Buy the Dow—with a 9% Yield
03/22/2011 3:30 pm EST
A closed-end fund that writes call options on its blue chips is perfect for these volatile times, writes Bryan Perry of Cash Machine.
It is always nice, as an income investor, to find a strong-paying asset that happens to be right where the upside action is.
It is no secret that big caps have been the go-to stocks for the first three months of 2011, at least from the vantage point of a professional fund manager. The lower dollar just does wonders for companies doing more than 50% of business outside the United States—and I don't see this theme changing anytime soon.
Big-cap stocks are the safest place to be, if one is going to invest in equities, during a time when the dollar is weak, corporate profits are booming—and yet, we have soaring domestic budget deficits and geopolitical issues in the Middle East.
One way to capture a fat 9%-plus dividend yield and own the biggest US multinationals is to own the Dow 30 Enhanced Premium & Income Fund (DPO). It’s a closed-end fund that invests in all 30 of the stock components of the Dow Jones Industrial Average while applying an aggressive swaps and covered call options strategy.
The Dow has easily been the most resilient of the major averages when the dark clouds of uncertainty lift, and I want you to have a portion of your assets in the index—while simultaneously collecting some hefty dividend income and option premiums.
The chart of DPO above shows a very constructive breakout from a "golden cross" back in October. This occurs when the 20-day (green) and 50-day (yellow) moving averages move up through the 200-day (black) moving average, signaling a brand new uptrend. Currently, the market is in a period of consolidation, thanks to the front page of the daily newspaper showing havoc in the global oil patch.
The DPO fund will purchase other securities or financial instruments, primarily swap contracts, designed to provide additional investment leverage to the return of the Dow stocks.
Managers of the DPO fund also will engage in certain option strategies, primarily consisting of writing (selling) covered call options on some of the Dow stocks. The options will be written on approximately 50% of the portfolio. As a result, the other 50% of the fund's total holdings will not be hedged—and have the potential for full capital appreciation.
The current 9.4% yield on DPO is easily accomplished when the Dow index is incurring triple-digit swings on a weekly basis. It's the very stuff option sellers live for to bring in premiums, and as a result a greater percentage of the portfolio can be left open for pure upside.
At this juncture, I like the risk/reward ratio associated with the Dow Jones industrials, and recommend purchase of the Dow 30 Enhanced Premium & Income Fund up to $11.30 per share. (Shares closed at $10.87 Monday.)
I fully expect to be raising that buy under price in the not-too-distant future.