Did you read Barron’s first cover story of 2016 and follow its advice? If so, now that Q1 is behind us, a status check is in order: How’s that all working out for you? We have a hunch that your answer isn’t exactly positive.
Do yourself—and your portfolio—a favor and think far bigger (we’ll help you with that vision shortly).
In case you didn’t read it, Barron’s “Best Income Ideas for 2016” story featured trading ideas focusing on ETFs and stocks that provide annual yields up to 9%.
Yes, 9%. Of course, to get any meaningful “income” from that 9% yield (annually), you’d have to post up at least $100,000 in the underlying stock. Assuming that is, you can stomach that kind of risk in a single position.
That will get you a cool $9,000 next year. Wooo… don’t spend it all in one place, now.
Of course, given the shockwaves in the stock market today, let’s hope you don’t wind up with a 20%, 30% or 40% loss in the underlying shares. 9% doesn’t look so good then, does it?
Our answer: You can do far better than 9% annually (and you don’t have to wait for the dividend check, nor accept huge risk by holding massive cash value in shares).
Read on for proof…
Barron’s, however, doubles down on their income silliness with the perceived attractiveness of high-yield bonds, which collapsed in the latter half of 2015 (much the same as ETFs collapsed in August 2015), but Barron’s believes you could generate terrific income opportunities if you’re looking for passive income returns. We think Barron’s isn’t giving you the full picture.
Sure, high-yield bonds could be a great buy. If they go up.
That’s a mighty, mighty big IF. Take a look at WHY that’s such a big IF:
The junk bond market collapsed in late 2015 because of risks associated with oil companies—companies that, right now, are facing huge bond payments at a time when, as you should know, oil prices are at record low prices, meaning their profits are falling; workforces are being slashed; expenses cut; output reduced; rig count reduced.
Do you see any good news there?
Let’s move on to the Federal Reserve, which, in December, raised interest rates in for the first time in seven years. It isn’t the first rate increase that should worry you as a bond holder—it’s the second, the third and the fourth.
Because the Fed was very clear that they are moving more aggressively to increase rates, even as most other global central banks are cutting rates or holding them steady. While things have slowed down a bit, two more increases are expected this year.
So what, right? Rising rates mean higher yields, but they also mean LOWER prices. That’s a very bad combination right now when it comes to high-yield bonds. Proof? Let’s go to the charts…
The best indicator of the high-yield bond market is JNK, Barclay’s High Yield Bond ETF.
Since the financial crisis of 2008, JNK has not traded in the $30s, until late last year when it collapsed and put in a new five-year low. FIVE-year low. The rate at which JNK has collapsed also hasn’t been seen since 2008.
It’s a waterfall that seems to still be falling—because that collapse has everything to do with oil and companies that have any hint of risk associated with oil.
But if higher interest rates mean lower bond prices, where does this chart go? Where does your money go? Yes, the hopeful among us would like to believe a recovery in the high-yield bond market is at hand (and to be truthful, it’s actually necessary in order to give a lift to the stock market).
It isn’t happening in 2016, though.
There’s more… wouldn’t you know it.
First and foremost: the best stocks in the market in 2015 attracted the most money. If you focus on yield next year and you get just one bad stock, you’ll be heading for the local lottery ticket dispenser to make up the losses.
Bad stocks did not attract capital in 2015. Any notion that 2016 will be different is speculative, at best; another waste of your money, at worst.
Implied correlation—the rate at which the individual stocks in the S&P 500 tracked the indexes—was at its worst last year, as just six stocks accounted for nearly 10% of the S&P’s gains in 2015…
It’s OK (I know what you’re thinking right now), the S&P didn’t GAIN 10% last year, did it?
No. It didn’t. Which tells you that, actually, based on the weighted shares of the index, the S&P 500 actually LOST money in 2015, if not for those six stocks (Facebook, Google, Amazon, Netflix, GE and Apple).
For active income investors, let us be clear:
Any “lower yield” strategy must be PART of your overall income portfolio.
You cannot expect to achieve anything better than “fast food income” without accepting some form of risk.
A true income portfolio should be diversified, but we’ll be straight with you…
The best income strategy in 2016: actively selling options (puts and covered calls)
You can sell both weekly options for weekly income, and monthly options for monthly income.
We believe selling options will outperform any other strategy in 2016 for four reasons:
- You do NOT have to be long-term committed to a stock to generate income from it (and frankly, in this market, who would want to be?).
- You “leverage” your capital without spending it when you sell puts, and you “leverage” your stock holdings (without spending capital) when you sell covered calls.
- The market won’t be less volatile in the first six months of 2016. Every single condition that led to late year volatility in 2015 still exists.
- You don’t need hundreds of stocks to generate income. You need 20 or fewer. That’s it.
Enter The World of Low-Risk Put Selling
If you’re serious about generating REAL income, a put selling strategy can generate superb returns that can trounce high-yield anything. Dividends, stocks, bonds… when you learn to use your capital correctly, you’ll change the way you produce income for yourself.
Even with oil prices plunging, expert trader and financial analyst Michael Shulman found one refiner that was ahead of the game—and even benefiting from the petroleum sell-off.
Tesoro Company (TSO) was battling against the grain, so Shulman recommended that his Options Income Blueprint members sell Weekly TSO put options on 10/28/2015 for $2.60 per share or $260 per contract…
Two days later those put shares expired worthless and his members pocketed $260 for a 2.7% gain or an annualized return over 135%.
Enter The World of Low-Risk Covered Call Selling
If you really want to maximize income potential, it’s here in covered calls.
Too many investors who own shares of stock (100 shares or more) fail themselves by not selling covered calls.
No matter how much you love your stock (and we all love our stocks), every week you let go by without selling calls is another week you are losing money.
Shulman had his members sell weekly covered calls on their Apple (AAPL) stock in October, and they collected $169 for every contract sold in just 3 days…
Do that 50 times a year and you’re banking over 90% annualized return.
Even better, Shulman recommended a buy write on Blackstone Group (BX), buying shares on 9/29 for around $30 and selling the BX 31 calls for around $.70 per share or $70 per contract.
The stock popped to over $32, and members were called out at $31. They pocketed $1.00 in capital appreciation and kept the $.70 in premium for a 2% gain in 3 days.
Run that trade 50 times a year and you have over 100% income generation on a $30 stock.
The Bottom Line
Clearly, Barron’s is happy with nickels and dimes. We don’t think you should be.
There are dollars to be had if you’re willing to learn how to grab them.
You can do far better than 9% annually—and you don’t have to wait for the dividend check, nor accept huge risk by holding massive cash value in shares.
Learn now about how Michael Shulman’s Six-Figure Portfolio coaching class collected $11,454 in cash income in February 2016—right in the teeth of the heavy market correction.