A 10.25% Yield Using the “Forbidden” Income Strategy

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
At Dividend Pro, I am always looking for new ways of generating high returns and income.
 
As a reminder, I do that three ways…
 
First, I recommend stocks and ETFs with high yields — some of which even pay out monthly. With the Dividend Pro portfolio yielding just about 10%, you’re generating about 40X the cash you would be compared to putting your money in the bank.
 
Second, I recommend call options on some picks which can generate double- sometimes even triple-digit gains. Last week’s option gain of 57.14% in Omega Healthcare (OHI) was a good example of that strategy
 
Finally, I’ve also used a “forbidden” income strategy of selling options, and collecting a premium for it. 
 
You’ve generated 79% gains using this strategy in Hospitality Properties Trust (HPT) in the past.
 
This week’s Dividend Pro recommendation — the PowerShares S&P 500 BuyWrite Portfolio (PBP) — uses this “forbidden” strategy to generate an impressive 10.25% yield.
 
PBP tracks CBOE S&P 500 BuyWrite Index. In doing so, it invests 80% or more of its assets in common stocks of the 500 companies on the S&P 500 Index and then writes, or sells, call options against them. Specifically, PBP sells one-month at-the-money S&P 500 call options against the portfolio at regular intervals. Dividends paid on the component stocks underlying the S&P 500 and the dollar value of option premiums received from written options are reinvested. Dividends are paid out on a quarterly basis.
 
So here is a quick recap of Dividend Pro’s “forbidden” strategy…
 
The buy-write, or covered call, strategy sells call options on a position to generate income from option premiums. This strategy works best when the market is flat to mildly bullish- which pretty much reflects conditions today. 
 
If the S&P 500 goes up in value slowly — as it is doing now, PBP should match the markets’ gains, as well as get an extra income from selling the covered call. 
 
If the S&P500 stays flat, PBP should be flat too, but still get an extra boost from the cash earned from the covered calls.
 
Only if the S&P 500 suddenly shoots up high, will PBP’s returns be limited because the options will be exercised. Even then, however, PBP will receive the cash from the covered calls.
 
If the S&P 500 tanks, then PBP will suffer those same losses, but the losses will be a bit less because they still get the cash proceeds from the covered calls. 
 
So buy the PowerShares S&P 500 BuyWrite Portfolio (PBP) at market today, and place your stop at $19.80.
 
A word of warning: PBP goes ex-dividend tomorrow, Sept.14. So if you want to collect this quarter’s dividend at the end of this month, act fast. You can also expect PBP to pull back in the coming days, once it does go ex-dividend. 

Portfolio Update

Global X SuperDividend ETF (SDIV) jumped 2.8%, as it lowered its expense ratio to 0.58% from 1.14%. Now boasting a yield of 7.66%, SDIV remains a BUY.
 
Two Harbors Investment Corp. (TWO) rose 1.88% last week. The company declared a quarterly dividend of $0.36 per share of common stock for the third quarter of 2012. This dividend is payable October 22, 2012 to common stockholders of record at the close of business on September 24, 2012. TWO is a BUY.
 
American Capital Agency Corp. (AGNC) soared 3.39%. AGNC announced that it will maintain its quarterly dividend at $1.25 per share for the third quarter of 2012. The dividend is payable on October 26, 2012 to shareholders of record as of September 21, 2012, with an ex-dividend date of September 19, 2012, or next Wednesday. AGNC’s one-year total return (through Sept. 11) is 44.28% vs. 27.01% for the S&P 500 Index. It yields 14.4%. With a beta of 0.42, it has also been less volatile than the average stock. AGNC is a BUY.
 
Prospect Capital Corporation (PSEC) rocketed 3.34%. Chief Financial Officer (CFO) at Prospect Capital purchased 23,500 shares in the past week for a total cost of $274,721.The PSEC will pay a monthly dividend of $0.1016 for the month on Sept. 21. PSEC is a BUY.
 
iShares FTSE NAREIT Mortgage REIT (REM) continued rising another 1.94%. REM attracted approximate $37.3 million dollars lat week — a 5.0% increase week over week in outstanding units. REM’s current yield is 11.93% and remains a BUY.
 
PIMCO Municipal Income Fund II (PML) fell back 1.22%. You should receive your $0.065 cent monthly dividend payment on Sept 12th. Trading below its 50-day moving average, PML is a HOLD.
 
UBS E-TRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL) soared another 3.84%. Hitting a yet another new record high as it shoot straight up, and yielding 13.93%, BDCL remains a BUY.
 
Apollo Investment (AINV) dropped back 1.10%. Forbes magazine named Apollo Investment Top Dividend Stock with Insider Buying. The current dividend monthly dividend is 20 cents per share, which equals a 9.98% dividend yield. The ex-dividend date is September 11, 2012, record date is September 13, 2012 and the dividend payout date is October 04, 2012. AINV is a BUY.
 
Omega Healthcare Investors Inc. (OHI) rose 0.82% over the past five trading days. Stellar second quarter 2012 results with a 31.0% year-over-year increase in FFO (fund from operations) and an impressive dividend yield of 6.8% make this a terrific  healthcare-facilities REIT. Hitting a new record high, OHI remains a BUY.
 
PowerShares Preferred (PGX) matched last week’s gain by rising 0.20%. PGX attracted $31.1 million dollar inflow just last week. Yielding over 6.4%, this monthly income payer remains a BUY.
 
Fifth Street Finance Corp. (FSC) ended the week 1.5% higher. The company announced a public offering of 7,500,000 shares at $10.79 per share for total gross proceeds of $80,925,000. Hitting yet another new 52-week high, and boasting an 11% yield, FSC remains a BUY.
 
PowerShares Emerging Markets Sovereign Debt (PCY) rose 1.22%. The average return emerging market bond funds has been 9.2% over the past five years. Thanks to its relentless rise, this bet on foreign debt now yields less than 5%, but remains a BUY.
 
Vanguard Natural Resources (VNR) dropped 5.55%. The company announced a public offering of 6,000,000 common units. Net proceeds from the offering will be used by the company to repay a portion of debt. Such a drop is typical after such announcements.  There is no sign that your monthly dividend of $0.20 — a yield of approximately 0.70% per month — will be affected. VNR is now a HOLD.
 
CVR Partners, LP (UAN) dropped back 2.31% this week. The stock is now oversold but trading within a well-worn-trading range. UANs current yield stands at 9.4% and is now a HOLD.
 

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In the wake of this summer’s devastating drought, domestic crop prices are spiking. In addition, a rare period of summer-like temperatures in March caused trees to blossom earlier than usual, only for crops to be decimated by unexpected freezing in April. These atmospheric disruptions have resulted in a significant U.S. grain shortage. In light of these conditions, the agriculture sector could provide a potentially appealing investment opportunity. In particular, I’ve got my eye on the Power

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