Monday, July 21, 2014
How much income would you like to make on your investments this year: 2.5% or 11%?
Every day, the market presents traders with a choice like this. And every day, most choose 2.5%.
But there's a way to take a great dividend-paying company... and multiply its annual yield many times over...
You do it by "trading for income." That's my term for selling puts and covered calls on high-quality stocks.
When you "trade for income," you take on less risk than ordinary shareholders. You also set yourself up to make great money even if the stock you own trades sideways. To make great money when "trading for income," you simply need the stock not to fall. Ordinary shareholders can't say that.
If you're not familiar with the strategies of selling puts and covered calls, you can learn more here and here.
Now, let me show you how you can make double-digit income from great dividend-paying companies this year.
Let's take a look at the world largest retailer, Wal-Mart (WMT).
Because of its dominant position in the sector, Wal-Mart generates billions in free cash flow every year. It buys back shares and pays a modest 2.5% dividend. And with a forward price-to-earnings (P/E) ratio of 14.5, Wal-Mart is slightly cheaper than the average stock.
Take a look at the following chart... For the past year, Wal-Mart's price has gone sideways. If you're an ordinary shareholder, all you've made is the 2.5% dividend.
But to make money selling puts and covered calls, you don't need stocks to rise in price. You simply need them not to fall.
So while this sideways trend has frustrated ordinary shareholders, my DailyWealth Trader subscribers have made big returns by "trading for income." Take a look:
We've closed four Wal-Mart trades in the past year in DailyWealth Trader. Our average gain has been 2% in just 40 days. That's an annualized return of 17.9% – an extraordinary profit for such a safe stock.
And you can make a great trade for yourself today...
Right now, you can buy Wal-Mart (WMT) for about $76.72 per share. You can then sell the September 20, $77.50 covered calls for around $0.96. When you sell covered calls, you collect cash upfront for agreeing to sell your shares for a higher price. You give up some of your potential capital gains for guaranteed income and added safety.
This trade produces an instant "yield" of 1.3%. That might not sound like much. But if you use this strategy for a year, the gains will add up...
The calls expire on September 20, two months from now. If the stock stays where it is or moves lower, you keep your shares... and you can sell another round of calls. Including the quarterly dividend, your total return will be 1.9%. If the stock has moved higher by expiration, you sell your shares at $77.50. Your total return will be about 2.9%.
Making a trade like this six times a year will produce 11%-17% returns.
In other words, you can earn double-digit income this year... just by trying something a little out of the ordinary.
Now... if you have 10 or 20 years and no need for income today, you could simply buy and hold great dividend-paying companies like Wal-Mart. They're likely to make great long-term investments. But if you'd like to "supercharge" the income these stocks pay you, consider "trading for income."
Amber Lee Mason
"Many individual investors tune out immediately when they hear 'options,'" Sean Goldsmith writes. "'It's too risky,' they say. 'It's too complicated... It's not for me.'" But in this success story, he shows how almost any investor can use options to invest with lower risk... and earn profits that are "far greater than what's possible by just owning the stock outright."
Dr. David 'Doc' Eifrig assures readers that selling options is neither too risky nor too complicated. "No other strategy offers a chance to safely profit, no matter what happens to stock markets," he says. "I truly believe it's one of the most valuable investing skills you can learn." Learn how to start selling puts in this interview with Doc.
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