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- February 17, 2012
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A “crazy” investment claim I made over a year ago still stands…
When you see a yield as high as 17%, you can usually bet one of two things is happening…
Either the business is generating so much cash it’ll attract a flood of competition, which will drive down profit margins and dividend payments… Or the business is in decline and investors have sold off shares, which drives up the apparent yield. Once the dividend cut comes, the share price declines even more. Any dividends you do receive will be peanuts compared to the big capital loss.
But over the past year, my claim has proved dead-on.
Anyone who took my advice made at least 17% in one of the world’s safest, cheapest stocks… a stock that has gone essentially nowhere in the past year. And anyone who takes my advice now will likely make another 17% or more over the next year.
My advice is to buy a big, cheap, safe stock like Microsoft, and sell covered calls against it. Sure, Microsoft’s big growth days are behind it, but when you’re generating income with covered calls, you don’t need the stock to grow.
You see, when you sell covered calls, you collect cash upfront for agreeing to sell your shares for a higher price. You give up some of your potential capital gains for guaranteed income and added safety. So it isn’t for gamblers reaching for the moon. This is for folks interested in a safe 10%-20% return in a year.
You can read more about how it works here. But let me show you what the numbers look like using this strategy with Microsoft…
Right now, you can buy Microsoft for around $27 per share. You can then sell the December 27 calls for $0.95. That produces an instant “yield” of 3.5% ($0.95 divided by $27) and protects you down to $26.05 per share.
The calls expire in December, two months from now. Once they expire, you can do it all over again. So you can figure a rough annual return on this strategy of about 21%.
And with a stock like Microsoft, you’re not falling into the usual trap. As my colleague Dan Ferris notes, Microsoft is a “World Dominating” stock that generates a tremendous amount of cash flow. It trades for less than 10 times earnings… and is trading near its “floor value” of $24 per share.
It’s a “crazy” claim that one of the world’s safest stocks will pay you 17% or more. But in this case, it stands.
– Brian HuntSource: Growth Stock Wire
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