My Favorite Income Strategy For A Low-Yield Market
If you’re frustrated with the low yields this market has to offer, you’re not alone. Finding dependable yields over 4%, much less double-digit yields, is very difficult in our current low-rate environment.
The Federal Reserve is keeping interest rates at all-time lows. Bonds are barely beating inflation, and the yields on the average blue-chip stock leaves a lot to be desired. For example, the S&P 500 throws off a yield of less than 2%.
This had led some investors to “reach for yield,” i.e., buying risky stocks with higher payouts. More often than not, this strategy leads to big losses.
To make matters worse, stocks are trading near all-time highs and carry lofty valuations. Robert Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio, for example, is well above its historical average.
Source: Robert Shiller, Yale University
Now, there is considerable debate about what that means, exactly, especially in this environment. Does a high CAPE ratio necessarily mean that owning stocks is a riskier proposition than normal — even in a period of historically low interest rates?
We’ll save that debate for another day. But one thing is for sure… this is an incredibly tough market to navigate for conservative income investors in particular. Fortunately, there is still a way to generate more income than you ever thought possible from some of the safest stocks out there.
A Perfect Strategy For This Low-Yield Market
I have devoted my career to showing income investors how to generate outsized gains with simple, low-risk strategies. Before becoming a full-time trader, I served as a military intelligence analyst for the U.S. Army. I began teaching myself about the market between deployments and soon I was generating income that exceeded my regular military salary.
Today, I want to teach you about one of my go-to techniques: selling covered calls.
This simple strategy involves options — a tool most investors don’t use regularly because of their preconceived notions about options being risky. But when done properly, selling calls can be one of the safest and most lucrative ways for income investors to make money.
A call option gives the buyer the right — but not the obligation — to buy a stock from the call seller if it’s trading above a specified price, known as the strike price, before a specified date. When you sell (or write) a call option, you have the obligation to sell a particular stock at the strike price if it should rise above that price before the option expires. I only recommend selling covered calls, which means you own the stock you’re selling calls on.
Essentially, covered calls allow you to get paid upfront to potentially sell a stock you own at a higher price sometime in the future. Whether the stock goes up or down, you can still potentially come out ahead. That’s not to say covered calls are risk-free — no investment is. But they can actually help reduce risk.
Consider what happens when you sell a covered call:
For every option you sell, you receive income, known as a premium, upfront in exchange. This money is yours no matter what. It’s deposited in your account just like a dividend.
Once you sell a covered call, one of two things can happen — either the underlying stock rises in price or it falls.
If it declines in price, your shares will decrease in value, but you have the option premium to counter the loss. In other words, if the shares fall, you’re better off selling covered calls than simply holding the stock.
If shares stay below the strike price through expiration, the option expires worthless for the buyer. That’s not necessarily a bad thing for sellers, though, because this means we keep the shares and have a chance to sell another call to capture another income payment. This is why you should only sell calls on high-quality stocks you would be happy to own for the long term.
But if the stock rises above the call’s strike price, you will have to sell your shares to the option’s owner. Anything between the price at which you originally bought the shares and what you sell them for is pure profit, in addition to the cash earned when you sold the option.
The only time you really give anything up with this strategy is if a stock’s price soars past the strike price during the option’s short life. In that case, you’ll miss out on some capital gains.
I think that’s an acceptable trade-off, especially if you’re a conservative investor or trader who values income. It’s for this reason that I consider covered calls to be one of the safest ways to earn more income in this low-yield environment. The money’s just sitting there, waiting for savvy investors to take advantage. Anyone, from young couples struggling to make ends meet to retirees looking to boost their income, can do it.
That’s why my research staff and I created a special presentation to show just how easy this is. With a little bit of instruction, you could be well on your way to earning hundreds — even thousands — of dollars from just one trade, which can be replicated again and again. If you’d like to learn more about how this works, I invite you to click here.