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High income idea


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2022 Feb 19, 5:16pm   1,888 views  31 comments

by clambo   ➕follow (2)   💰tip   ignore  

I have been investing in mutual funds since 1983.
I have also bought a few stocks but not many of them. One (AAPL) has been great for me.
My investments have been for capital appreciation. I recently inherited a few funds which provide income.

Lately I’m thinking about income since I don’t work, and I just learned about “covered call ETFs”.

Wow they paid high rates recently.

XLYD, QYLD, RYLD are a few of them.
I’m going to check them out and maybe sell some of my shitty WFC to buy one.

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1   Patrick   2022 Feb 19, 5:23pm  

The thing about covered calls is that you trade away your potential capital gain in exchange for the premium of the covered call right now. I assume the ETF does the same thing.

So let's say you own some stock, like AAPL, which is trading at 167/share. You write and sell a covered call on that such that the buyer has the right to buy those shares at 170. Maybe you get $1/share from that call right now.

But then AAPL goes to 200, but you don't get any of the gain beyond 170, because the guy who bought your call exercised it and bought your shares at 170 like you promised he could, in exchange for that $1/share. You didn't benefit from that 30 points of gain like you would if you had just held.

All that said, I sat next to a guy at Schwab who would sell covered calls all the time and make money from it. I don't think he ever got rich, but he liked doing it.
2   clambo   2022 Feb 19, 5:47pm  

I imagine the ETF has no little or no capital gain potential, it’s strictly for income.

I don’t know of other income funds which paid out 10%+ last year.

There may be a potential for capital loss, I will read the prospectus.
3   gabbar   2022 Feb 20, 9:17am  

Is high Revenue/Share a good method for finding good stocks?
4   clambo   2022 Feb 20, 3:56pm  

I don't know which criteria stock pickers use, but there are books about it, one by Benjamin Graham is well known.
5   Patrick   2022 Feb 20, 4:00pm  

HunterTits says
Put all your money into Canadian banks.


More seriously, maybe this is a very good time to buy puts on Canadian banks.
6   Patrick   2022 Feb 20, 4:01pm  

gabbar says
Is high Revenue/Share a good method for finding good stocks?


I think it's pretty good, especially if the revenue per share is both high and rising.

Losses can be made up if revenue keeps increasing.
7   Booger   2022 Feb 20, 5:44pm  

QYLD, and others like it haven't been through a real downtown yet. That and those aren't qualified dividends that you are getting from it. Otherwise I like it, and might buy some at retirement time.
8   Booger   2022 Feb 20, 5:50pm  

I also wonder what would happen to covered call ETF's if they get too popular. I mean there isn't an unlimited demand for calls and I suspect that it is possible to saturate the market, and if that happens the returns of these funds will fall.
9   clambo   2022 Feb 20, 9:02pm  

What intrigued me was that the funds pay out monthly, which is pretty cool.

Some of my mutual funds pay their dividends and capital gains once per year, in December.

My bond funds pay every month, and a couple of my funds pay every 3 months.

Another one I’m looking at is JEPI.

I’m going to sell my T. Rowe Price New Asia Fund probably soon anyway, so I can test one out.
10   Hircus   2022 Feb 21, 1:19am  

Never heard of these. Cool.

Looks like these 3 have about 7-8% total CAGR (assuming you DRIP) over their relatively short lifetimes. Quite a bit less than the s&p though, and if the dividends arent qualified, then you'd be paying higher taxes compared to just selling X shares of SPY per month for income, assuming LTCG.

I wonder how they will perform in various down market conditions. I would guess initially good when the market dips, but maybe less good during a long bear market if demand for calls drops off a cliff.
11   Reality   2022 Feb 21, 5:49am  

The bigger worry is what happens in a down market, when the underlying stocks go under water. After a long period of financial expansion/bubble, the primary concern in investing shifts from return-on-capital to return-of-capital.
12   clambo   2022 Feb 21, 7:10am  

My understanding is these weird funds will likely have a significantly lower total return than the stock market index each sells covered calls for.

The reason I am going to try one is I have a mental block against selling my favorite mutual funds and stocks; I have fallen in love with them.

I have a bunch of shares of AAPL which are worth a bundle but I don’t want to sell any shares, I can’t part with them.

So, knowing that I expect income only will be liberating for me, and if I think it’s a bad idea I don’t mind selling it.

I don’t know how badly their asset values will fall in a down market.

Maybe there will be a difficult stock market until the fall elections; if the Democrats lose I expect stock buyers to like it.

Of course I should just read the darn prospectus 😉
13   Shaman   2022 Feb 21, 7:29am  

Rookie!
Just take out loans against your stock to pay the bills. They’re tax free and you don’t have to sell anything to do it. That’s how the big boys roll.
14   gabbar   2022 Feb 21, 8:37am  

Reality says
The bigger worry is what happens in a down market, when the underlying stocks go under water. After a long period of financial expansion/bubble, the primary concern in investing shifts from return-on-capital to return-of-capital.


What's the difference between these two?
15   clambo   2022 Feb 21, 8:37am  

Shaman, aren’t you describing selling calls?
I can pay my bills already with dividends and interest fortunately.
16   Reality   2022 Feb 21, 9:25am  

gabbar says
What's the difference between these two?


Return-on-capital refers to chasing interest;
Return-of-capital refers to preservation of capital.

When the capital market cycle proceeds to its ponzi-phase, there are a lot hucksters out there dangling vague promises of "return-on-capital" when in reality what they want is preventing your capital (principal) from returning to you. In fact, almost all government and banks eventually reach that stage.
17   clambo   2022 Feb 21, 2:20pm  

Picking stocks is fun but not a good way to invest for your needs; use mutual funds.

Vanguard and T. Rowe Price have everything you may need.

If you only have a few hundred bucks, check out Fidelity, they have no minimum investment, and good funds too

I got lucky a few times but it was after I had invested in mutual funds.
18   Booger   2022 Feb 21, 2:58pm  

Shaman says
Rookie!
Just take out loans against your stock to pay the bills. They’re tax free and you don’t have to sell anything to do it. That’s how the big boys roll.


Margin rates aren't cheap.

https://www.tdameritrade.com/pricing/margin-and-interest-rates.html
19   clambo   2022 Feb 21, 3:30pm  

You can get a margin loan but not in cash; you have to buy a security which the broker can sell quickly.

I wanted to do this to pay off a credit card once.
20   Eman   2022 Feb 21, 9:51pm  

Booger says
Shaman says
Rookie!
Just take out loans against your stock to pay the bills. They’re tax free and you don’t have to sell anything to do it. That’s how the big boys roll.


Margin rates aren't cheap.

https://www.tdameritrade.com/pricing/margin-and-interest-rates.html?source=patrick.net


@Booger, try Interactive Broker and Fidelity. Their margin rates are around 2%.
21   clambo   2022 Feb 21, 10:21pm  

How did we start talking about margin?
I mentioned an income investment that was new to me.
Margin can’t be used for income.
22   Misc   2022 Feb 22, 3:39am  

If you really believe that the new investment or even the old investments will return more than the 2% margin interest charge, then why not load up on margin?

What could go wrong???????

--- Just remember that those who control billions upon billions of dollars that they could invest in anything would rather loan you the money at 2% than make the investments you are thinking of themselves.
23   zzyzzx   2022 Feb 22, 5:35am  

Eman says
nteractive Broker and Fidelity.


4-8.325% rates at Fidelity.
24   clambo   2022 Feb 22, 5:57am  

I have a margin story herewith.
Last year I noticed AAPL was about $120/share.

I thought about buying some on margin and got approval from Vanguard.

I had $1/2 million available for a margin loan.

I wanted to buy 1000 shares of AAPL to sell later on.
I didn’t do it because I am basically a chicken 🐓 and also lazy.

Woulda shoulda coulda.
25   AmericanKulak   2022 Apr 8, 1:50am  

clambo says
I have a bunch of shares of AAPL which are worth a bundle but I don’t want to sell any shares, I can’t part with them.


Nobody ever went broke from selling too early. Whereas many went broke by holding too long.
26   SunnyvaleCA   2022 Apr 8, 2:50am  

clambo says
I have a bunch of shares of AAPL which are worth a bundle but I don’t want to sell any shares, I can’t part with them.

If you owned Apple before September 2020, you went through the 4-for-1 split. So now you have 4x the number of shares. With that in mind, could you consider selling a few shares every month for income?

Or maybe keep track of how much better the stock has performed compared to inflation and consider selling some shares to bring your Apple holdings to be inflation-adjusted just as much value as when you bought them.

Apple dividend has a 0.5% yield, but that's actually enough for me to live on now that I've paid off my shack. (Many of my shares when through the 4-for-1, 7-for-1, and 2-for-1 splits.)
27   SunnyvaleCA   2022 Apr 8, 2:58am  

I recently decided to find some stocks that pay high dividends and didn't fall too badly in the 2009 crash or the Covid-crash. Preservation of capital. Stocks were JNJ, MMM, and PM. Dividend yield between 2.33% and 5%. Other than PM, the stocks' prices have easily exceeded inflation over the last decade, so preserving capital while spinning off income.
28   AmericanKulak   2022 Apr 8, 1:15pm  

What do you all think of Recession Stocks, like Dollar General and so forth?

DEO/ABEV (Alcohol) and Humana are on my list
29   FortwayeAsFuckJoeBiden   2022 Apr 8, 1:27pm  

HunterTits says
Put all your money into Canadian banks. But write the words "Trump Supporter for the Freedom Truckers" in the memo field of the check you use to deposit it.


when i want to screw with someone i write “for sexual favors” in memo field. stupid humor, i should grow up. but i hate irs.
30   Hircus   2022 Apr 8, 3:49pm  

clambo says
You can get a margin loan but not in cash; you have to buy a security which the broker can sell quickly.


I'm pretty sure a few of the large brokerages that I use allow you to take out margin money, although I haven't done it yet. But I plan to.

The key is you need to stay in compliance with the margin requirements. For example, I think IBKR wants to make sure you maintain 50%. So if you had 100k of long stock, you could buy another 100k of stock on margin, giving you 200k stock total, and be ok w/ the 50% margin requirement. Although sitting right at the 50% minimum is a recipe for a margin call if the long stock value goes down even a tiny smidge, so it's essential to leave some buffer. Anyway, my point is you could take out 10k, so now your non-margin asset value is 90k, and 100k in margin stock = ~47%, which will get you margin called. So to meet the 50%, you could only keep 90k of stock bought on margin, not 100k.

But notice... before you used margin, you had 100k in long stock. If you took out 10k, then you had 90k in stock left. But now w/ margin, you took out 10k, but you have 180k stock in your account. So you could actually take out a full 50k, leaving you with 50K your stock + 50k margin stock = 100k.

So that's how you "take out" margin money. Again, make sure to leave a buffer to avoid a margin call.

Personally, my big fear w/ margin is the possibility of a flash crash, which will get you margin called even if you leave a large buffer, utterly destroying wealth. But, I think I will maintain a PUT on my position to make it so that even if the stock crashed, my PUT would establish a price floor, preventing the margin call. Maintaining puts for every day of the year can get expensive, but its not so bad if your just trying to cover tail risk. i.e. if I own SPY stock (both mine and the shares on margin), maybe the current share price is $450 and maybe I work out that my buffer will be sufficient to avoid a margin call unless the price falls below $200, then I can just buy a PUT at $205, which should probably only cost maybe 1% per yr or so to maintain. Now I don't need to worry about the possibility of financial wipeout from a margin call. Of course, a market crash that stays down for years will still hurt your net worth just like it does without margin, but that's another topic.
31   clambo   2022 Apr 8, 10:24pm  

I don't know how all brokerages let you use margin, but I'm pretty sure Vanguard won't let me borrow actual cash.

I can "borrow" shares of a stock, since it's in their electronic possession really.

if the stock starts to fall, they will tell me to send in the cash (margin call) or they will sell the stock, without further notice.

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