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The Safe, 17% Income SolutionBy
Tuesday, July 19, 2011
When you see a stock offering a 17% yield, you should almost always run the other way.
A high yield is often a dangerous trap. The dividend will be slashed soon...
Either the business is generating so much cash, it'll attract a flood of competition, which will drive down profit margins and thus dividend payments... Or the business is in decline and investors have sold off shares in anticipation of a dividend cut, which drives up the apparent yield.
Once the dividend cut comes, the share price declines even more. Any dividends you do receive will be peanuts compared to the big capital loss.
That's why "reaching for yield" is often one of the costliest, riskiest things you can do with your savings. And that's why I knew a headline I wrote last fall, "How to Make 17% Income on the World's Safest Cheap Stocks," sounded crazy. Such a big yield and the word "safety" almost never go together.
But that was the situation back then... and it still is now. Let me explain...
As we've pointed out many times in DailyWealth, big tech companies like Apple, Google, Intel, and Microsoft are some of the greatest values in the market. When you factor in their big cash hoards, many of these firms trade for less than 10 times earnings... which is absurdly cheap for a great business.
Microsoft, for example, is a huge, stable business with large profit margins. Many investors can't stand the stock because its fast-growth days are behind it.
But I'm like a lot of folks out there. I'm not interested in reaching for the moon right now. I'm more interested in a safe return of 10%-20%.
And Microsoft is a safe investment here. Just from a common sense technical analysis standpoint, you can see that Microsoft always enjoys buying support from investors when shares trade near $24 per share.
This is important: Microsoft may not rise 100% or 200% in the next year, but chances are very good that it won't go down.
.png) This situation is why the strategy I laid out last year is generating a great income stream with Microsoft. Anyone who has done it with Microsoft or a similar stock is generating annual income in the 10%-20% range.
The idea is to use the world's biggest, most stable technology companies as a "base" for a covered call program. In short, what you do is sell the bulk of a stock's upside for an instant, upfront payment. (I explain the full details in this piece.)
Back in October, you could make about 17% annualized with this super-safe trading strategy. And that's still the case.
When I look at most traditional income vehicles out there, like real estate stocks and bonds, I see too much risk for not enough reward. To generate substantial income on a portfolio, we have to get a little creative ...
If you're willing to try something new, consider this unusual "safe 17%" solution.
Good investing,
Brian Hunt
Further Reading:
As Brian says… the higher the yield, the riskier the business.
But there is a way to earn a double-digit dividend yield safely. Here, he shows you the best place to find unconventional short-term income ideas: How to Make 17% Income on the World's Safest Cheap Stocks.
Market NotesTHE BIG RED FLAG FLYING OVER COMMODITIES Bearish action in the commodity market to begin the week: Brazilian stocks are slumping.
In mid-May, we noted the declining Brazilian stock market as a reason to stay cautious toward commodities in general. Back then, Brazil's benchmark index had slumped to a 10-month low around the 64,000 level.
As we noted then, Brazil is one of the ultimate destinations for investors who want exposure to commodities. Its national oil company, Petrobras, has found a series of giant offshore oilfields in the past decade. Brazil is also a major producer of agricultural commodities like soybeans, cattle, corn, coffee, and sugar. It's a major producer of iron ore. Much of this production heads to China, Brazil's largest trading partner. If China catches a cold, so does commodity-leveraged Brazil.
As you can see from today's chart, things are still bearish in Brazil. The benchmark stock index just struck its lowest low in over a year... and is closing in on a multi-year low of 58,000. We state again: For commodity stocks in general to make headway in 2011, they'll need Brazil at the forefront. Right now, it's holding up the rear and heading lower.
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