How to Build a Dividend Aristocrats Portfolio Using a Poor Man’s Covered Call Strategy

In a world where fixed income barely justifies its name, investors hungry for steady cash flow often turn to dividend stocks. Among them, Dividend Aristocrats stand as an elite class—companies that have raised their dividends for at least 25 consecutive years. But what if you could squeeze significantly more efficiency out of these income-generating stocks while conserving capital? Enter the poor man’s covered call.

This options strategy is a workaround for capital-intensive covered calls. Instead of purchasing 100 shares of a stock outright, you replace that position with a deep in-the-money, long-dated call option (a LEAPS contract). By doing so, you sidestep the heavy cash burden of stock ownership while still collecting premium income.

Let’s break down the mechanics of this approach and how it can be tailored to a portfolio of Dividend Aristocrats.

The Case for Dividend Aristocrats

Dividend Aristocrats represent a rare breed—companies so financially disciplined they’ve steadily increased payouts through recessions, bear markets, and economic upheaval.

As of 2025, there are 69 companies recognized as Dividend Aristocrats—S&P 500 constituents that have increased their dividends annually for at least 25 consecutive years. For income-focused investors, they offer a compelling combination of reliability and long-term performance. But buying 100 shares of each of these stalwarts isn’t feasible for many. That’s where the poor man’s covered call strategy comes in.

But we must remember, liquidity is everything in options trading. While 69 stocks currently hold the prestigious Dividend Aristocrats title, only about 15 truly offer highly liquid options markets—the rest, unfortunately, suffer from wide bid-ask spreads, low open interest, and thin daily volume.

These companies consistently have highly liquid options markets, making them ideal candidates for options trading strategies like the poor man’s covered call.

Why Are Dividend Aristocrats Less Volatile?

1. Consistent Dividend Payments – Regular and growing dividends create a price floor, as income-focused investors step in during market downturns.

2. Financial Stability – To raise dividends for 25+ consecutive years, these companies must have strong balance sheets, predictable cash flows, and resilient business models.

3. Lower Speculation – Unlike growth or tech stocks, most Aristocrats aren’t driven by extreme speculation, meme-stock frenzies, or high-frequency trading.

4. Institutional Ownership – Many Dividend Aristocrats have high institutional ownership, meaning they are held by pension funds, ETFs, and long-term investors, reducing wild price swings.

Volatility Compared to the Market

• Beta Below 1.0 – Many Aristocrats have a beta below 1, meaning they typically move less than the S&P 500 in both up and down markets.

• Less Drawdown During Bear Markets – In past downturns, Dividend Aristocrats have outperformed the broader market by declining less than non-dividend payers.

• Sector Influence – Many Aristocrats are in defensive sectors like consumer staples, healthcare, and utilities, which naturally experience less volatility.

Are They Always Safe?

While Dividend Aristocrats are generally stable, they can still be affected by:

• Interest Rate Changes – Rising rates can make dividend stocks less attractive compared to bonds.

• Sector-Specific Risks – Energy Aristocrats (XOM, CVX) can still experience wild swings based on oil prices.

• Earnings Surprises – Even the most consistent companies can face negative earnings shocks, though the impact is often less severe than in growth stocks.

Understanding the Poor Man’s Covered Call

A traditional covered call requires buying at least 100 shares of stock and then selling call options against those shares to generate income. The poor man’s covered call achieves the same goal—collecting premium income—but with far less capital at risk.

Instead of buying 100 shares, you purchase a long-term, deep in-the-money call option with an expiration of at least one year. This option acts as a stock substitute, allowing you to control 100 shares at a fraction of the cost. You then sell shorter-term calls against that position to generate ongoing income.

Choosing the Right LEAPS

For a poor man’s covered call, selecting the right LEAPS contract is key. My preference is to target options expiring in approximately two years, though some traders opt for slightly shorter durations (12-16 months).

When choosing a LEAPS contract:

• Look for an in-the-money strike price with a delta around 0.80. This ensures the option moves almost dollar-for-dollar with the stock.

• Favor highly liquid options with tight bid-ask spreads to minimize slippage.

• Avoid paying excessive time value—focus on contracts with intrinsic value.

Case Study: Walmart (WMT)

Consider Walmart, a Dividend Aristocrat with a strong history of dividend growth. Suppose the stock is trading at $8,746. A traditional covered call would require purchasing 100 shares, tying up $8,746 in capital. But with a poor man’s covered call, you could buy a LEAPS call instead for typically 65% to 85% cheaper.

My preference is to select a LEAPS contract with an expiration date around two years. While some options traders opt for shorter durations—typically 12 to 16 months—I prefer the additional flexibility that a two-year LEAPS provides. A longer-dated contract allows for more time to manage the position while minimizing the effects of time decay.

When reviewing available expiration cycles for Walmart’s, I aim for an option expiring close to two years out. For example, the January 15, 2027, expiration (669 days out) is the longest duration offered making it my preferred choice.

As the LEAPS contract approaches 8 to 12 months until expiration, I begin the process of rolling the position. This involves closing out the existing LEAPS and establishing a new one with approximately two years until expiration, ensuring continued exposure and optimizing the trade’s effectiveness.

Establishing Your LEAPS Position (Selecting the Right Strike Price)

After selecting the expiration cycle (January 15, 2027), the next step is choosing an in-the-money call strike with a delta around 0.80. This ensures that the option moves closely with the stock while minimizing the impact of time decay.

Examining Walmart’s option chain, the $72.5 call strike meets this criterion, carrying a delta of 0.79 and trading at approximately $23.20. When entering the trade, it's critical to always use a limit order—never buy at the ask price unless necessary. In this case, the ask price is $24.00, but a limit order ensures you get the best possible execution.

So, instead of committing $8,746 to buy 100 shares outright, we invest just $2,320 in a LEAPS contract. This results in a capital savings of $6,426 (or 73.5%), freeing up funds for diversification or additional income-generating strategies.

Selling Calls to Generate Income

Once you establish your LEAPS position, you can begin selling short-term call options against it. Ideally, you’ll sell calls with 30-60 days until expiration, targeting a delta between 0.20 and 0.40 (which equates to a 60-85% probability of expiring worthless).

For Walmart, the May 2, 2025 93 call strike expiring in a month might fetch a premium of $1.08. This generates a 4.7% return on the $2,320 investment in just 46 days—translating to an annualized return of over 45% in just premium sold. You can use the call premium sold as income or to simply lower the cost basis of your LEAPS position.

Compare this to a traditional covered call:

• A covered call position would yield about 1.2% per month or roughly 12% annually versus over 45% for a poor man’s covered call approach.

• The poor man’s covered call produces more than triple the yield while freeing up capital for diversification.

Adjustments and Management

When your LEAPS contract approaches 8-12 months to expiration, it’s time to roll into a new long-term contract to maintain exposure while avoiding excessive time decay.

If you’re bullish, another alternative is to buy two LEAPS contracts for every short call sold. This allows participation in additional upside while still benefiting from covered call income as the overall delta of the position increases.

Forfeiting the Dividend to Create Our Own Income Stream

One drawback of using PMCCs with Dividend Aristocrats is missing out on dividends—since LEAPS options do not entitle holders to dividend payments. However, we can replace and even surpass dividend income by selling short-term call options against our LEAPS positions.

Consider this:

• Traditional Dividend Aristocrat Approach: Buy 100 shares of a $200 stock, receiving a 3% dividend yield ($6 per share annually, or $600 per year).

• PMCC Approach: Instead of relying on dividends, we sell monthly covered calls against our LEAPS, generating 2%–4% monthly in premium—which translates to 24%–48% annually, significantly exceeding the dividend yield.

While this approach sacrifices the traditional dividend, it effectively creates our own “dividend” through premium collection. And unlike standard dividends, this income can be actively managed, adjusted, and compounded into other positions.

Expanding Beyond Dividend Aristocrats: Building Portfolios Inspired by Investing Legends

The beauty of this approach is that it doesn’t have to be limited to Dividend Aristocrats. PMCCs allow us to build portfolios modeled after some of the greatest investors, using their philosophies while maintaining capital efficiency. Here’s how we can apply the strategy across different investment styles:

✅ Warren Buffett-Inspired Portfolio – Focus on high-quality, wide-moat companies like Coca-Cola (KO), Apple (AAPL), and Johnson & Johnson (JNJ). These are long-term compounders with strong brand loyalty. Selling covered calls against these giants can generate steady premium income while benefiting from long-term appreciation.

✅ Peter Lynch-Inspired Portfolio – Target growth stocks with strong fundamentals and apply PMCCs to capitalize on their momentum. Think Home Depot (HD), Starbucks (SBUX), and Costco (COST). These stocks may not offer high dividends, but their liquid options markets make them ideal for a premium-generating strategy.

✅ Ray Dalio-Inspired Portfolio – Use PMCCs to create an All-Weather Portfolio, blending defensive dividend-paying stocks (Procter & Gamble, PepsiCo) with cyclical plays (materials, energy, and industrials). This allows for balanced income generation across different economic cycles.

✅ Lazy Portfolio Strategies – For those who prefer a more passive approach, PMCCs can be applied to lazy portfolios like the 60/40 portfolio, the Three-Fund Portfolio, or risk parity strategies. This allows for market exposure while systematically generating yield through covered call selling, reducing volatility and enhancing income over time.

✅ John Bogle-Inspired Portfolio – If passive investing is more your speed, PMCCs can be applied to ETFs like SPY, QQQ, or VYM. This method allows for market exposure while systematically generating yield through covered call selling.

By leveraging PMCCs, we create a flexible, capital-efficient portfolio inspired by investing legends. This approach balances stable dividend payers, high-growth opportunities, and diversified sector plays, ensuring greater cash flow, risk management, and scalability compared to traditional buy-and-hold investing.

The Bottom Line

Building a dividend income portfolio using PMCCs unlocks the potential to:

• Drastically reduce capital requirements while maintaining exposure to blue-chip stocks.

• Generate a self-made dividend stream that outpaces traditional dividend yields.

• Diversify across multiple stocks and sectors, rather than being concentrated in just a few high-yielding names.

• Construct a portfolio modeled after legendary investors while maintaining flexibility and efficiency.

By replacing dividends with strategic call selling, PMCCs allow us to build a smarter, capital-efficient portfolio that generates income month after month—with flexibility traditional dividend investing simply can’t match.

A poor man’s covered call offers a compelling alternative to traditional covered calls, especially for those who prioritize capital efficiency. When paired with Dividend Aristocrats, it creates an income-generating strategy with reduced downside risk, superior returns on capital, and greater flexibility.

As always, strategy execution is key. Choosing the right LEAPS, selling calls systematically, and managing position rollovers will determine long-term success. If you’re looking to enhance income while maximizing capital efficiency, this strategy deserves a place in your portfolio.

Want to learn more about Poor Man’s Covered Calls?

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Andy Crowder