and seeing it execute a few days later, making 10s or 100s of dollars with only a few minutes effort
  • Creating more complex trades to limit risk or increase reward
  • Buying a call and having it go up 10x or more in value

Both dividend growth investing and options trading can be a great creative or tactical outlet. If an investor doesn’t care about that aspect, then index funds may be the path for them.

Ranking: Dividend Growth Investing: 4, Options Trading: 5.

And the Cash Flow Investing Winner Is…..

Cash Flow Investing: Options Trading vs Dividend Growth Investing

Dividend Growth Investing: 24/35

Options Trading: 29/35

Options trading wins the cash flow investing contest by a sizable five point margin. Both are wonderful investment strategies that can be lucrative when used smartly. I have invested in dividend growth stocks for over six years now and sold options for more than three years. As important as the total returns are, I also value the fun and challenge they have added to my life.

As an interesting note, below is my cash flow from the past six years. I measured my cash flow, not total returns, so I don’t have records for my total returns. I started buying dividend stocks in mid-2014 and selling options in mid-2017. I also bought a house and hit the reset button on my portfolio at the beginning of 2017.

In that time, my options trading has significantly outpaced my dividend growth investing from a cash flow perspective, despite using far less capital and far half the time:

Dividend and Options Trading Income
Dividend and Options Trading Income

As you can tell from the table, I started to focus more on options trading in 2019 and began to view my dividend growth stocks as more of a store of value rather than my money engine. I took out $50k in a home equity line of credit to increase the funding of my options trading side hustle, but even with that I still deployed less capital in my options trading strategy than my dividend growth strategy.

This means for me it seems that options trading has been significantly more capital efficient way of investing for cash flow. It is also the first side hustle where I was able to make $1,000 a month in recurring revenue.

If you want to learn more, please take a look at my options trading eBook (affiliate link for which I might be compensated) where I dive further into my philosophy and trading strategies.

Share this post:

1 thought on “Cash Flow Investing: Options Trading vs Dividend Growth Investing”

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.