You May Make Over 30% Returns on Your Investments

Most people think that when they invest in their favorite stock or the favorite stock of the guy down the street you decided to pile into, that they must just sit and wait for that stock to go up or down. That the only way they will make money is if the stock goes up, and that they can’t collect any of that cash until they sell. We have found 2 ways to make income from stocks that the average investor can actually. We’re a bit obsessed with squeezing every dollar out of our hard-earned savings, so we watch our investments on a daily basis, but these two only require a few hours per month. I will use actual examples of trades we’ve done and stocks we own, but keep in mind that we are not professional stock brokers, fund managers or insurance salespeople and offer none of the following information as advice.

Dividends

We've managed to pick some of the best dividend stocks for 2011. This is not information about the utilities that your parents invested in. The 4.5% dividend that many good utility stocks pay is a great way to spread the risk in your portfolio and still receive a quarterly check, but you must have quite a bit invested to make it a source of real income. Let's use TECO Energy (symbol TE) as an example, and we’ll try and keep the numbers as round as possible, assuming up to a $10K investment:

TE: On May 12, 2011, TE issued a dividend of $.21/share (actually a little more, but we’ll round for our examples). The stock traded yesterday for $19.22. It’s up more than $4/share from last year, which is excellent. If you bought 500 shares of TE yesterday for $19/share, you would have invested $9,500.

  1. The $.21 dividend per share is paid out quarterly, so every quarter you would make $105.
  •  $.21 X 500 = $105.00.
  1. There are 4 fiscal quarters in a year, so you would make $420 annually.
  • $105 X 4 = $420
  1. This breaks down to $35/month
  • $420/12 months = $35

There are a few companies commonly discussed on the financial TV shows and retirement blogs that pay a bit more than the roughly 4.5% that many Utilities do, but as you can see an extra .5% is not going to help you make your car payment. Here’s one of the stocks (the best one so far) that we own and make income on: AGNC. American Capital Agency is a Real Estate Investment Trust (REIT) that invests in government backed mortgages. I know, it sounds scary! But guess what? In July of 2010, AGNC was  at about $22/share, yesterday it was $29/ share. That’s more than a 31% rise in price. The dividend it issued on June 21, 2011 was $1.40/share. That’s more than 400% higher than TE. If you bought 340 shares at $29/share you would have invested $9860.

  1. There are 4 fiscal quarters in a year, so you would make $1904 annually.
    1. $476 X 4 = $1904
    2. This breaks down to $158/month

The annual dividend yield on AGNC is currently 18.63% - amazing! While this doesn’t quite add up to a car payment, remember that if you had invested in a mutual fund or most other stocks, you would have little or no income at all. We also invest in several stocks in the same category you may want to investigate: TWO, NLY and one mutual fund in the same group, the Invesco IVR Fund.

Covered Calls

Covered calls is a bit more sophisticated that just buying a stock or mutual fund and collecting dividends. A “covered call” is a kind of option that some traders use to mitigate losses on a stock, and others use to generate income. When you deal with an option on a stock, you are buying or selling the control of the shares you own. It’s been explained a thousand ways, and this isn’t technically the most correct, but let me explain it this way, using a gallon of gas because the price fluctuates so much:

  • Buy 1 gallon of gas for $3.50 and put it in a can in your garage
  • Spread the word that you have a can of gas and you’ll keep it for 30 days
  • Tell people that you’ll sell them the can of gas in 30 day for $3.50 if they give you $.25 right now.
  • So far, you spent $3.50 and you made income when you sold an option on your gas for $.25
  • Let’s say the price goes up to $4.00/Gallon in 28 days and the person that bought the option for $.25 says, “thank you..I’ll take my gas for $3.50 now”. Great deal for the option BUYER, because they paid $.25 for the right to buy the gas at $3.50, so they paid $3.50+.$25=$3.75 for $4 gas. YOU are happy because you invested $3.50 and made $.25 in profit in under 30 days. That’s about 7% return on your investment.
  • Let’s say the price goes DOWN to $3.25/gallon in 28 days. Will the option buyer come and pay you $3.50 for the gas? Nope. So that option expires. Now you have the $.25 option “premium” in your pocket and you still own the gas. So what do you do?
  • Sell the option to buy that same can of gas at $3.50 again and make another $.25.

It’s not quite this simple, but it’s really, really close.   The options value of stocks varies pretty widely, so you’ll need to choose the right ones. Sometimes you’ll get bought out, sometimes not and it doesn’t always go your way, but here’s an example of a play we just made to give you an idea. Keep in mind that this is not our best trade, just a recent one:

We bought 600 shares of ENTR, a technology company, for $8.74 share on April 29, 2011, investing about $5,200. That’s our can of gas:

  1. We sold the right to buy these shares of ENTR at $9. We sold these options for $.55 each on May 2nd.
    1. 600*$.55 = $330. We made $330 in income in May
    2. On May 23rd, when the options expired, the stock was only selling for $8.39 so they didn’t want to pay $9 for it after all. We still have our can of gas.
    3. On July 6th, we sold the $9 options again for $.75 this time. They expire Aug 20th.
      1. 600*$.75=$450 We made $450 in income in July

We could have probably made one addition options deal in the time we’ve owned the stock, but just weren’t paying close enough attention. The results we’ve gotten though are pretty good:

May $330 + July $450 = $780 in about 3 months

If you annualize this, like everyone does, that’s $3,120/yr. 60% ROI. $260/month

Just using these 2 examples of AGNC Dividends and a simple covered call play, we’ve demonstrated taking $15K in investments and making $260 + $158 =$418/month. That’s a nice car payment, or a good start toward your monthly expenses.

There are, of course, risks involved and we have not always been successful with these kinds of investments, but the obvious potential is certainly worth the time to do your research and get trading.