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Don't Book Your Summer Holidays Yet: The Income Method



  • An old adage advises leaving the markets for 5/12ths of the year.
  • Historical returns show May through October underperform the rest of the year.
  • Income investors have additional considerations to take into account before even thinking of following this adage.
  • We recommend some additional securities for your income portfolio that you may have overlooked recently.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

Co-produced with Treading Softly

Whenever May comes rolling around, we hear about the old adage, "Sell in May and go away". We often get asked why people like to use this saying and what validity it has. Here at High Dividend Opportunities, we look at things through the lens of our Income Method. This means we do not look at the market like total return junkies or day trading fanatics, but as long-term income investors who carefully craft their portfolios for long-term success via immediate income investments. We sprinkle in value investing principles to help generate additional alpha - which, through portfolio rotation, we capitalize into more income generation.

We are like the landowner who sells trees to International Paper (IP) or Enviva Partners (EVA). We realize that rotating our matured investments for new opportunities can generate additional growth and income when carefully practiced. We're not burning down our portfolio on hopes and dreams, but rotating via meticulous research.

So today, we wanted to look at this adage from the lens of an income investor.

A Little Backstory

This saying hails back from England, when higher-class individuals would leave London in May to summer in the country before returning in mid-September. Essentially, the upper crust - and their spending - moved off to other locales for a span of time.

This means the major wheels of investing and commerce went with them.

As the stock market took hold in America, this adage became focused on May through Labor Day or often May through the end of October. This span of time was the most common vacationing time for those actively involved in the market, and volume decreased accordingly. Usually, when buyers are off vacationing, shorting increases and lower volume allows for faster price drops.

How Does This Hold Up in

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.

Analyst’s Disclosure: I am/we are long NEWT, NEWTL, PCI, UTG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (57)

Why was my comment deleted when I asked asked you opinion on KBWD a monthly payer at 15 percent?
MtBudmoreView profile picture
Since apparently 2019 never happened and certain commodities may have evolved yet to be decided, to the next reality. Nothing about the future is overwhelmingly accepted as widely believed. We're between doomed and glory with experts for everything in-between. I'll take your PCI and Newt avoiding Dante's inferno by adding a PDI and ARCC etc. I like your take!
The Value Portfolio profile picture
During times of uncertainty, when the market prices it in by dropping prices, that's potentially the best time to invest.
Donggle profile picture
@The Value Portfolio too bad the last 3.5 years was wasted.
Doesn’t the Capital preservation method rule over the income method? Many of your divided recommendations have been cut, suspended. And the values halved.
Donggle profile picture
@huskers123 give me the details of the Capital preservation method, timing the markets is the only thing that would seem to work, but we all know you cannot time the market.
I’ve timed the market pretty well. Get out when the 50 DMA is 2 STDs above the mean . Did in all the last take downs except this last one and I should have kicking my self . You can hedge or you can choose investments that are not all that correlated to the economy like biotechs. The biotechs I’ve owned have almost made up for the losses I’ve incurred from this latest takedown. It will take about 8 years of dividends in the accounts I setup with the income method to recover, that’s if they don’t appreciate. I’m hoping they will of course. Which would shorten then break even time.
Donggle profile picture
@huskers123 I think you pointed out the problem with any plan, if you dont stick to it, it makes no difference if you have a plan. You get many whipsaws with the 50DMA ? Take a look at the 5 yrs charts of biotech. You needed something to save you from the hedge. The non correlated sounds good in theory only, the market sinks all ships, non correlated is not being in the market.
I think the income method is better for people that need income and take the dividends, not try to get cap gain by reinvestment. If dividends are 100% of your income when retired, good luck.
Longbottom profile picture
Thanks for the write up. I currently have pci, utf, thw and oxlc for my monthlys (although I think oxlc will suspend its divvy for a bit). What do you think about etg?
I’m in NEWT, USAC, ARCC, NMFC and EPD. Feeling cautiously optimistic after they have all reported first quarter earnings. I will probably buy more NEWT. I’m of the belief that a good dividend is coming due to their involvement with the PPP and SBA loans. I recommend listening to the conference calls for all of the above mentioned stocks.
Thank you Rida for all of your valuable advice. With your help I’m keeping grub on the table!
Donggle profile picture
What is UTG defending against, had close to a 50% drop in principal about 2 beta on the downside and .5 beta on the up so far. Now that is volitility.
What about EPR? MAC? SPG? NLY?
ShankaSwingTrades profile picture
I've been watching MAC too
ShankaSwingTrades profile picture
Thank you for your articles
Always great info.
Obviously I'm doing my own DD..
But do you like $NEWT at it's current price?
I've been following now and hoping to scale in..
The Value Portfolio profile picture
I would start with MAIN. Almost the same dividend but much larger and with much more stability.
Arsenal26 profile picture
Rida - when did you say to sell OXLC?
Rida Morwa profile picture
@Arsenal26 I have never said to sell OXLC.
Ta0 profile picture
I currently own a relatively large chunk of PCN. Should I sell the entire holding and purchase PCI instead?
Rida Morwa profile picture
@Ta0 PCN is a more conservative sister fund of PTY. I would consider swapping it for PTY or simply holding it as it is also run by PIMCO.
Ta0 profile picture
@Rida Morwa Thank you for your answer. :)
PCN is funny right now, its premium is back to 30% such that the share price now matches the Nav from before the crash, which hasnt recovered due to the wider credit spreads.
bobholt profile picture
@Rida Morwa

Thanks you. As always, another good article with sound advice. I'm shifting some equity (especially ETFs) to income (PCI) and some lower yield ETFs to UTG.

What do you think of PONAX/PIMIX?
Rida Morwa profile picture

I generally do not invest in mutual funds due to their added fees and restrictions. I would much rather hold a CEF that is easier to trade in and out of and does not include load fees etc.
What do you think of KBWD? It is a monthly payer
Rida Morwa profile picture
With KBWD, Their top holdings contain $ORC - which had large forced losses due to MBS prices shifting as we've seen with other MREITS - and $PSEC which has large CLO positions that are bound to be hurting during this time. generally for these sectors prefer to hold high quality individual securities vs an ETF where you get a basket of good and bad.
Ethan Roberts profile picture
Rida, you raise some very interesting points in this article. I particularly like your thinking about sustaining income throughout the year. A few observations that I have:

With the market indexes still a long way below their peaks in February, many solid companies who have pledged to maintain their dividends, now have 4-5% dividend yields or more. If stocks do begin to decline again, I will simply use some cash to sell naked puts and either generate premium income if prices don't hit my strikes, or be "forced" into buying some favorite dividend stocks at discounts to today's prices which are already 10-20% below their highs.

Second point: Re: UTG, one doesn't have to buy a stock or fund that pays monthly dividends to garner a monthly dividend. You simply buy a number of quarterly paying dividend stocks whose payouts are in different months, thereby insuring that you are receiving dividends every month. For example, T pays their dividend in January, April, July, and October. Meanwhile, CVX pays out their dividends in February, May, August, and November. And MO pays their dividends in March, June, September, and December. So if you owned those three stocks, you would receive a dividend payment every single month, even though those stocks pay quarterly dividends.
Have a good weekend!
Rida Morwa profile picture
@Ethan Roberts That is an interesting plan with your puts for companies you prefer. I have a long standing that you should never sell a Put for a firm you don't want to own at the strike price. There is a risk present with selling puts if the security falls rapidly, but accepting that risk is part of the process.

I usually like to keep things as straight forward as possible.

As for your second point, yes I know you can vary your pay dates by picking various securities, but often you are locked into different sectors paying at different times which can create extremely lumpy income payments from a monthly perspective. While I dont recommend only funds - as any regular reader of mine knows - I do think it is a benefit when a well run fund allows you to covert quarterly payments into monthly ones.
Donggle profile picture
Does anyone really want to own the stock when selling a put? Not in your life just the premium. Owning the stock means you are now holding the bag with a chunk of your cash, probably lower now then your put price. One bad trade eats up all those little premiums you banked. Now you are stuck do you sell a covered call possibly lock in your loss at a higher level?
Ethan Roberts profile picture
Yes, I can see that last point you made. BTW, I do own Realty Income to smooth out the lumps!
kbaba profile picture
Dow is trading higher than at any time in history before 2018. That's insane when one considers the effect of COVID-19 which aren't going to disappear overnight. Beware of normalcy and optimism bias. This is unsustainable. Invest or don't but have very serious hedges
Rida Morwa profile picture
If you feel a market crash is imminent, are you mostly holding cash? @kbaba
kbaba profile picture
I'm playing chicken with the market a bit because I think the down side is going to take a number of weeks to sink in. I'm super hedged instead. Big big position in a small but profitable gold miner with low P/E RNKLF (up 20% friday) Big cruise line put positions and some negative funds like DWSH and VXX.

On the long side, Very large positions in Agency MREIT preferreds mostly NLY and AGNC (which I bought very much lower) and some of their common (Thesis credit risk back-stopped by government at a very high priority) and some preferreds in companies like TGP and HMLP, with long term contracts not heavily exposed to COVID.

Been selling the long positions to boost liquidity lately. I'm contemplating more sales but every time the market goes down, my portfolio does up, and when the market goes up, the same, so feels like the right balance for now. Thesis is the Cruise lines are weaker with their lack of government support and being at the highest risk of reopening late, while the MREITs are stronger as GSE protected housing is the first thing to be protected.

Also have quite a lot of Alternative energy commons and preferreds, BEP, BEP-A, AY, TERP and CWEN-A but have been trimming them lately as they ran back up again.

this could admittedly backfire but so far have booked more capital gains during the pandemic than my whole investing career combined so I'll have to contribute to the governments economic needs at unprecedented levels at tax time, a welcome but painful side effect.
Moats and Income profile picture
Agree completely, Rida....we see so many other chasing the pot of gold...like a dog chasing its tail...the opportunity cost of time is forever lost for those in that mode.

Not saying some spec isn’t okay (and fun)...I do it to with a limited part of portfolio...and in areas where my expertise lies...

I’ll take a look at the baby bond. Thanks.

And, our Saturday paper delivery in the states was heavier than normal. Return of print ads due to reopening...:). We still hold onto the local print paper...something about reading from paper vs electronic that’s comforting...but, in this historical instance, the weight of the paper meant more to those that understand...;)
BULRUN100 profile picture
@Rida Morwa don't you find PCI's expense ratio too high at +2%? Looking for monthly paying ETF's, do you follow others that you recommend at a lower cost ratio?
Rida Morwa profile picture
@BULRUN100 PCI is an ultra-active bond CEF. Expense ratios operate are calculated from leverage costs and management costs. Those management costs are like a CEOs pay, if the CEF is performing well and a reliable income producer, then management is earning their payment.
As the end of the fiscal year comes for PCI(6/30), what level of income/distribution cut are you anticipating for July and forward? How are you factoring this into purchasing plans? Thanks.
Rida Morwa profile picture
@sme20 PCI and PTY have a long history of stable distributions. I expect PIMCO to do everything possible to maintain that history and not cut. PTY had a very slight distribution cut in 2007, maintained it through all of that global recession and raised it after. If anything were to occur, it would likely be similar.
@Rida Morwa - I'll reserve further discussion until the UNII report for April 30 comes out, that should be very telling. I know they raised last year, but this is a whole new ball game for credit market investments, one that no one could see coming, but that fact remains, is this something you would want to invest in until some clarity is gained? Covered calls in the QQQ for me.

What dates and prices are you looking at for the QQQ covered calls?

thanks and good luck.
Thanks for your comments about timing the market and the fact that with an income portfolio, dividends continue even if the market drops (except of course in some cases in unusual times like we are now in with the Covid-19). As you have pointed out several times that when the market drops, many times it provides a buying opportunity.
Rida Morwa profile picture
@John Vellema
You are very welcome! We are living through unusual times indeed. Often the overlooked aspect of going to cash is the big question of how to you replace the income you need to live off of. Often that causes going to 100% cash to be a net-negative plan. Picking the right places to park cash is a must - so we've been focusing on preferreds and baby bonds.
Only if you raised cash before hand!
Definitely will not be selling in May, Mr. Morwa.

Have been accumulating UTG lately. Possibly buying PCI (or PTY or PCN) this summer to replace the income from a called taxable muni in the IRA.

Thank you for the write up.

Retired income investor
Rida Morwa profile picture
@usiah You are very welcome. Buying up PCI, PTY and UTG will provide you with multiple strong monthly income streams, I personally hold them all.
I just bought some IP a couple of weeks ago and so far, so good, as it is up almost 15% since then plus it pays almost 6% on current price. Too bad I didn't buy more but too often, greed kills.

All the best.
Rida Morwa profile picture
@jzwmnb01 I understand that feeling. The market has been quick to change prices. I have long held allocation rules that keep myself from being overly greedy on any transaction.
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