If you’re like me, your main goal is to keep the income rolling in with a solid set of yield plays — but that doesn’t mean getting complacent once you’ve got your dividend portfolio in place.
Rather than ignoring the short-term swings in the broad market, a smart investor pays attention and looks for opportunities to boost his income stream, which sometimes means thinking outside the box. In addition to your typical buy-and-hold positions, I recommend you always stay on the lookout for new strategies that can complement the dividend payers you may already own.
And now’s a good time to do so, as I expect U.S. equities to remain more in favor with large investors seeking income and growth.
So many people are calling for a correction … which is precisely why we might not get one. With the end of the quarter fast approaching — and then the all-important fourth quarter just ahead — there is enormous performance pressure on underinvested fund managers who are concerned about global geopolitical risk and slowing European growth.
The S&P 500 is up about 7.5% year-to-date, and that’s the benchmark that almost all fund managers are measured against. Most hedge funds are lagging the S&P this year — and, therefore, it can be assumed that any and all dips going forward will be used as buying opportunities in efforts to catch up. The August rally caught a lot of professionals flat-footed; to make up for lost ground, those fund managers are likely to reach for small- and mid-cap stocks, as they offer more bang for the buck than large-caps.
Now, it’s certainly true that not as many of these stocks pay traditional dividends … but today I’d like to show you how you can manufacture an instant “dividend” for yourself by trading an up-and-coming Internet stock. Let’s get started.
My Buy-Write Recommendation for TrueCar (TRUE)
TrueCar (TRUE) is a hot, newly listed Internet company that has permanently changed the car-buying experience for consumers with its negotiation-free car buying and selling platform. Everyone knows that you are likely to wind up paying more than you expected at a dealership, thanks to sneaky tactics and hidden fees; instead, you can now go to TrueCar, which prides itself on providing a simpler and much more transparent experience. (I wouldn’t want to be a car salesman now that these guys have made a name for themselves with national TV ads.)
If you’ve been following my articles, a pick like this may surprise you. Unlike my usual high-yielders, the company doesn’t pay any sort of a dividend.
But what I’ve got in mind for TRUE is more of a short-term trade in which we create income for ourselves in the form of option premium, by executing a “buy-write” on the stock. In other words, we’ll purchase (buy to open) the shares and “write” (sell to open) calls against them.
Here’s the trade:
For every 100 shares of TrueCar (TRUE) you own or purchase at market, “sell to open” 1 TRUE Sept. $25 call for a net debit of $22.50 or less.
TRUE shares are trading at about $22.75, and the TRUE Sept. $25 calls are trading at about $0.50 per contract. Subtracting the targeted call premium you could collect from that stock price ($22.75 – $0.50) would result in a net debit of $22.25, lower than the figure we’re targeting ($22.50).
The sale of the calls at that $0.50 price brings in upfront income — our instant “dividend.” Then from here, the goal is to hold TRUE shares through September options expiration. I fully expect the stock to be trading north of $25 by then; if it is, the buyer of your TRUE Sept. $25 calls will want to “call away” your shares. (In other words, he or she will be purchasing TRUE shares from you at $25, for a slight discount to their market value.)
If all goes as planned and your TRUE shares are called away, your net profit will be at least $2.50 ($25 – $22.50), which translates to an 11% gain. Very nice, considering a lot of buy-and-hold strategies would take a lot longer to see that kind of appreciation.
Bryan Perry is the editor of , a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced . With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.
