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How To Create Your Own High Yield Cash Machine

Many investors look to their portfolios for income.  To get current income, these investors should look for high yield investments.  High-yielding investments can be a little confusing if you just search for the biggest yields.  This article will share some guidelines to creating a cash machine for high income.

A “Real” High Yield Investment:

  • Pays dividends yields of 5% to 20% annual
  • Highly liquid vehicles that can be bought or sold through discount or online brokers
  • Less volatility than the average large cap stock portfolio
  • Drives dividends from cash-flow, not debt payments
  • Pays dividends monthly and/or quarterly

There are so many investment categories that offer high yield securities.  Here is a list of high yield investments:

  • Business Development Companies (BDCs)
  • Canadian Royalty Trusts
  • Closed End Funds
  • Convertible Securities
  • Corporate Bonds
  • Emerging Market Debt
  • Exchange Traded Funds (ETFs)
  • Exchange Traded Notes (ETNs)
  • Grantor Trusts
  • Master Limited Partnerships (MLPs)
  • Oil/Shipping Tanker Stocks
  • Option Income Funds
  • Preferred Stocks
  • Real Estate Investment Trusts (REITs)
  • Structured Products (i.e. STRIDES)

 While do you want to buy high yielding investments?  The five keys to the cash machine high income investment strategy are as follows:

  1. It pays a double-digit yield
  2. It’s highly diversified
  3. It’s highly liquid
  4. It’s flexible
  5. It offers upside appreciation with less volatility than common stocks

 To build your own cash machine portfolio you must do the following:  

  • Desire to build income portfolio
  • Look for securities paying yields of 5% to 20%
  • Invest in asset classes with strong fundamentals in pockets of economic strength
  • Rotate in and out of sectors of strength
  • Target capital appreciation of 10% to 15% per year

The bottom line is that all income investors should have at least a portion of their income in a cash machine with high yield investments.

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Using a Protective Put to Prevent Investment Losses

At Get Rich Investments, we create investing strategies to capture monthly income. This may take the form of covered call trades, cash-secured put trades, CEFs for monthly dividends and other strategies. However, as the market volatility increases such as we have experienced lately, investors get worried about protecting their capital. We do have an answer which is an effective strategy. It is called a protective put trade to protect against losses during a price decline. We like to also combine the protective put with our covered call strategy to have our income and protect our capital at the same time.

Please don’t take my word for it , here is how our friends at Fidelity Investments describe using a protective put.

There are two types of options: calls and puts. The buyer of a call has the right to buy a stock at a set price until the option contract expires. The buyer of a put has the right to sell a stock at a set price until the contract expires.

If you own an underlying stock or other security, a protective put position involves purchasing put options, on a share-for-share basis, on the same stock. This is in contrast to a covered call which involves selling a call on a stock you own. Options traders who are more comfortable with call options can think of purchasing a put to protect a long stock position much like a synthetic long call.

The primary benefit of a protective put strategy is it helps protect against losses during a price decline in the underlying asset, while still allowing for capital appreciation if the stock increases in value. Of course, there is a cost to any protection: in the case of a protective put, it is the price of the option. Essentially, if the stock goes up, you have unlimited profit potential (less the cost of the put options), and if the stock goes down, the put goes up in value to offset losses on the stock.

Let’s highlight how the protective put works. Assume you purchased 100 shares of XYZ Company at $50 per share six months ago. The cost of this trade was $5,000 ($50 share price multiplied by 100 shares).

The stock is now trading at $65 per share, and you think it might go to $70. However, you are concerned about the global economy and how any broad market weakness might impact the stock.

A protective put allows you to maintain ownership of the stock so that it can potentially reach your $70 price target, while protecting you in case the market weakens and the stock price decreases as a result.

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When the stock is trading at $65, suppose you decide to purchase the 62 XYZ Company October put option contract (i.e. the underlying asset is XYZ Company stock, the exercise price is $62, and the expiration month is October) at $3 per contract (this is the option price, also known as the premium) for a total cost of $300 ($3 per contract multiplied by 100 shares that the option contract controls).

If XYZ continues to go up in value, your underlying stock position increases commensurately and the put option is out of the money (meaning it is declining in value as the stock rises). For instance, if at the expiration of the put contract the stock reaches your $70 price target, you might then choose to sell the stock for a pretax profit of $1,700 ($2,000 profit on the underlying stock less the $300 cost of the option) and the option would expire worthless.

Alternatively, if your fears about the economy were realized and the stock was adversely impacted as a result, your capital gains would be protected against a decline by the put. Here’s how.

Assume the stock declined from $65 to $55 just prior to expiration of the option. Without the protective put, if you sold the stock at $55, your pretax profit would be just $500 ($5,500 less $5,000). If you purchased the 62 XYZ October put, and then sold the stock by exercising the option, your pretax profit would be $900. You would sell the stock at the exercise price of $62. Thus, the profit with the purchased put is $900, which is equal to the $500 profit on the underlying stock, plus the $700 in-the-money put profit, less the $300 cost of the option. That compares with a profit of $500 without it.

As you can see in this example, although the profits are reduced when the stock goes up in value, the protective put limits the risk to the unrealized gains during a decline.

We continue to identify winning option trades to generate income and to exit early as the stock bullish patterns moves prices higher.

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