4) Even More Income from Income Stocks
Yes, there are a number of stocks that generate 3%, 4% or even 6% dividends, but many rise and fall in correlation with the market, meaning you could experience breathtaking losses anytime the market takes a hit like it has many times this year.
But, there are a few steady income generating stocks that are not wildly volatile (up or down)—you could say they are stuck in a narrow trading range, but still throw off decent dividends and enjoy “rich enough” premiums to sell covered calls around.
Two examples are the phone companies, both Verizon Communications (NYSE:VZ) and AT&T (NYSE:T), that pay over 4% in dividends but carry enough premium to let you generate an extra $50 to $75 per month per contract in income writing covered calls. Both stocks are relatively “boring” stories but hold up well when the market gets creamed because their relatively “high-yield” attracts big institutional dollars in times of trouble.
Why not get paid “bonus income” for owning two steady, well-known names that are not going away.
5) The New Frugal
Wall Street sees spending or slowing everywhere except for the upper class. Maybe that is true – but among people who are more careful about what they are spending, or have less to spend, the dominant trend is what I have been calling, for more than two years, The New Frugal. The geniuses think that luxury brands such as Tiffany (NYSE:TIF) or Coach (NYSE:COH) are doing well because wealthy people are continuing to spend or spend more. Wrong – they are doing well because middle class people are reducing spending on most items and saving their dollars for high quality, name brand purchases.
For investors, the New Frugal is a permanent change in shopping habits. Do I exaggerate? The sale of diamonds on the mass market, that diamonds are forever, give her a diamond wedding ring and so on, we invented during the Great Depression.
For income investors active enough to “sell options” on dips, every time there is a pull-back due to fears over the economy and spending, brand names – Tiffany, Coach, Ralph Lauren (NYSE:RL), Nordstrom (NYSE:JWN) and so on – present opportunities for accumulation – if you sell calls or puts on them for quick cash!
6) Create Your Own Dividend
I used the word “yield” before. Let me now use it in a more concrete way.
Suppose you own Starbucks (NASDAQ:SBUX) shares. They pay a dividend that would not give you enough cash to buy a latte (grande, skim, extra foam please). You want income but you are a great believer in the long term value in the stock. What do you do?
Sell some covered calls. A stock like Starbucks, used to support the sale of covered calls throughout the year, can yield a more than 8% return on the capital you have invested in the stock. And if you manage your positions properly, you will probably not get called out of the stock – the buyer will not exercise the call option.
The ability to create your own dividend really resides in your “idea” about Starbucks. Let’s say you do not want to own the stock, you were blown in the post Lehman crash and want to stay pretty liquid (pardon the pun). And you still love Starbucks. Instead of owning the shares and selling covered calls, you sell puts. Over and over again. You may even yield more than that 8% because you need 15%-20% less capital, on average, when selling puts.
Sure beats buying and holding low-paying dividend stocks.