Investors About to Make a Mad Dash for This Group of Stocks
Since the election, we have seen markets move sharply. Stocks are up, bonds are down, interest rates are up and gold is down.
All of these markets are pointing to a strong economy — and toward a potential bull market for income stocks.
The trend in interest rates seems to creating a panic, at least for writers at The New York Times. One recent headline seemed particularly alarming: “Mortgage Rates’ Rise Catches Home Buyers — and Lenders — Off Guard.”
The story began by highlighting a potential problem that threatens to crash the housing market. Essentially, since the election, mortgage rates have gone up more than 0.57%, with a 30-year mortgage now priced at 4.375%. Further down in the article, in parentheses, is a full disclosure of the damage: “The annual cost of a $400,000 mortgage, for example, rose almost $700.”
As you can see, higher rates are a problem… but not that big of a problem. Monthly payments for a $400,000 mortgage are potentially $58 higher now than they were before the election. Readers of the newspaper could afford to pay that amount by simply switching their subscription to online only instead of getting home delivery.
The median price of a home in the United States is about $189,000. Assuming no down payment, higher rates are costing homebuyers less than $28 a month. This amount isn’t likely to lead to a crash in the housing market. It’s even possible slightly higher rates could lead to a surge in home purchases, as people try to get in before rates go even higher.
Beyond the housing market, we are seeing other interest rates rise, but they are still low by historic standards. The rate on the 10-year Treasury note, for example, is less than 2.5%, delivering income of less than $250 a year for a $10,000 investment. If the Federal Reserve raises rates in December and then four more time times next year, the 10-year rate might approach 4%, and a $10,000 investment could deliver income of $400 a year, or about $33 a month.
These small increases would have such a small impact in dollar terms because rates are already so low to begin with. That’s why I believe a bull market in income stocks is likely. Investors who have been waiting for rates to rise may soon see that higher rates just won’t be high enough to generate sufficient income. That could lead to a rush into dividend stocks.
This would certainly be good news for income investors. If you’re familiar with me, then you know my entire goal is to help traders generate extra income from their portfolio.
And one of the ways I do this is by selling covered calls. When you sell a call option on a stock you own, you collect an income payment up front that is yours to keep no matter what in addition to any capital gains and dividends you earn.
Let me give you an example of a real-life trade I made a while back to illustrate how the strategy works.
I sent an alert to my readers telling them about International Game Technology (NYSE: IGT). Most people have never heard of it, but it’s one of the leading providers of slot machines.
At the time, it threw off a dividend yield of 3%, but I saw a golden opportunity to generate much more income with a covered call strategy.
First, I recommended investors buy at least 100 shares of IGT, which were trading at $15.88 per share. Based on 500 shares, this would have required a total investment of $7,940.
Then, I told them to sell a call option that would obligate them to sell their shares if they were trading above $17 roughly a month later.
This allowed them to collect an immediate payment up front, and if the share price moved from $15.88 to $17 within a month, they would sell their shares and pocket the capital gains.
Let’s look at how the trade worked out.
My readers received an up-front payment of $290 in the form of option premium for selling five calls on their 500 shares (each option controls 100 shares of the underlying stock).
And sure enough, IGT began to rise and surpassed $17 by the time to option expired. So, my readers sold their shares and locked in an additional $560 in capital gains. What’s more, while we held shares, IGT paid a dividend of $0.11 per share, which added another $55 in profits.
Between the premium, dividend and capital gains, this trade delivered a profit of $905 in a little over a month from an investment of $7,940. That worked out to an 11.4% return in 32 days, or a stunning annualized return of 130%.
Now, you may be wondering, what if the share price hadn’t hit $17? What if it had ended up at, say, $16?
That would have been just fine. We would have continued to hold the shares and could have sold more calls to collect more income.
The extra income you can bring in from covered calls can amount to a few hundred or few thousand dollars per trade.
So far, my readers and I have collected an average options payment of $600, based on owning 500 shares per trade. Imagine what an extra $600 every few weeks could do for your portfolio or lifestyle.
Unfortunately, most investors don’t realize how large an opportunity this is. As a result, they’re settling for puny 1% or 2% annual yields from blue-chip stocks.
But if you’re not content with this, I’ve put together a special report called, “How to Pocket an Extra $3,000 a Month Using ‘Entry Level’ Options.” I’m offering free access to it here.