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Tim's Corner: Squeezing More Income From Your Portfolio

Dec. 08, 2020 9:03 AM ET5 Comments
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All I want is compliance with my wishes, after reasonable discussion.”― Winston Churchill

Image result for 50% offThis instablog post is sponsored by Tim Plaehn, expert on income investing and a friend & colleague of mine at Investors Alley as well as a contributor here on Seeking Alpha. Tim runs the Dividend Hunter newsletter which offers a solid & diverse selection of attractive high yield plays. The service now nearly 10,000 active subscribers and can be had HERE for the rock bottom price of $49 (It usually is $99) for the first year. Tim provides a solid selection of lower beta, high yield recommendations for these challenging times.

The problem with the ‘herd’ is that our voice is never ‘heard’.”― Craig D. Lounsbrough


By Tim Plaehn,

My email inbox regularly fills with questions about how to reach a certain level of monthly retirement income. The notes typically come from retired or nearly-retired individuals who realize their retirement savings at the financial advisor-recommended 4% annual withdrawal rate will not produce the amount of income wanted or needed. I want to share one way to generate significantly more than 4% cash income from your retirement savings.

The following example is hypothetical. The strategy employed works, but it is crucial that before you start using it for your own retirement income, you understand the range of potential outcomes and how to adjust your positions when they don’t work out exactly as planned.

For our example today, let’s assume you have, over the years, acquired a significant number of Apple, Inc. (AAPL) shares. Many investors have done very well with AAPL. The company’s future looks bright, and you don’t want to sell your shares. However, the less-than-1% annual dividend yield from Apple doesn’t go very far toward paying the bills.

Income for Life? How to Get $6,851 Per Month Before Social Security, Pension or Any Other Retirement Source

To derive more income from your AAPL shares, you can sell call options backed by those shares. The strategy is called covered call trading. Let me illustrate:

Apple currently trades for $123 per share. You want to generate 1% per month of income. At the time of writing, calls that expire in 36 days are trading on the options exchange; looking through the Apple options chain, I see that the $136 strike price calls are priced at $1.35. The option price divided by the stock price gives a 1.1% cash return in 36 days. That hits the 1% per month goal.

You would sell one Apple $136 call for every 100 shares of stock. A 100-share round lot backs each call option contract. In this case, you receive $1,350 for every 100 shares of Apple you want to commit to your covered call trading program. Selling the call option obliges you to deliver Apple shares if the calls are exercised, which would only happen if the stock climbs to above $136 per share, and you would receive $136 each for your shares.

If Apple remains below $136 when the calls expire, the options expire worthless, and you keep the $1,350. The next week you can again sell more calls against your Apple shares. You can repeat selling call options every month or so, generating a 10% to 12% annual yield from your shares. Selling calls with strike prices that far above the current stock price makes it unlikely your shares would get called away.

If you had the good luck to have your Apple shares appreciate by 10% in a month, there are techniques you can employ to keep them if you really don’t want to sell at the option strike price.

I hope this example makes sense, and you get the idea of how you can produce a very nice cash income from the stocks you already own.

Collecting more taxes than is absolutely necessary is legalized robbery.”― Calvin Coolidge

Tim Plaehn of The Dividend Hunter has developed a monthly dividend calendar. It is yours free when you click here.

Thank You & Happy Hunting,

Bret Jensen

Founder, The Biotech Forum, The Busted IPO Forum & The Insiders Forum

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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