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How to Make Monthly Income in a Sideway Moving Market

Expectations for the third quarter earnings were dismal, with forecasts for a decline in profits from a year ago.  But a recent flurry of high-profile reports has investors scowling at the weak revenue numbers, adding to worries about the state of the U.S. economy and the outlook for corporate America.

IBM, General Electric and Microsoft fell short of revenue expectations, creating a sour mood early in the third-quarter reporting period.  This has led to a market that is moving nowhere too soon.  For the last month (Sept 24 – Oct 19), the benchmark S&P 500 Index is only up 0.4% while the PowerShares S&P 500 BuyWrite Portfolio (PBP) is down 0.95%.

Where can income investors go for monthly income in a sideway moving market?

One option is to look at a covered call strategy for monthly income.  A covered call strategy provides income from the premium received when a call option is sold against 100 shares of a stock.  In general, a covered call makes money when the stock price goes nowhere (like today’s market), when the stock price increases and provides downside protection when a stock slightly declines in price.

Subscribers to the Monthly Income Plan had exceptional returns from the monthly covered call trades.  We enter 4 monthly covered call trades on September 24 2012 for trades to expire on October 19 2012.  This is a total of 26 calendar days for these covered call trades.

The results included:

a 6.75% monthly return on the United Rentals, Inc. NYSE: URI covered call;

6.57% on the USG Corporation NYSE: USG covered call;

5.09% on the Royal Caribbean Cruises NYSE:RCL covered call;

and a 5.4% return on the SanDisk Corporation NASDAQ: SNDK covered call.

This is an average return of 5.95% in one month on these 4 covered call trades.  For comparison purposes, this is an annualized return of 83.6%.

These trades significantly beat the S&P 500 and PBP Buy-Write for the last month.  For income investors, they made $595 for every $10,000 invested in these 4 combined covered call trades.

Click here to subscribe to the Monthly Income Plan to get new covered call trades each month for only $19.95 per month.

 

Equity ETFs with High Yield Dividends

In order for a company to continue paying a dividend, it must maintain its capacity to pay.  While it is tempting to purchase funds merely because they have high dividend yields, investors must be conscious of the underlying fundamentals of those companies paying those funds because future payments may be slashed.  Current equity price trends are a better indicator of financial health than dividend yields because companies rarely cut dividend payments until they lack the capacity to pay.  However, market participants observe deteriorating fundamentals, causing equity prices to decline.  In order to find companies with competitive dividend yields and improving fundamentals, this screen includes criteria based on increasing revenues, cash flow and book value to ensure that the firm’s ability to pay dividends is not decreasing.

POWERSHARES S&P 500 BUY WRITE PORTFOLIO (PBP) seeks investment results that generally correspond (before fees and expenses) to the price and yield of the CBOE S&P 500 BuyWrite Index.  The fund normally invests at least 80% of total assets in common stocks of the 500 companies included in the S&P 500® Index and writes (sells) call options thereon. The underlying index measures total returns of a theoretical portfolio including the S&P 500 Index stocks on which S&P 500 Index call options are written (sold) systemically against the portfolio through a “buy-write” strategy. The fund will write options that are traded on national securities exchanges. It is non-diversified.

SPDR S&P INTERNATIONAL DIVIDEND (DWX) seeks to replicate, net of expenses, the S&P International Dividend Opportunities index.  The fund invests at least 80% of assets in securities that comprise the index. It invests in ADRs and GDRs that trade on developed market exchanges.  The fund is non-diversified.

ISHARES MSCI EMERGING MARKETS FINANCIALS SECTOR INDEX FUND (EMFN) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Financials Index. The fund invests generally at least 90% of its assets in securities of the index and in depositary receipts representing securities of the underlying index.

ISHARES MSCI POLAND INVESTABLE MARKET INDEX FUND (EPOL) seeks investment results that correspond generally to the price and yield performance, before fees and expense, of the MSCI Poland Investable Market Index. The fund generally invests at least 90% of assets in the securities of the underlying index and in depositary receipts representing securities of the underlying index.

GUGGENHEIM MULTI ASSET INCOME (CVY) seeks investment results that correspond generally to the performance, before the fund’s fees and expenses, of an equity index called the Zacks Multi-Asset Income Index. The fund invests at least 90% of total assets in securities that comprise the index and depositary receipts representing securities that comprise the index.

The table below shows the detail staistics for ETFs meeting this criteria.

Click to enlarge

High Yield ETFs for the Income Investor

Exchange traded funds (ETFs) outperformed the fund universe in 2011 and will likely continue the trend in 2012.  Investors are looking for safety and yield, and dividend ETFs offer a low-cost, transparent way to invest in a basket of companies and mitigate single-stock risks.  The following screen looked at performance, dividend yield, expense ratio and analyst recommendations.  All of these ETFs are rated a buy or hold by Ned Davis Research.  The list has some interesting ETFs such as:

POWERSHARES S&P 500 BUYWRITE PORTFOLIO (PBP) – seeks investment results that generally correspond (before fees and expenses) to the price and yield of the CBOE S&P 500 BuyWrite Index. The fund normally invests at least 80% of total assets in common stocks of the 500 companies included in the S&P 500® Index and writes (sells) call options thereon.  PBP was recently upgraded by Ned Davis Research on January 6 2012.  PBP has a high yield of 10.16% which must be in the top range of ETFs.

POWERSHARES CEF INCOME COMPOSITE PORTFOLIO (PCEF) – seeks income by being a “fund of funds” by investing in 124 different closed-end funds in various types and strategies.  This is a nice offering for investors wanting to diversify across a significant amount of CEFs without the single-CEF risk.  PCEF price performance has improved over the last 13 weeks but this is an ETF for dividends as it provides a dividend yield of 8.27%.  Top CEF holdings include: EXG, ACG, ETY, EVV, FAX, JQC, ETW, BBN, NFJ and ETJ.

SPDR BARCLAYS HIGH YIELD BOND ETF (JNK) and ISHARES IBOXX $ HIGH YIELD CORPORATE BOND (HYG) provide fixed income ETFs with high yields.  For exposure to preferred stock dividends look at these ETFs: POWERSHARES FINANCIAL PREFERRED PORTFOLIO (PGF); SPDR WELLS FARGO PREFERRED STOCK ETF (PSK; ISHARES S&P US PREFERRED STOCK INDEX (PFF); POWERSHARES PREFERRED PORTFOLIO (PGX).

Here is the list of ETFs passing the screen for high yield ETFs:

List of high yield ETFs for 2012 prepared by getrichinvestments.com

Click to enlarge

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