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A Cure for the Myth of Fixed Income
4/10/2013 9:27:00 AM
By: Wyatt Investment Research
If you're at or near retirement age, you've probably heard a dangerous myth repeated often in the media by so-called financial experts.
Your own broker, money adviser or mutual fund manager may have repeated this myth to you dozens of times.
And it's a myth that's so powerful and common that I know you've read about it in the pages of this very newsletter. It may have prevented you from fully enjoying your retirement, or caused you to worry that you won't have enough money when you do retire.
Maybe you're putting off the purchase of a new car or a fancy vacation … until things change…
It's the idea that a "low-interest rate" environment means you CAN'T earn a substantial income from your current nest egg. Simply put, low interest rates shouldn't stop you from safely earning high rates of interest from your investments.
And I want to prove to you that you can SAFELY earn 8-12% in income each year - without going out of your comfort zone as an investor.
In fact, I believe you can earn this type of income without doing anything differently - without buying risky stocks, or using complicated day-trading techniques or margin.
You probably realize that bonds and CDs are a no-go if you want income.
Unless you have well over $1 million in the bank, a 1% savings account rate won't cut it. And even then, you'd only collect $10,000…
We have to do better.
So if you're like most investors, you've headed to the stock market. I can't blame you. Stocks are clearly a better deal. You can safely collect 2-5% on blue chip dividend payers.
But that's still not even a historically average interest rate. So how do you get to 8% … or even 12%?
All you have to do is learn one simple transaction - which thousands of investors use everyday - to collect extra income from dividend stocks you already own.
All you need do to produce this income is sell calls on shares you already own. This is known as a "covered call" strategy.
Here's how it works:
Suppose you own 100 shares of Microsoft ( MSFT ) and you think the stock won't go much higher, if at all, over the next few months. Microsoft is trading at around $29.50. You can sell a June call - the right to own 100 shares - at a strike price of $31 and pocket a "premium," in this case, of almost $40.
Before I go on, it's important to understand why someone would want to pay you this income up front. Simply put, most investors are gamblers. They like to make a bet that your stock will go higher. They're essentially betting you that your stock will go above a certain price - and paying you this bet up front.
But the thing is, if Microsoft shares stay below $31 by the third Friday in June when the option expires, the "bet" is yours. In fact, the bet is yours no matter what.
The bet or "premium" received also gives some downside protection - $40 compensates for a $0.40 drop in the share price, equivalent to roughly a 1.5% decline in the stock.
The trade-off is that writing a covered call can cap your upside. In this case, your position benefits up to a $31 stock price. Any gain in the stock beyond $31 is essentially "owned" by the call buyer. So the maximum gain is $1.50 in stock appreciation ($31.00 - $29.50) plus the $0.40 in premium.
If the stock moves above $31, the option will likely be exercised and your shares will be called away. But you could make an additional 6.7% return over the course of the year if you choose to use this successful strategy. With an annual dividend of 3.2% you have the potential to boost your income to 9.9% with a few, simple steps.
You can quickly see why so many professional money managers are using this strategy for investors who seek income, particularly retirees.
Over the next several weeks I will discuss the strategy in greater detail. In the meantime, feel free to contact me at email@example.com with any questions that you might have at any time. I would be more than happy to discuss with you what I feel is the future for income investing.