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Wednesday, February 29, 2012
If you're like most retirees, chances are good that you've fallen for a big investment myth.
This myth is probably preventing you from enjoying the retirement you expected. It could be costing you nice dinners, better vacations, and more leisure activities.
The myth is that extremely low interest rates mean you should earn equally low rates of income from your savings.
I'm going to show you today that this idea – which you'll hear from many financial advisors and brokers – is simply wrong. Right now, it's possible to earn 10%-20% yields on your money – safely.
This is not a joke... and it's no marketing claim. I know thousands of people who are using an unusual investment technique to regularly earn safe, double-digit yields on their savings. Here's the story...
I'm sure you're familiar with what's going on with bank CDs and government bonds. Rates are so low, folks like you and me can't earn a decent rate of interest.
For example, 10-year government bonds are yielding just 1.92% right now. Five-year CDs are paying 1.75% or less. These yields will generate less than $1,000 a year in income (before taxes) on a $50,000 stake. As savers, we need – we must – do better than that.
I prefer stocks over bonds. Many good, safe stocks are yielding 3%-5% right now. But again, you can do better than that. Much better...
All you have to learn is a simple technique that thousands of folks are using to double, triple, and quadruple the yields they earn on stocks. You have to learn about selling "covered calls."
In general terms, selling a covered call amounts to buying shares of a stock... and then selling "call options" on that stock to other traders. Selling a "call option" gives another party the right to buy your shares from you at an agreed-upon price in the future (in this case, a higher price).
I know it might sound like a strange transaction. But this sort of transaction happens millions of times a day...
Why does it happen? Well, many people like to gamble in the stock market. And options are one of their preferred "games."
Most of the people who buy these options are gamblers... Most of them are betting on a particular stock hitting a particular price in a particular amount of time.
These folks are making risky, low-probability bets... And I'm happy to take the other side and pocket their cash.
The whole process is different from just buying shares. And it takes a little while to get used to the idea. But let me walk you through some numbers, so you can see how useful a tool it is if you're looking for safe income...
Right now, for example, you can buy Microsoft for $31.82 per share. Let's say you buy 100 shares, for a total of $3,182.
Right after buying your shares, you can sell someone the right to buy your shares from you for $32 per share in about three months. You collect $107 for selling that right. This $107 payment represents an instant 3.4% yield on your investment.
If Microsoft does not rise to $32 per share in three months, you simply keep that instant 3.4% yield, your 100 shares, and any dividends you collected along the way. You can then do pretty much the same trade all over again.
Do this "3.4% in three months" trade four times in one year, and you can make 13.7% (while collecting Microsoft's safe 2.5% regular dividend). On a $50,000 stake, that would generate more than $8,000 a year. Of course, we don't ever recommend you put more than 5% of your account into any one trade, but you can see how much better this strategy is than standard income ideas.
Understand... this Microsoft trade isn't just theory. My readers have sold covered calls on Microsoft many times to make 3%, 4%, even 5% in two to four months.
Keep in mind... Microsoft is a very safe, very cheap stock. And we're earning double-digit annual yields with our simple "covered call" strategy.
The conventional "knock" against covered calls is that you "sell away" the potential upside stocks offer. It's a valid concern. But these days, I know most folks are more concerned with earning safe, 10%-20% yields than they are with trying to "shoot the moon" using risky strategies.
I've deliberately kept this explanation simple. There are more things an investor needs to know to successfully sell covered calls. It's especially important to keep one major thing in mind. It's by far the most important factor when it comes to earning safe double-digit income with this idea. In tomorrow's essay, I'll tell you what it is.
Here's to our wealth, health, and a great retirement,
When you see a stock offering a super-high yield, you should almost always run the other way... because it's often a dangerous trap. But with covered calls, you can generate 17% income on the world's safest cheap stocks. Read more about how it works here.
"If you're a do-it-yourselfer, I recommend getting started on your own covered call portfolio," Doc Eifrig writes. But even if you're not ready for that, he's got a one-click way to employ this income-boosting strategy. Learn more here: How to Triple the Income You Collect from Super-Safe Stocks.
THE MARKET IS GOING WILD FOR PIPELINES
Investors are going wild for MLP stocks... just have a look at Kinder Morgan Energy Partners (NYSE: KMP).
Back in early 2009 – near the bottom of the great credit crash – we noted how income-seeking investors should consider a position in Master Limited Partnerships (MLPs). This sector consists of firms that own and operate energy transportation assets, like pipelines. To entice people to invest in America's energy infrastructure, the government has granted MLPs special tax breaks, which require them to pay out most of their income to investors.
In our original note, we pointed out how this beaten-up sector had carved out a bottom... and offered 10% yields. We updated you on this big trend over the next year here and here. And as you can see from our chart of blue-chip pipeline operator Kinder Morgan, the market is now going wild for this idea.
With a $30 billion market cap, KMP is a giant in the pipeline industry. It's one of the largest and most liquid ways to buy American pipelines. In just the past five months, the stock has ripped 30% higher... which is an extraordinary move for a "boring" pipeline firm. Many other pipeline firms are surging as well. The performance-chasing momentum crowd is piling into MLPs.
In The Daily Crux