She could do a little better with the Invesco Preferred ETF (PGX), which pays an annual dividend yield of 4.9%. However, nearly all of its holdings are rated BBB or lower, so there is a lot of risk in that portfolio, too. As for common stocks, the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), yields 4.7% on an annual basis. Over half of its holdings are in the financial services, real estate, and energy sectors. If the economy goes in the tank, those businesses could take a beating. Let it Ride So what should my cousin do? The answer I gave her may surprise you. I suggested that she not sell any of her Lowe's stock. That way, she can write covered call options against those shares. Here's how that works. She can sell to someone else the right to buy her shares of LOW at a specified price within a certain timeframe. If LOW rises above that price by the time that option expires, those shares will be called away from her. In that case, she is no worse off than if she sold them now. However, she is better off by the amount of the options premium she would receive now by entering into that contract. For example, last week while LOW was trading near $194, the call option that expires on January 21, 2022, at the $200 strike price could be sold for $12. That equates to 6.2% of the current share price. But that is for a holding period of 208 days. On an annualized basis, that works out to an options yield of 10.9%. If LOW never rises above $200 by the time this option expires, she gets to keep her shares and write a new covered call contract against those same shares. She also gets to keep any dividends paid by Lowe's while she is the owner of those shares. If those shares do get called away from her, she can use that cash to buy other stocks against which she can write more covered call contracts. Lowe's is far from the top of the list of stocks with high covered call option yields. It just happens to be the stock that she currently owns. Make risk work FOR you… Of course, the markets aren't risk free right now. Case in point: The red-hot NASDAQ currently hovers at a record high. Some technology stocks are great buys now. But many others aren't. In fact, there's a slew of much-hyped "story stocks" in the tech sector that are overbought and poised for a tumble. As chief investment strategist of Mayhem Trader, I've pinpointed the most vulnerable stocks in the tech sector. I've also devised a simple way to profitably leverage their imminent decline. To learn about my next "mayhem" trade, click here. |
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