In late 2007, Citigroup (C) insiders – who should have known better – comforted themselves with a security blanket that, in hindsight, was better fit for a Goodwill donation.
“The dividend’s as safe as the next board meeting,” they told themselves as the yield on their shares climbed well above 10%. On a trailing basis, that is.
Next board meeting, their payout was chopped – and their shares dropped more than 90%.
Citigroup reminded us why ten years ago, and telecom disaster Frontier Communications (FTR) reinforces the point today.
(Its shares, which I warned you about, are down 83% over the past year).
Now I get why you’re looking at the 10% and 12% payers.
They turn a million bucks into $100,000 to $120,000 in annual income. Now that’s some retirement cash flow!
And I’m not telling you these double-digit cash yields aren’t achievable. They are with the right strategy – which I’ll explain in a minute.
The wrong strategy is buying a dividend dog like Frontier or this business development company (BDC), which eats through its capital as fast as it pays dividends:
Avoid 10%+ Payers Like These
The right 10%+ cash yield strategy is two-fold:
- Pick the strongest dividend stocks, and
- Accelerate their dividends – so that you collect an entire year’s worth of payouts in just a few months.
If you do things right, you can actually bank an entire annual dividend stream – in cash – in just one month. Here’s how.
Trading in “Buy and Hope” for 15% to 20% Cash Flow
Most investors buy stocks and hope they go up in price. Dividend-minded folks, who tend to be more sophisticated thanks to their cash flow requirements, tend to buy stocks for their payouts – and hope they don’t go down in price (or maybe secretly hope they do appreciate a little bit).
There’s a better way. Let me show you a real-life example.
This summer, I told my Options Income Alert subscribers that it was time to turn Texas Instruments (TXN) into a 20% cash machine. In hindsight, you might think we had poor timing – because the stock mostly traded sideways for the summer:
20% From This Sideways Stock?
Plus TXN only yields a little more than 2% – a far cry from 20%. However, by combining our stock purchase with some simple put and call sales (and they are simple, for reasons I’ll explain shortly) we were able to generate consistent cash flow from this sidewinder:
20% From a Sideways Stock!
Does it bother you that dividends are only paid on a quarterly basis? After all, we must pay our bills monthly – which means that monthly cash flow should be our goal.
That doesn’t mean we need to restrict our buys to the few monthly dividend payers out there. We can turn any stock into a monthly payer using my dividend acceleration technique. In fact, we “sped up” TXN’s payouts when we:
- May 25 – Sold puts for $113 per contract, and
- June 19 – Sold (“wrote”) covered calls for $94 per contract,
- July 24 – Sold (“wrote”) covered calls for $106 per contract,
- July 27 – Collected $50 per contracted in dividends,
- Aug 21 – Sold (“wrote”) covered calls for $159 per contract, and
- Sept 15 – Shares were “called away” at $80 per share.
In just 113 days (less than 4 months), we generated nearly $5 per share in income on an $80 stock! Here’s the final tally I emailed to my subscribers:
There are a few important lessons here:
- Our capital was tied up for less than four months,
- We banked an annualized return of 19% all in cash, and
- This strategy was less risky than buying the stock outright.
Why? Because we were able to generate consistent cash flow every few weeks. When we do this, good things are going to happen over any medium and long-term period.
And Usually It’s Even Easier Than This
The ideal stock to sell cash-secured puts against is a dividend grower. Its payout provides a natural lift to its share price. And remember, we don’t really care if a stock goes up – we generally only ask that it trades sideways or better.
Let’s take refiner Valero. Refineries are big sprawling facilities that nobody wants in their own backyards. There hasn’t been a major facility built on American soil since 1976, and more than half of all U.S. refineries have been shut down in the last 25 years!
The Bear Market in U.S. Refineries
Existing refiners have benefited from their own scarcity, and they should continue to do so. It may be next-to-impossible to build a new refinery, but it is much easier to get approval to expand an existing facility.
Blue chip Valero already owns the “beachfront properties.” Plus the firm has a great management team that knows how to make money – for the company and us investors – no matter what happens with energy prices.
Over the last five years the company rewarded investors with a cumulative 250% dividend raise. Meanwhile its poor stock price is still playing “catch up” with its payout:
A Stock Due to Catch Up
Shares yield 3.4% today. But we regularly generate up to 10 times as much cash simply by selling puts that are trading below Valero’s current share price.
That’s exactly what my options subscribers and I have done three times as Valero’s stock price inevitably gets pulled up towards its payout curve:
- In November 2016, we collected $153 per contract for 25% annualized gains.
- In May, we banked $129 per contract for 20% yearly returns.
- And in July, we added another $97 per contract for 36% annualized returns.
Contracts are for lots of 100 shares. When we sold the puts on Valero, it was trading between $65 and $70 per share. Which means our subscribers set aside $6,500 to $7,000 per contract they sold (the option “strike price” times 100).
Folks who sold 5 or 10 contracts at a time were able to scale their income accordingly. A 10-pack sold on the November trade, for example, would have generated $1,530 in “instant income” versus just $153:
Accelerating VLO’s 3.4% Dividend To a 25%+ Cash Yield
And by the way, this cash gets deposited into your account instantly. No need to wait for dividend day, or for the option to expire. You sell the option, and you get the cash flow right now.
— Brett Owens
I know many investors who “want to learn” how to do this. They know that others are doing well with options, but they’re not sure how to go from buying and selling stocks and funds to buying and selling options.
Here’s a secret – they’re almost exactly the same. And you probably have the ability to do it already from your online brokerage account.
Ready to start collecting secure 20% cash yields today? I hope so, because I want to make sure you receive my next trade alert. Click here and for the details on my 20% “Cash Yield” Dividend Accelerator system – and I’ll hook you up with a risk-free trial.
Source: Contrarian Outlook