A Perfect Play for Conservative Investors
11/30/2011 3:00 pm EST
By pairing a covered-call strategy with a solid dividend stock, like the one Victor Schiller recommends here, you’ll get a steady income stream and protect yourself from uncertain markets.
Victor Schiller joins us to provide some insight on the market. Victor, thanks for being here.
Sure, yes. When we look at the markets, the first thing you have to admit is that the recent few years have been the wildest almost ever in the market—very trying for investors. You know, especially investors who nowadays more and more are counting on the returns from their investments to support them in their later years, because nobody knows if Social Security is really going to be here.
So, I think that all we can expect is that turbulence to keep going. And since the fed has already come out and said that they are not going to raise rates for a while, I think the stock market is about the only place that you can turn to as an investor.
It’s really about just making the smart choices and doing the research and making the smart choices as an investor and hedging.
How do you go about doing that?
Well, there are a bunch of different ways, but probably the most fundamental way is by using covered calls, so not only when you buy a stock, you would then sell a call against it, which then gives you some downside protection. The problem with that is that if the stock takes off into the stars, then you’re not going to be able to take advantage of that upside, but in the meantime it does protect you on the downside.
An example of that would be try and find a good dividend-paying stock that’s paying somewhere in the 3% to 5% annualized dividend and do a covered call on it, and that will protect you. You can probably find something that will protect you down to a 10% drop on that stock.
So you’re getting the dividend, you’ve got the downside protection, and you’re making 3% to 5%, which is probably two to three times what you could make in a money market account. So, it seems like that’s going to be a good rational conservative way to move forward for the next few years.
Do you have any stocks in particular that you might suggest?
Yes, there is one stock that I personally play regularly. It’s called American Campus Communities (ACC). What they do is they provide rental housing to college students.
The way I discovered this is that I was out doing college tours with my kids and I realized how many people were sitting in that room. This is totally inelastic. There will always be demand for rental housing around universities, whereas if you did other kinds of rental housing or other kinds or REITs—like these shopping center REITs…I mean you go through shopping centers all the time and you see empty space—but these guys don’t have an empty space problem.
There are always students that are ready to fill those seats and they need someplace to live. That pays, I think, around 6% or 7% annualized dividend. It’s a nice healthy dividend, and I always cover it with a covered call, so you can usually get somewhere around 7% to 10% downside protection on that.
So the covered call is primarily insurance?
It’s insurance to a point. It’s not like total insurance but it will insure part of your downside on the stock.
And the stock is not that kind of stock that’s going to take off into the stars typically. It does trend upward. It goes down a little bit sometimes, too, but there is not a lot of risk of upside leaving money on the table.