I’m going to give you four ways to get passive income from stock investments. Although we’re talking dividend income, we could get price appreciation along with our dividends. We’ll look at safer deals. Then growth and higher risk speculation.
First, the Dogs of the Dow. When the first trading day of the new year comes along, buy the five or so of the 30 companies in the Dow Jones with the highest dividend yields. Hold the stocks for a year. Then repeat the process every year. This strategy has done well over the years. You can look outside the Dow Jones 30 for dividend plays as well.
Second, research closed end funds (CEF’s) and mortgage REIT’s (mREITs). Usually CEFs and mREITs pay higher dividends. A rise of interest rates can be very adverse for mREITs. Mortgage REITs are mortgages. CEF’s frequently invest shareholder’s funds in covered calls (options). Run Yahoo’s stock screener or another stock screener and look up yields on CEFs.
Third, foreign government bonds. OK, we’re talking interest here, not dividends. Foreign government bonds tend to pay much higher interest than U.S. T-Bills.
Fourth, if you have a bank account outside the U.S., you might be earning a hefty interest rate on it. Even if you don’t have a bank account outside the U.S. you can invest in currency funds.
You could use leverage on the Dogs of the Dow, CEF’s, mREITs, and foreign currencies. MREITS are already leveraged. If you anticipate the income from your investments to be greater than the interest you pay to borrow cash (margin), you could consider using leverage.
The world of stock options is very vast. You can earn income from selling covered calls. But if the underlying stock goes higher than you expect, your option caps the gain.
One thing I’d look into is using a “put” to insure your big holdings. A put is an option to buy the underlying stock if the price drops. You can’t insure CEF’s with “puts.”
Keep in mind you could have above average dividends and have the same stock appreciate in price. Over time, a dividend strategy can really enhance the dividend income you receive.
A good strategy is to stick close to is to own companies, and industries you understand. It’s OK to have a concentrated portfolio, given you understand the investments.
The reader assumes all responsibility for his/her financial decisions. This article covers investments that can result in losses.
Avoid investments you don’t understand.
Use “puts” and happy hunting.