Guggenheim Enhanced: A Covered Call Strategy
08/23/2017 2:52 am EST
Respecting the market’s more uncertain landscape during the August-September timeframe, it is an optimal time to put to good use a well-honed covered-call strategy that has been performing well over the past year, states Bryan Perry, editor of Cash Machine.
To that end, I’m recommending Guggenheim Enhanced Equity Income (GPM), a closed-end fund that invests about 30% of its capital in the S&P, Nasdaq and Russell 2000 indexes with the balance in select equities that are some of the hottest names in the stock market.
Specifically, the fund’s investment objective is to seek a high level of current income and gains with a secondary objective of long-term capital appreciation.
Under normal market conditions, GPM will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities.
The fund uses a covered-call strategy to generate yield and to seek efficiencies from the tax characteristics of the fund’s portfolio.
The fund will have the ability to write call options on indices and/or securities which typically will be at or out-of-the money. The strategy typically targets one-month options, although options of any strike price or maturity may be utilized.
The fund will seek to earn income and gains through both dividends paid by securities owned by the fund and cash premiums received from selling options.
Currently, GPM has assets of $611.32 million, trades at a 4.11% discount to Net Asset Value, uses 31.42% leverage and pays a current yield of 11.45% with dividends paid quarterly.
Shares of GPM are up 11.38% year to date (YTD) and on pace for a solid year of performance, while exhibiting a low level of volatility.
I expect the bull trend to continue throughout the rest of 2017 and into 2018, so I am highly favorable to GPM’s portfolio of having a third of it in three major indexes, while also owning several high-beta stocks to sell call options against.
The combination should continue to drive good performance and generous income. The fund managers have declared the same 24-cent per quarter dividend since June 2009, when the market was just coming off of the very bottom of the worst of the correction.
If the fund managers could weather the past eight years without an interruption in the dividend payout, I’m confident they can continue to perform going forward. I’m placing GPM within the Aggressive High Yield Portfolio that coincides with its 11.45% dividend yield. Buy GPM under $8.50.