Collect Monthly Income With This Little-Known Strategy
Pay your bills and save for thrills...
Before we get to the investment vehicle that can provide steady monthly income, I wanted to share this satirical billboard that’s popping up across Pennsylvania...
I’m all for political satire, but this would be funnier if it weren’t true, especially since the Pentagon released a report earlier this year saying al-Qaeda could reinforce quickly enough in Afghanistan to conduct an attack on U.S. soil in one to two years. Officials now say that timeline is a “conservative” estimate. And now that the U.S. military admitted the Aug. 29 Kabul drone strike targeted the wrong vehicle, killing 10 civilians, we need to be wary of blowback.
Both sides of the aisle are complicit in this mess, but after the announcement of Biden’s tyrannical and unconstitutional vaccine mandate for businesses last week, his approval rating now sits at 42%.
Look, we don’t want to dwell on politics too much here, but this is the stuff that’ll impact the world markets and our lives, so we need to stay on top of it.
Speaking of the markets, we’re halfway through the September slump and heading into October — the historical “crash month” — so investors are nervous. Not to mention inflation is really starting to take hold. Have you been grocery shopping lately?
Our job as Outsiders is to think outside the box and bring you valuable investment ideas. So here’s a strategy that can help pay the monthly bills and build a sizable nest egg...
Planning for an Early Retirement
When I started investing in individual stocks, I dabbled with GameStop (NYSE: GME), Innovative Industrial Properties (NYSE: IIPR), Microsoft (NASDAQ: MSFT), and Philip Morris (NYSE: PM). All performed better than expected, but we’ve also been living through the longest bull market in history, so that was almost a gimme. What I especially appreciated was receiving quarterly dividends from these companies, and I almost never buy stock if it doesn’t pay a dividend.
I also liked playing stock options because it gave me the ability to control a large number of shares without risking much capital upfront. Buying calls on Cronos Group (NASDAQ: CRON) and puts on DavidsTea (NASDAQ: DTEA) turned out to be huge winners for me in 2019.
I’ve recently taken a more conservative approach by buying index funds and reinvesting the dividends, using what’s known as a dividend reinvestment plan (DRIP).
For example, by buying the S&P 500 Index, you get exposure to all stocks in the index, including quarterly dividends. The index has historically returned roughly 10% to 12% per year, with a current dividend yield of 1.28%. Even if you don’t reinvest the dividends, you can take the extra cash and do what you want with it. However, the dividend yield on the S&P is approaching historical lows, so you’re not getting much bang for your buck...
Indexing is not a sexy strategy, and you’ve probably heard it a thousand times... Invest $100 starting at age 25 into the S&P at an average return of 10% to 12% and you’ll have more than $1 million by the time you’re 65.
But I always find these number games misleading and unfair, given 70% of Americans live paycheck to paycheck; Americans have $900 billion in credit card debt and $1.56 trillion in student loan debt; the average U.S. household income is $60,000; and the no. 1 cause of bankruptcy in America is medical bills.
Simply put, Americans need more money, and many of us are playing catch-up with our retirement. And while the majority of your portfolio should be indexed to allow compound interest to do its magic, most of us don’t have the luxury of time or patience to wait.
So for those willing to take on a little more risk, investing in covered call exchange-traded funds (ETFs) combines the conservative nature of indexing, the risks of options, and the income from dividends to give you a shot at early retirement.
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Bringing Sexy Back
Invented in the 1990s, ETFs trade just like stocks and track the performance of just about anything in the market, including indexes and commodities, and can be structured to track specific investment strategies, like selling covered calls.
Covered call ETFs own shares of an underlying company or index and then sell monthly covered calls against those positions. The funds collect a premium for selling the calls to call buyers and distribute those premiums as dividends to the ETF holders.
Compared with quarterly dividend payments from most stocks, covered call ETFs pay monthly dividends with above-average yields.
For example, the largest covered call ETF is the Global X Nasdaq 100 Covered Call ETF (NASDAQ: QYLD). It pays a nearly 12% monthly dividend and has a dedicated following in the market. I’m also a fan of the Credit Suisse X-Links Crude Oil Shares Covered Call ETN (NASDAQ: USOI), which sports a 15.58% monthly dividend yield, and the JPMorgan Equity Premium Income ETF (NYSE: JEPI), yielding 7.48% monthly. The underlying returns aren’t too shabby either...
Sure, there are fund manager expenses and tax implications with collecting dividends, but this is a great way to earn extra monthly income.
Two factors are working in your favor today with covered call ETFs.
First, as we mentioned previously, the 1.28% yield on the S&P 500 is near historical lows, so those dividends aren’t helping you much unless you’ve got a boatload of money sitting in an index fund.
Second, the CBOE S&P 500 Volatility Index, or the VIX, is just above 20, which means there aren’t many great buying opportunities, especially within the S&P 500 Index.
I wrote in May that the VIX tracks the volume of call and put options on S&P 500 stocks to project 30-day volatility expectations. A level of 20 or below means the market is functioning “normally.” When it’s around 30 or 40, there’s some nervousness. And a level of 50 or 60 means the market is entering a correction, as it did in March 2021 and October 2008...
When the VIX is high and stocks are falling, you should actually buy because the index doesn't stay elevated for long. And when the VIX drops, stocks tend to rise.
The point is until we see another spike in the VIX, the S&P 500 will remain relatively stagnant, so you might as well make as much money as you can with dividends in the meantime.
If you want even more dividend ideas, check out the latest picks from The Crow’s Nest run by fellow Outsider Jimmy Mengel. He’ll put you on the path to steady dividend income while investing in cutting-edge, disruptive technologies. Click here for the details...
To your wealth,
Editor, Outsider Club
After Alex’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing. Check out his editor's page here.
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