The Only Safe Way to Generate Income in Today's Market

So far, we've only experienced the problems that come from falling prices in one section of the economy: single-family housing. It's wrecked Wall Street, and destroyed stock markets around the world.

As I look around, I see more debt that needs marking down... What about the loans made to consumers to buy cars, go to college, or use credit cards? Or the loans made to corporations to finance the takeover spree of 2006 and 2007? International loans will be another big problem. And then there's commercial property. What will happen when all the loans made against office buildings and retail parks across the country start defaulting? 

For a good example, look at Citigroup's balance sheet. Residential mortgages make up less than 10%. The rest of its capital is invested in consumer loans, corporate loans, and commercial real estate loans. How many of these loans were written in the bull market and priced for perfection? I dread to think.

It's like we've been hit by a tidal wave. We've capsized. Now, several more tidal waves are speeding toward us...

The situation is particularly acute for income investors. Not only will companies cut dividends, investors will demand higher dividend yields to make investments. What's the use in buying a stock for its 10% dividend when its price could fall 50%?

In light of the situation, today I'm going to show you the ONLY safe way to generate income in bear markets like we're in now. By following this system, you'll put America's strongest stocks in your portfolio and use them to generate 20% annual income yields.

Here's how it works:

Step one in our strategy is to buy the absolute safest stocks.

As I've said many times before, the safest stocks are the ones that generate strong cash flows and have long histories of paying rising dividends... These dividend growers hold huge power over their competition through strong brand names, access to capital, the best management, and sheer size. These are the best companies in the world. Over time, they'll retain their value better than any other stocks.

Step two is to sell call options against these stocks.

DailyWealth's editor in chief, Brian Hunt, calls this the golden age for selling options. Brian's referring to the volatility in the market these days...

Volatility increases the price of options. That's because volatility makes it more likely option buyers will have the chance to profit. So when volatility rises, option sellers increase their prices.

Due to the incredible volatility, options have never been more expensive than they are right now. Today, options sell for five or six times more than similar options did in the calm markets of 2005 and 2006.

The textbooks call this a "covered call" strategy. In a covered call strategy, you buy a stock and sell call options against it. Essentially, you sell most of your upside potential to another investor in return for guaranteed income now.

Take Chevron Corp (CVX) for example. It pays a 3.7% dividend and buys back $7.5 billion in stock each year. No matter where the oil price goes, Chevron will still make money. In 2001, with oil prices around $25 a barrel, Chevron was able to crank out $11.5 billion in annual cash flow. In the last 12 months, Chevron has generated $31 billion in cash flow. 

On Monday, Chevron's stock closed at $74.30. You could sell the June 2009 $80 call for $9.50. By selling this option, you sell any upside in the stock above $80. No matter what happens, you cannot make more than $5.70 in stock price gains (that's $80 - $74.30) between now and June.

If Chevron's stock falls, you take all the losses. But by buying Chevron after a 30% decline in its stock price, at less than seven times earnings, you've limited most of your downside risk.

In return for selling seven months' worth of upside potential, you'll receive $9.50 per share. If Chevron sells for less than $80 in June, you can sell another call option. I can't say how much the market will pay you for that option, but let's assume you get at least another $5 per share. Here's what that'll look like:

If Chevron trades for $74.30, that's a 21% income yield over the next 12 months, not counting any movement in Chevron's stock price.

I suggest you talk to your broker about the strategy, find four or five of your favorite blue-chip stocks, and sell options against them. You're buying the strongest, most profitable companies in the world at the best values in a generation.

Then you take advantage of the highest option premiums in history to generate safe 20% income streams. There's no better income strategy in bear markets...

Good investing,

Tom