How To Double Your Income (Safely) In This 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 nearly impossible in the current market environment.
For instance, the S&P 500 throws off a yield of less than 2%. Most bonds are barely beating inflation, and the yields on blue-chip stocks are pathetic.
This has led some investors to “reach for yield,” meaning they buy 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. This makes owning them a riskier proposition than usual.
For conservative income investors, this is an incredibly tough market to navigate. Fortunately, there is still a way to generate more income than you ever thought possible from the safest stocks out there…
One Of The Safest Ways To Earn High Income
Today, we 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 regularly use because of their preconceived notions about options being risky. But when done correctly, selling covered calls can be one of the safest and most lucrative ways for income investors to make money.
So let’s get into how this actually works…
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 are obligated to sell a particular stock at the strike price if it should rise above that price before the option expires. We only recommend selling covered calls, which means you own shares of this stock on which you’re selling the calls.
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 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.
How You Can Double Your Income
Let’s look at how selling calls on a company like Phillips 66 (NYSE: PSX) could make a big difference for investors looking for income. PSX is one of the country’s largest energy refiners and midstream operators. In short, it’s a high-quality stock with a higher-than-average dividend. Over the past 12 months, the company has paid out $3.88 per share in dividends. That’s a yield of about 3.7% at current prices.
Now, don’t get me wrong… PSX’s yield is certainly on the higher end of the range of quality stocks on the market. But we can do even better with covered calls.
To keep things simple, let’s say we hold shares for a year. That’s long enough to qualify for four of the company’s quarterly dividends. These are exact same dividends your friend or neighbor who owns the stock also received. This means we can expect to bring in $388 of income for every 100 shares we own.
Now, this is where covered calls can enhance that income…
Let’s say you decide to sell one Feb-17 call with a strike price of $120. This particular contract offers a premium of about $135 at the midpoint.
This will pay us a total of $135 for every 100 shares of PSX we own. Now, let’s say we can pull that off two more times during the year — a very doable scenario. This means, in total, we pull in an extra $405 for every 100 shares we own ($135 x 3).
In this scenario, we’ve turned $388 worth of income into $793 ($388 + $405). That means we doubled our income — simply from making three covered call trades on the side. Again, this is a very doable scenario. In fact, it would be very easy to pull off a few more trades like this within a calendar year and earn even more.
For a market that’s not offering much in the way of dependable high yields, that’s really something.
Bringing It All Together
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. That’s because it 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.
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 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. For example, if PSX rallies from about $102 now to $125 by February 17, our gains are capped at $120 (plus the income we earned). But we’re still making a profit. Alternatively, you could choose an option with a higher strike price, like $125, if you’re willing to accept less income.
That could be an acceptable trade-off. It all comes down to your goals. The point is that covered calls are one of the safest ways to earn high income in this low-yield environment. They’re perfect for anyone, from young people looking for more income on the side to retirees who want to pad their nest egg.
P.S. If you’re looking for a way to generate steady income using strategies like this, then you need to turn to Robert Rapier…
Income expert Robert Rapier can show you how to squeeze up to 18x more income out of dividend stocks with just a few minutes of “work” each week.
Up, down, sideways… even in the face of rising interest rates… tech selloffs… overseas war… and anything else Mr. Market throws at you, Robert’s trades are income-generating machines. Click here for details.