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How Digital Utilities Could Pay for Your RetirementBy
Thursday, October 6, 2011
Can you really pocket a safe annual yield of at least 15%?
You can if you follow my unique "Digital Utilities" program...
Traditional utility stocks – like power, water, and natural gas providers – enjoy guaranteed profits. If you want indoor plumbing or a refrigerator, you have to do business with the municipal utility company. In exchange for their monopoly position, utilities accept regulations that limit their ability to raise prices... Essentially, municipalities assure themselves reliable power in exchange for guaranteeing the companies' profits.
The government-guaranteed profit turns these companies into income-producing machines. The payments are so secure and safe, these stocks have been a good friend to retirees and other income investors for generations.
These traditional utilities still have a place in the retiree's portfolio. But a new sort of utility – Digital Utilities – is an even better idea...
"Digital Utilities" is the name I've given to dominant "big tech" companies like Intel and Microsoft. Both companies hold near-monopoly positions in their industries.
Intel dominates the semiconductor industry. Microsoft dominates the software industry. Each time you hop on the computer, chances are good these companies will make a tiny bit of money.
But Intel and Microsoft are even better than traditional utilities. They sell their goods and services around the world, so local government regulators can't control them. Regulators can't limit their profits, prices, and return on capital the way they can with traditional utilities. This allows Digital Utilities to pay reliable and growing dividends in the 3%-4% range. It has also allowed their share prices to hold up well during the recent stock panic.
Regular shareholders of Intel and Microsoft will do just fine over the coming years. Both companies rake in huge amounts of cash, and will continue to raise their dividends. But for folks willing to do a bit more work – and who are willing to learn something new – Digital Utilities present an incredible income opportunity right now...
That opportunity is selling "covered calls."
In general terms, my strategy amounts to buying shares in safe, dividend-paying companies like Intel and Microsoft, then selling "call options" to other traders, which gives them the right to buy my shares at a higher price.
Most of the people who buy these options from me are 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.
The whole process is different from just buying shares. And it takes a little while to get used to the idea. But let me walk you through some numbers, so you can see how useful a tool it is if you're looking for safe income...
Right now, for example, you can buy Microsoft for $24.53 per share. Let's say you buy 100 shares, for a total of $2,453. Right after buying your shares, you can sell someone the right to buy your shares from you for $25 per share in three months. You collect $137 for selling that right. This $137 payment represents an instant 5.5% yield on your shares.
If Microsoft climbs above $25 by December, you sell your shares for a modest capital gain and keep the instant 5.5% yield and any regular dividends Microsoft paid along the way.
If Microsoft does not rise to $25 per share in December, you simply keep that instant 5.5% yield, your 100 shares, and any dividends you collected along the way. You can then do the trade over again... and again. Do this "5.5% in three months" trade four times in one year, and you can make over 20% (while collecting Microsoft's safe 3.2% regular dividend).
With conventional bonds and CDs yielding less than 2% annually, we've got to think unconventionally to find great sources of investment income. Building a covered call strategy around Digital Utilities is one such idea. If you're interested in collecting safe, 15%-plus yields, you should consider this idea immediately.
Here's to our wealth, health, and a great retirement,
Doc Eifrig
Further Reading:
Back in August, Doc told DailyWealth readers about a single stock that "allows us to enjoy the fruits of the covered call strategy without any of the work." Read more here: How to Triple the Income You Collect from Super-Safe Stocks.
"Invest only in the safest stocks, and you'll retire rich," Dan Ferris writes. "And if you wanted to, you could probably retire years ahead of schedule." Find out what three traits Microsoft has that makes Dan call it one of the safest stocks in the world.
Market NotesA 10-YEAR LOOK AT COMMODITY PRICE INFLATION Most people know commodities suffered a brutal September. The benchmark commodity index is down 12.5% in the past month.
But what most folks don't know is how this selloff has helped punch a big hole in a popular theory that says, "Inflation is a problem. Raw materials like oil and copper are soaring."
A big concern among many investors is that, in their bid to stave off a global recession, world governments will print enormous amounts of money... which would drive up the nominal price of real, useful "stuff," like crude oil, copper, corn, and coal. And while it's a risk we should all consider, today's chart shows it's no problem right now...
The chart below displays the past nine years of the CRB commodity index, one of the most widely used gauges of raw material prices. As you can see, in late 2002, this gauge was around 225. After years of wild fluctuations, the gauge now reads 292. This is an overall gain of 30% in nine years... which works out to about a 2.9% compound annual gain. When priced in Canadian dollars or and Swiss francs, commodities have actually fallen over the last nine years. Inflation in commodities? Not so much...
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