Get Rich - Stay Rich - Investing for Monthly Income

Archive for April, 2011

Five CEFs with 10% Yields

Can you still get a 10% annual dividend yield in today’s market?  Yes.  We scanned the CEF (closed-ended funds) landscape to find the 5 highest yielding CEFs with monthly distributions.  All of these CEFs have an annual yield above 10%.  As you would expect, 4 of the 5 CEFs are trading at a premium to their NAV (net asset value) so you would add these stocks to your watchlist and wait to purchase on a market pullback.  These are great investments to re-invest your dividends or to create a monthly passive income.  A 10% yield will compound fast at a monthly distribution rate.  Click the image below to enlarge.

Dreyfus High Yield Strategies Fund (DHF) is a non-diversified, closed-end management investment company. The Fund’s primary investment objective is to provide high current income by investing at least 65% of its total assets in income securities rated below investment grade. The fund also provides capital growth as a secondary objective. The Fund invests primarily in fixed-income securities of below investment-grade credit quality. Issuers of below investment-grade securities may include companies in early stages of development and companies with a highly leveraged financial structure. The Dreyfus Corporation (Dreyfus) serves as the Fund’s investment manager and administrator.
Alpine Total Dynamic Dividend Fund (AOD) is a diversified, closed-end investment company. The Fund’s investment objective is to invest in equity securities that provide high current dividend income. The Fund also focuses on long-term growth of capital as a secondary investment objective. In addition, the Fund has no limitations on the percentage of holdings that can be in either international or the United States companies. It invests in various sectors, including consumer discretionary, industrials, energy, information technology, materials, consumer staples, healthcare, financials, utilities and telecommunication services. Alpine Woods Capital Investors, LLC is the Fund’s investment adviser.
PIMCO High Income Fund (PHK) is a diversified, closed-end management investment company. The Fund’s primary investment objective is to seek high current income. Capital appreciation is a secondary objective. The Fund invests in a diversified portfolio of United States dollar-denominated debt obligations and other income-producing securities that are primarily rated below investment grade. The Fund seeks to invest at least 50% of its net assets in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody’s Investors Service, Inc., below BBB by either Standard & Poor’s or Fitch, Inc., or unrated but judged by the investment manager to be of comparable quality), which may be represented by forward contracts or derivatives, such as options, futures contracts or swap agreements. Allianz Global Investors Fund Management LLC serves as the Fund’s investment manager. Its sub-advisor is Pacific Investment Management Company LLC.
Western Asset High Income Fund II Inc. (HIX) is a diversified, closed-end management investment company. The Fund seeks to maximize current income by investing at least 80% of its net assets, plus any borrowings for investment purposes, in high-yield debt securities. As a secondary objective, the Fund seeks capital appreciation to the extent consistent with its objective of seeking to maximize current income. The Fund invests in high-yield and emerging market instruments. The Fund invests in securities and distributes dividends from net investment income and net realized gains. It invests in corporate bonds and notes, collateralized mortgage obligation, collateralized mortgage obligation, collateralized senior loans, collateralized senior loans, convertible bonds & notes, sovereign bonds, sovereign bonds, common stocks, convertible preferred stocks and warrants. The Fund’s investment manager is Legg Mason Partners Fund Advisor, LLC.
AGIC Convertible & Income Fund II (NCZ), formerly Nicholas-Applegate Convertible & Income Fund II, is a diversified, closed-end management investment company. The Fund’s investment objective is to provide total return through a combination of capital appreciation and high current income. It invests in a diversified portfolio of domestic convertible securities, and non-convertible, high-yield bonds rated below investment grade. It seeks to invest at least 50% of its portfolio in convertibles. The Fund invests in sectors, such as advertising, airlines, aerospace and defense, auto components, commercial services and supplies, construction and engineering, diversified financial services, healthcare providers and services, and telecommunications. Allianz Global Investors Fund Management LLC serves as the Fund’s investment manager and is an indirect, wholly owned subsidiary of Allianz Global Investors of America L.P.

Covered Call Trades for May 2011

It is time to begin looking at the next month (May) covered calls at this time as April expired on Friday.  I have already started a short list of potential trades.  This list is most at-the-money and slightly out-of-money calls.  I have included the S&P Ranking as well as the volatility measures on the chart.  Here is the list. with company profiles below (click image to enlarge).

Thermo Fisher Scientific Inc. (Thermo Fisher) is engaged in serving science. It provides analytical instruments, equipment, reagents and consumables, software and services for research, manufacturing, analysis, discovery and diagnostics. The Company operates through two segments: analytical technologies and laboratory products and services. Analytical technologies segment includes pharmaceutical, biotechnology, academic, government and other research and industrial markets. Laboratory products and services segment offers combination of products and services that allows its customers to engage in their core business functions of research, development, manufacturing, clinical diagnosis and drug discovery. In April 2010, the Company acquired Proxeon A/S, a supplier of products for proteomics analysis. In December 2010, the Company acquired Lomb Scientific. In April 2011, the Company sold two laboratory testing services businesses, Athena Diagnostics and Lancaster Laboratories.
Cummins Inc. designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls and air handling systems. The Company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It has four segments: Engine, Power Generation, Components and Distribution. It serves its customers through a network of more than 600 company owned and independent distributor locations and more than 6,000 dealer locations in more than 190 countries and territories. In November 2010, it purchased a majority interest in a previously independent North American distributorship. On January 4, 2010, it acquired the 70% interest in Cummins Western Canada (CWC).
World Fuel Services Corporation is engaged in the marketing and sale of marine, aviation and land fuel products and related services on a global basis. The Company operates in three business segments: marine, aviation and land. In the marine segment, it offers fuel and related services to maritime customers, including international container and tanker fleets, commercial cruise lines and time-charter operators, as well as to the United States and foreign governments. In the aviation segment, the Company offer fuel and related services to commercial airlines, second and third-tier airlines, cargo carriers, regional and low cost carriers, corporate fleets, fractional operators, private aircraft, military fleets and to the United States and foreign governments. In the land segment, the Company offers fuel and related services to petroleum distributors operating in the land transportation market, retail petroleum operators, and industrial, commercial and government customers.
Prudential Financial, Inc. is a financial services company. It has operations in the United States, Asia, Europe and Latin America. Through its subsidiaries, it offers an array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services. It offers these products and services to individual and institutional customers through third-party distribution networks. It has two businesses: Financial Services Businesses, which comprises its U.S. Retirement Solutions and Investment Management division, U.S. Individual Life and Group Insurance division, and International Insurance and Investments division, and The Closed Block Business, which comprises the assets and related liabilities of the Closed Block. On February 1, 2011, it completed the acquisition from American International Group, Inc. (AIG), of AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company.
General Motors Company (GM) is a global automotive company. It develops, produces and markets cars, trucks and parts worldwide. GM also provides automotive financing services through General Motors Financial Company, Inc. (GM Financial), formerly AmeriCredit Corp. (AmeriCredit). These financing operations consist principally of financing automobile purchases and leases for retail customers. The Company operates in five segments: GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA) and GM Financial. GM Financial is an automotive finance company. GM Financial purchases automobile finance contracts for new and used vehicles purchased by consumers primarily from franchised and select independent dealerships. On October 1, 2010, GM completed the acquisition of GM Financial. In February 2010, GM completed the sale of Saab Automobile AB (Saab). In May 2010, the Company completed the sale of Saab Automobile GB (Saab GB).
Jacobs Engineering Group Inc. is a technical professional services firm in the United States. It provides a range of technical, professional, and construction services to. The Company provides four categories of services: project services, which include engineering, design, architectural, and similar services; process, scientific and systems consulting services, which includes services performed in connection with a range of scientific testing, analysis, and consulting activities; construction services, which encompasses construction services, as well as modular construction activities, and includes direct-hire construction and construction management services, and operations and maintenance services, which includes services performed in connection with operating facilities on behalf of clients, as well as services involving process plant maintenance. In December 2009, it acquired TYBRIN Corporation. In February 2010, it acquired Jordan, Jones and Goulding, Inc.
Newfield Exploration Company (Newfield) is an independent oil and gas company engaged in the exploration, development and acquisition of oil and gas properties. The Company’s domestic areas of operation include the Mid-Continent, the Rocky Mountains, onshore Texas, Appalachia and the Gulf of Mexico. Internationally, the Company operates in Malaysia and China. Mid-Continent division is focused primarily in the Anadarko and Arkoma basins. Its Greater Monument Butte is the Greater Monument Butte field area, located in the Uinta Basin of Utah. During the year ended December 31, 2010, approximately 82% of its proved reserves and 90% of its probable reserves were located in resource plays, primarily in the Mid-Continent and the Rocky Mountains. As of December 31, 2010, Newfield had proved reserves of 3.7 one trillion cubic feet equivalent. On February 11, 2010, the Company acquired some of TXCO Resources Inc. (TXCO’s) assets in the Maverick Basin of southwest Texas.

Should You Continue Buy & Hold Investing?

How many people do you know who have achieved great wealth by holding their stocks for long periods of time?  There are a number of these investors who achieved staggering success such as Warren Buffett.  However, there are numerous reasons why I prefer income investing including covered calls to buy and hold.

“If anything, buy and hold is a completely reckless and irresponsible strategy.  This is why I have always preached ‘buy and homework.’  There is nothing wrong with buying a stock with the intention of owning it for years, as long as you are willing to check up on that stock every week to make sure that your investing thesis for owning it has not fallen apart.”  Jim Cramer (2007)

This is good advice from Cramer.  I can add more rationale why I prefer income investing to buy and hold investing:

1 – Stocks don’t always go up
As evidence from the last decade, stock returns can be volatile.  Over the last 10 years of the 2000 – 2010 decade, the S&P return was flat.  if you incorporate income investing into your strategy, you are still getting that money as a return that can be reinvested for more compounding.

2- Buy and hold doesn’t produce income
Stocks just lying around the portfolio produce no cash to you except for dividends assuming the stock pays a dividend.  Growth stocks may or may not be ome runs.  Do you really want to tie-up your capital in an investment that doen’s produce cash flow to you?  You can improve your cash return by investing in monthly dividend payers and writing calls against stock that you already own.

3- Is your timing right?
To make nice returns with buy and hold, you must be in the right stocks at the right time.  You must find the stocks that will appreciate in value and buy them at the right time to get a good price.  This requires a timing element in the stock market.  What if you found a stock just before the economic crisis of 2008?  You would have the right stock at the wrong time and lost money in the process.

If you prefer to hold a portion of long-term stocks in your portfolio, then you should consider writing calls against these stocks to generate additional income.  Of course, you can add some monthly dividend ETFs to your portfolio to add more income and diversification.

Should You Sell Covered Calls in an Up Market?

So the stock market is up 100% or more since the low of two years ago, should you still sell covered calls?  The answer is yes because stocks don’t move up in a straight line as there are many up and downs along the long-term trend.  Here are six reasons why you may want to consider selling covered calls in a rising market:

1 — Momentum
Maybe a stock has risen more than the market recently and the momentum traders are doubling down. In doing so they usually increase the call premiums to where they’re just too juicy to not try a deep in the money buy-write. Anybody look lately at Netflix (NASDAQ: NFLX)  Lululemon Athletica (NASDAQ: LULU),  or Chipotle Mexican Grill (NYSE: CMG)? These can be highly volatile so it is probably wise to keep the durations short (i.e. sell the near month, and not four to six months out).

2 — Pending News
Before a big news announcement, for example, Apple (NASDAQ: AAPL) with respect to Verizon (NYSE: VZ) iPhone, or any company before an earnings announcement) the option premiums tend to increase. Rather than buying into the hype, consider selling the hype by selling covered calls. The amount in- or out-of-the-money should scale with your opinion of which way the news will fall.

3 — Margin
When trading on margin you need to be extra careful. You can get hurt quickly if there is a sudden move against you. One way to increase your protection is by selling deep in-the- money calls. You may still lose money if there is a dramatic move down, but the call premium should buy you time to exit the position (if you need to) with fewer losses than you would have had if you had merely held the stock long.

4 — Taking some off the Table
Don’t be too greedy. After you’ve had a nice run in a stock it is prudent to either (1) sell a portion of the stock, or (2) write some calls against it so that if it gives back some of its recent gains you can capture some profit from the call premium. Often these can be combined by selling covered calls that are in-the-money on the portion of the stock you want to sell anyway. That way you eek out a bit more profit from the position. Or, if you’re still very bullish then try selling some near-term out-of-the-money covered calls.

5 — Partial Cover
If you can’t make up your mind whether you should cover the entire holding, then consider selling covered calls on part of your position. You’ll end up being half right and half wrong at the same time, but at least you won’t have been all wrong.

6 — Monthly Income
If you have core holdings that you plan to own for the long-term then why not write some out-of-the-money calls on them to generate some extra income (even if they’re rising in a bull market)? Depending how far out-of-the-money you choose, you may need to sell several months worth of time instead of near-month (to cover the transaction costs).

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