How To Collect $7,322 In Payouts Next Month (On Just $500k!)
Contrarian Outlook | Mar 21, 2018 06:38AM ET
Last month, I handpicked a four-pack of dividend growers for a select group of subscribers. On the surface, our February mini-portfolio had an impressive pedigree. It yielded 2.2% annually and boasted 21% dividend growth.
But I was challenged with a task taller than simply buying and hoping for gains. These readers not only wanted their dividends – they wanted them paid monthly!
And they weren’t going to settle for 0.2% per month. No, they demanded meaningful monthly income on a modest portfolio. (I’ll use $500,000 for our real-life example – but you don’t need this much to employ this strategy. A $50,000 stake will work just as well.)
If you earn 0.2% per month on $500K, you have $1,000 in monthly income while you wait for your stocks to go up. That’s better than nothing, but it’s certainly not enough to live off of. We need to do two things to improve this cash flow:
- Accelerate these dividends.
And,
- Collect our payouts monthly.
In other words, we need to take the modest current yield and turn that into a much larger yearly return. Like this:
Trading 2.2% Yields for 31% Yearly Payouts
Let me walk through each example so that you can see exactly what we did to generate $7,322 in cash last month. We set aside $500,000, but we didn’t actually have to buy a stock at any point. And we closed the month with no active positions, which means we now have $507,322 in cash that we can redeploy this month using the same strategy.
Step 1: Collect 5 Dividend Payments From the Wall Street Strip
If you view Wall Street as a giant casino, you’ll like this trade. We collected a quick “insurance payment” on one of the beautiful buildings lining the Strip!
For our purposes, the physical property is a website (and accompanying mobile app) with a captive, growing stock trading audience. TD Ameritrade (NASDAQ:AMTD) was highly ranked by Barron’s in its yearly grading of online brokers. The firm continues to grow client assets, quickly approaching one trillion dollars:
TD Approaches $1 Trillion
Get The News You Want
Investor assets parked in AMTD’s stock are, in turn, treated to higher dividends. The firm recently hiked its payout by 16.7% to $0.84 per share (a 1.5% forward yield).
With momentum on AMTD’s side, it was a great time to draft behind this stock – and safely pick up Wall Street’s “spare change” for a cash payment worth nearly five quarterly dividend payments.
We had two choices:
- Buy AMTD outright and collect our first $0.21 per share dividend payment in May.
Or,
- Sell puts below AMTD’s current price to collect $1.15 per share immediately.
It was an obvious choice. We sold the puts, banked the premiums and never had to actually buy any shares (the options we sold expired worthless last weekend – which is great for us as sellers).
Note: Contracts are sold or bought in lots of 100 shares.
Also, the “cash set aside” is simply that – money that we save just in case we need to purchase these shares. It sits in our account as cash alongside the cash we just received for selling these contracts.
We generated $2,530 on a $125,000 cash pile. And these puts eventually expired worthless – which means we earned this income without having to actually buy any shares.
We didn’t wait for options expiration to make our next move, however. The following week, we made another low-risk high-reward trade.
Step 2: Riding Rising Rates for 29% Yearly Returns
SunTrust Banks (NYSE:STI) had been doing a fine job accelerating its own dividend over the past five years ago. It made sense for us to combine forces.
Higher interest rates are, naturally, boosting the bank’s net interest income (NII). SunTrust earned $1.43 billion in NII in the fourth quarter of 2017 versus $1.34 billion the same time period in 2016 – a gain of 6.7%. That’s a nice raise for doing nothing.
The firm’s shareholders are used to kicking back and making more money year after year, too. They received a 53% dividend increase last summer, and are looking forward to another generous hike before they wrap up this summer’s vacation.
So we tapped SunTrust’s dividend stream as well – for more money than the regular quarterly distribution, paid faster, too! We accelerated this 2.2% annual dividend to 29% simply by selling puts comfortably below the current price.
The stock grinded higher in the ensuing weeks, and we banked our generous premium payout free and clear.
Step 3: 22% Yearly Income From a Tech Cash Clow
The following week we considered Cisco (NASDAQ:CSCO), an old school tech company that continues to reinvent itself while harvesting boatloads of cash from its legacy businesses. The firm is a digital utility for the Internet, collecting money from a host of related businesses including infrastructure platforms, software applications, security products and consulting services.
Investors are always fretting about the firm’s growth prospects – but you’d never guess it by looking at Cisco’s results.
The company is wisely transitioning many of its products to subscription models.
Recurring revenue now accounts for 33% of the firm’s total sales. It also has $5.5 billion in “deferred product revenue” that it will be collecting in coming years as these subscriptions renew. The company is quietly turning itself into an internet-powered annuity!
Shareholders will receive their new and improved payout of $0.33 per share for the first time in early April. But we did even better without actually holding shares!
We “front ran” this dividend payment and collected $0.41 over just two weeks.
Meanwhile, we turned our attention to our fourth and final trade of the month.
Step 4: Uncovering Free Cash for a Final Quick Payout
On the surface, Western Digital (NASDAQ:WDC) 2.1% dividend looks dicey. The firm hadn’t hiked its payout in three years while its payout ratio (percentage of paper profits it pays as dividends) has spiked above 100%.
But these headline numbers are misleading because WDC’s cash payout ratio (based on free cash flow, or FCF) is actually quite conservative:
Cash Ratio of 16% Shows Stock is Due for a Dividend Hike!
Here’s the actual “tale of the cash tape” for WDC:
The firm could double its dividend tomorrow and still boast a modest one-third cash payout ratio.
When will shareholders receive their overdue raise? We didn’t care. We option sellers can collected half of the company’s yearly dividend in a short 8 days.
(Once again, without actually having to buy shares.)
All four of the option contracts we sold above expired worthless. That was perfect for us as sellers. It means our $500,000 portfolio has grown, it’s still in all-cash and it’s ready for redeployment this week. (Tomorrow to be specific!)
Four Simple, Low-Risk Trades Earned Us $7,322
Note: For a $50,000 portfolio, just move the decimal points above one step to the left.
How To Bank $7,322 in Payouts Next Month (and Every Month After)
I know many investors who “want to learn” how to do this. They know that others are doing well with options, but they’re not sure how to go from buying and selling stocks and funds to buying and selling options.
Here’s a secret – they’re almost exactly the same. And you probably have the ability to do it already from your online brokerage account.
Plus, now is the time to insulate your portfolio from a potential pullback. Stop buying and hoping – and start generating monthly cash flow (with lower risk to boot!) via dividend acceleration.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
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