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Editor's note: Today's essay is the third in Doc Eifrig's series on where to find safe income in a "zero-percent world." Tuesday's essay covered how to collect big, tax-free income. And yesterday, we showed you which dividend-growing stocks should form the core of your portfolio. For another high-income idea from Doc, read on...
How to Triple the Income You Collect from Super-Safe StocksBy
Thursday, August 18, 2011
In just the past few weeks, one of the world's greatest investment income strategies got even better...
It's a little-used strategy that allows you "juice" the income you earn from the world's safest, best dividend-paying companies by 300% to 500%. It's a shame most folks don't use this strategy, because they're missing out on amazing income payments (income my subscribers have been collecting for quite a while). In some cases, these income streams run into the 20%-per-year range.
This strategy exists because, unfortunately, most folks who trade stock options are hopelessly unsophisticated gamblers.
You see, many folks buy stock options in order to make risky, low-probability bets on stocks. They do so in the hopes of hitting big... and making 200% or 300% in a week. While a few traders succeed with this kind of strategy, it's far safer and more reliable to SELL options.
One of these safe selling strategies is known as "covered call writing."
In general terms, my strategy of "covered call writing" amounts to buying shares in safe, dividend-paying companies I'd be happy to hold for years (like the ones I told you about yesterday). I then collect 2%-5% on my original investment by selling "call options" to others, which gives them the right to buy my shares at a higher price.
The people who buy these options from me are the gamblers... Most of them are betting on a particular stock hitting a particular price in a particular amount of time. These folks are making risky, low-probability bets... and I'm happy to take the other side and pocket their cash.
Here's how one of these trades works...
Regular readers know how much I like Johnson & Johnson. As I've said before, it's cheap, it treats its shareholders right, and it's got one of the market's strongest tailwinds at its back.
It also pays a dividend of $2.28 a year, for a 3.5% yield. That's rich, given that your bank is paying next to nothing on your cash. And Johnson & Johnson's dividend is growing at 9.9% a year for the past five years. I'd be happy just to hold shares of this health care giant.
But there's a way to more than triple the income you make on Johnson & Johnson.
You do it by selling covered calls. Again, this amounts to buying shares, then selling someone else the right to buy the shares from you at a higher price. For that right, you collect a small bit of income. Essentially, you're converting potential future upside in the stock into income today.
In my Retirement Trader service, we're using Johnson & Johnson to collect another $6 to $8 a year with this technique, pushing our total yield as high as 16%. That's incredible for such a super-safe stock.
I know most folks will refuse to consider this strategy. It involves a modest amount of extra work and study. Most would rather gamble, buy stocks randomly because they have good "stories," or just flat out stick their heads in the sand. But don't shy away because it involves options... or because it's different. This strategy is actually safer than just buying shares outright.
With the extra income you collect, you can offset a downturn in the stock. Also, if shares go nowhere, you can keep selling calls. So you're profiting with cash in hand even if the market stagnates. When the market gets volatile (like it has in the past few weeks), premiums get even bigger, and you make more money.
Now... if you've gotten this far, and you're still not ready to get started selling covered calls yourself... I do have a "one click" solution...
In my Retirement Millionaire service, we're using an investment that allows us to enjoy the fruits of the covered call strategy without any of the work. It's called the NFJ Dividend Interest and Premium Strategy Fund (NFJ).
NFJ invests most of its capital in high-quality blue-chip stocks (and a few bonds). Then, it writes covered calls on about 60% of its portfolio. It turns the income it collects into an 8.9% yield for investors. That's lower than what you can collect doing this on your own. But it’s just a one-click commitment.
If you're a do-it-yourselfer, I recommend getting started on your own covered call portfolio. It's a powerful tool that can double or even triple the income you collect from safe stocks. But even if you're not ready for that, consider NFJ.
Either way, you're getting higher income from a super-safe strategy.
Good investing,
Doc Eifrig
Further Reading:
"If you're looking for income, this is exactly the opportunity you need," Doc wrote on Tuesday. "You can collect much more than you would in the bank, take advantage of others' misplaced fears... and rest assured that your principal is safe."
Yesterday, he showed you another big income idea: "Have you panicked yet? I don't blame you if you have." But now, you need to take a deep breath... and get ready to take advantage of one of the best opportunities I've seen in my investing career..."
Market NotesWHEN ARE THEY GOING TO SHUT THIS THING DOWN? The poor performance of UNG – one of our contenders for "world's worst investment" – has entered a horrific new phase.
Remember: being a successful investor is as much about knowing what NOT to invest in as knowing what TO invest in. The world is full of bad places to park your wealth... like high-fee, low-performance mutual funds, hyped-up IPOs, mining scams, and overpriced stocks. These ideas all present ways to break the golden rule of investing, which is, "First of all, don't lose money."
This brings us to the popular natural gas investment fund, UNG. Because they provide investors with a "one click" way to own baskets of stocks or commodities, funds like UNG have enjoyed a surge in popularity. UNG, for example, has attracted hundreds of millions of investor dollars. But some funds are structured so they must continuously enter the futures market to maintain positions. This structure often causes them to "bleed" value (aka your money) away.
Regular readers know we've advocated buying income-paying trusts as a way to invest in beaten-down natural gas... and avoiding UNG as you would a lawyer's office. As you can see from today's two-year performance chart, it's been the right advice. While natural gas has moved sideways, big trust San Juan Basin (black line) has returned investors nearly 100% in distributions and capital gains... while UNG (blue line) has lost investors 60%! Follow the golden rule and avoid UNG.
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