4 Dynamite Strategies to Increase Yield in Today’s Markets
Ever since the “great recession” of 2007-2009, we’ve been told that we’re in a “low-yield” or “low-interest rate” environment. With Bernanke basically telling Congress he’s going to continue to print money until the ink runs out, the paper runs out, or he gets tired, we’re likely to be in this low rate period for a long time.
But that doesn’t mean investors have to accept it. There’s obviously a pro to these rates staying low: We can borrow money very inexpensively. But here at FFA, you should know by now – we’re not exactly the biggest fans of debt. So, as I see it, low interest rates hurt more than they help.
For those investors who have already built their cash reserve and are now “searching for yield” (man, do I hate using CNBC-isms on this blog), here are four dynamite strategies to get you more bang for your buck.
#1 – Take a look at preferred stocks.
Preferred stocks are just that – they’re preferred – over common stock in matters of liquidation and dividend preference, but generally they’re pretty stable. Consider PFF, the iShares Preferred Stock Index fund, it’s yielding nearly 6%, with monthly dividends, and low volatility. Traditionally preferred stocks are financial-type companies, so you have to be cognizant of some sector risk, but if you like ho-hum boring performance (excluding the 50% decline in 2008), PFF is worth a look.
#2 – Consider closed-end funds
Closed-end funds differ from traditional mutual funds because, unlike traditional open-ended funds, they have a set number of shares they issue. Because of that, closed-end funds can sell either at a “discount” (the share price is below the net asset value) or at a “premium” (the other way). Many times, closed end funds use leverage to enhance their returns, so you need to be aware of that, but again, for the right person, The Dow 30 Enhanced Premium and Income Fund (Ticker: DPO), which is yielding 7.88% could be a winner. Nuveen Investments offers a large selection in this space.
#3 – Use Municipal Bonds
Muni bonds do have some volatility, and like most bonds, if interest rates do rise, the share price will plummet, so it’s not a set-it-and-forget-it investment. There are many different muni funds out there, so pick your favorite fund family and do a little research. Did I mention muni bonds are tax-free? You can pick up income, better than the bank rates, and it’s tax free. The best strategy here is to pick a couple non-correlated funds (US Government, High Yield, International, and Muni) and put them together in a portfolio. Many fund families allow new investments as low as $2,000, so you could do something like this with as little as $8,000.
#4 – Write covered calls
A call is an option to buy a stock at a specific price by a specific date. A covered call is when you already own the stock, and “writing” a covered call means you promise to sell your stock at a specific price by a specific date, in exchange for cash today. For example, let’s say you own 500 shares of Disney (ticker: DIS). Today’s closing price was $51 or so, so you’ve got $25,000 worth of Disney. I approach you and say, “Hey, how about this deal: You promise to sell me your DIS stock at $55 between now and July 20. In exchange for that, I’ll give you $1.50 per share today.” Is that a good deal? Let’s look: First, you get $750 in cash today. Second, for me to exercise my option, DIS has to be above $55, right? So that’s another $4 in appreciation, which is $2,000. If by July 20, DIS is below $56.50 (the $55 agreed upon price and the $1.50 up front cash), you made a good deal. If DIS is below $55, you keep your stock and keep the $750 up front money. If DIS goes down in value below today’s price, you’re still $750 ahead of everyone else. If you managed to do this twice a year at $750 each time with DIS as an example, that would be $1,500 plus the $0.75 dividend DIS issues (another $375) and if DIS does nothing all year, you’ve made $1,875. That’s a 7.5% yield folks.
There are other ways to increase yield, too, but I think these are the most appropriate for most people. Quick disclaimer: The stocks and ETFs used in this article are merely used as an example and are not a recommendation to buy or sell any security of any kind anywhere. There, now the lawyers will be less mad.
OK, your turn, blogger world: Best ways to increase yield. Go.
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