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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Nice list of potential ways to increase yield. I definitely need to look into a few of these options. I don’t have any specific ways to increase yield, but I would imagine purchasing riskier assets would correlate to higher return. Of course, with risky investments there is also a chance for higher losses…
DC @ Young Adult Money recently posted..$100 Giveaway – No Spending Edition
You’re right, if you increase risk, you should increase return, but what I’m trying to do is increase yield – or said another way, the money my money makes – without taking more risk!
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I would probably go.with preferred stocks only because I understand them best from a technical standpoint. Never looked much into them from a practical standpoint though.
Lance @ Money Life and More recently posted..2013 Tax Rate Tables and Other Inflation Adjustments
Lance, rather than trying to buy a specific issue, take a look at the index fund – nice basket of different investments – gives you some diversification. Nice monthly income, too.
Great ideas OG! It’s harder to find yield today, but it just requires a little creativity. I’ve seen a good number of investors go into a Preferred stocks to get some return. They’re good, as long as your mindful of what sector you go into…but they can be really good producers. I am a fan of covered calls myself, but would tend to recommend those to investors who’re educated enough.
John S @ Frugal Rules recently posted..Giveaway: Can You Challenge Yourself Not to Spend Money?
I remember being scared out of my mind when using options the first time: “You mean my loss is UNLIMITED???” But you’re right, once you get some edumucation it’s easy to understand – especially covered calls. Easy money.
I like this article, and I like how close I am to needing this kind of advice. Thanks, Other Guy!
Kathleen, Frugal Portland recently posted..Save now, spend later (plus $100 giveaway)
How close you are? You can do these things with $100! A little increase here and there = big increase. We tell our business consulting clients that if you make 0.5% improvements in 20 different areas – that’s a 10% gain!
I have so much to learn about investing, but I love the idea of covered calls–thanks for sharing this info!
The Happy Homeowner recently posted..Do No Spend Days Really Work? (and a CASH GIVEAWAY!)
Preferrred stocks aren’t talked about much, but are a nice option for yield. If the investor can tolerate some default risk, lower rated, short term corporate bonds are also a source of greater yield.
Barbara Friedberg recently posted..I BONDS DEMYSTIFIED; GET GOOD RETURNS ON YOUR CASH
I also love your post, Barbara, about I Bonds…good stuff there, too.
Good summary, particularly of covered calls! We will be referring to this guide over the next years I think!
John@MoneyPrinciple recently posted..Money management 101: tools of the trade
Ha! Based on Maria’s recent post, John, you’re right there!
Good points! Warren Buffett bought $5 billion of preferred stock in Bank of America to help stabilize it. If I only had a couple of billion laying around to invest!
krantcents recently posted..How to Prepare for 2013 or Any Year!
You could just write a check, KC!
Remember your net yield will be determined in purchasing power.
Taking MORE risks in a paper market that won’t even sell you a 3% CD is very risky. In the end many more individuals have to be burned to pay the gains of a few. If you’re on the inside it’s awesome but if your not you’re screwed shout out to $fb IPO buyers.
Buy silver earn 7% or better and forget about it.
Freedom Jackson recently posted..#ThrowbackThursday Running Jackets for Professional Bloggers.
Your silver and gold comments always crack me up. You say “buy silver and gold” and I immediately say that silver and gold, while good investments, have three times the volatility of the stock market. This piece is about higher yield and safety, not about riding roller coasters.
Thanks for sharing these options. I have been looking at Muni bonds, but really don’t understand enough yet about them. Honestly, if I was going to put $25K into something right now, I’d probably use it as a down payment on a rental property. I really want to have one more before the rates start to rise, but really need to be patient and see how a few things turn out this year.
Kim@Eyesonthedollar recently posted..Eyes on the Dollar 20/20 Roundup #22-I’m Old Edition
Outside of covered calls you could also sell puts on stocks you want to own. I do this to increase the yield on the cash I have sitting in my brokerage account. I simply sell a put at the price I’m willing to own the stock and hope my price is met if not I keep the premium and move on =)
Cha-ching!