|July 1, 2015
The Income Strategy
To Supplement Dividends
By Amber Hestla
Income investments are an important portion of any retirement portfolio. Historically, they've provided retirees monthly or quarterly income distributions to help cover expenses, healthcare and any other living expenses.
The other morning I was perusing a Morgan Stanley Smith Barney report that outlined four different 401(k) allocations.
While there are many factors that go into an individual investor's asset allocation, the portfolios range from 25% to 60% in income-producing bonds. Along with bonds, the portfolios invest anywhere from 10% to 54% in large-cap stocks.
Assuming that part of the reason for investing in these types of assets is to add income-producing securities to your portfolio, a logical question to ask is: Do these models account for the lower yields that we're seeing in the current environment?
I doubt it.
If you're trying to earn income by investing in large-cap stocks and bonds, you face serious obstacles.
Mainly that yields are down across the board...
The average yield in the S&P 500 is only 1.9%. At that rate, you're not even keeping up with inflation. It would take nearly 40 years to double your money. And that assumes the market doesn't fall, which is no guarantee.
And the average one-year CD yields 0.27%. Yields on 10-year Treasuries, a widely held safe-haven asset, are hovering at around 2.34%. And even high-yield bonds are paying just 6%.
In fact, of the 13,980 stocks listed on U.S. exchanges, a mere 166 yield 10% or above. And most of them are companies like Seadrill (NYSE: SDRL), which cut its dividend in 2012 and is down nearly 74% over the past 12 months.
Don't get me wrong. I'm not against dividends, CDs and the like. You'd probably be wise to have some money in them. I'm simply pointing out that market conditions have made it extremely difficult to produce sufficient income from these investments alone.
But there's a potential solution... if you're willing to try something different.
Using my strategy, it's possible to collect significant income, without having to worry about dividend cuts or low yields.
Take Seagate Technology (Nasdaq: STX). Most people have never heard of it, but it's one of the most dominant companies in its industry. It makes hard disk drives and has been in business since 1979. It has survived the ups and downs of the computer industry and now controls about 40% of the hard drive market.
Simply put, it's the type of company that works great for my strategy. And using my strategy, my readers were able to collect significantly more income than they would have through dividends.
Seagate paid a 4.8% dividend yield when I recommended this trade, so a $10,000 investment would have paid $120 per quarter over 12 months. That's not bad. But even so, I showed investors how to collect even more money up front.
Using my trade, without actually buying any Seagate shares, you could have made $580 overnight. Here's the best part, my readers only had to set aside $5,400 to collect this income.
In other words, you could have made more income in one day from a $5,400 investment than a $10,000 investment in the stock would have churned out in a year. That's a 10.7% yield.
The same goes for another company: Questcor Pharmaceuticals (Nasdaq: QCOR).
A week after my Seagate trade, I zeroed in on Questcor. At the time, it offered a 2.4% dividend yield, so a $10,000 investment would have delivered $60 per quarter in dividends over 12 months.
Again, not bad. But using my strategy could have produced an immediate payment of $390 by setting $1,560 aside in your brokerage account.
And the great thing is, you could have repeated this trade again and again every few months.
In percentage terms, my Questcor trade returned 25% on margin in just 43 days -- a stunning 212.2% annualized gain. So, in theory, you could have repeated the trade roughly eight times throughout the year and generated a whopping $3,120 in income.
I know what you're thinking: "Anyone can catch some lucky trades every now and then."
But I'm not just cherry picking winners. In fact, I've made money on all of the 85 trades I've closed in my premium advisory, Income Trader. I didn't get a perfect track record by only trading technology or pharmaceutical stocks, either. I recently recommended using my strategy with Citigroup Inc. (NYSE: C). So far the trade is working out great.
We'll either pocket a 4.7% return in just 66 days (without ever owning shares) or be able to buy shares for about $49.53 in mid-July, a 10% discount to its current price.
So how am I able to pocket respectable income or potentially have the opportunity to buy shares for 10% less than where they're trading at today? Well, it's not anything complicated. In fact, I talk about how exactly my readers and I are able to take advantage of situations like those mentioned above in a free eight-minute webinar I just put together.
Please just take a few minutes to check out this video. If you'd like to earn extra income and have the chance to buy some great companies at extreme discounts, click here to learn all about it.
Income & Options Strategist