A Retiree-Friendly Income Strategy
At 2% or 3% a year, bonds are not the best choice right now, says Mike Scanlin, who explains how covered calls can provide the income stream retirees are looking for.
Covered calls are certainly one strategy to generate income off of your portfolio, but how do covered calls compare to say bonds and other ways to get a yield? My guest today is Mike Scanlin to talk about that. So Mike, you've got a couple of different choices here when you're trying to generate income from a portfolio. Covered calls one, maybe bonds buying bonds is another. How do you balance those two?
Well, bonds are totally safe. There's no equity risk if you buy, but they don't pay very well. Ten-year Treasuries right now are 1.5%, 1.6%, it's really hard to live on a retirement portfolio generating 2% or 3% a year.
If you were to buy large-cap dividend-paying blue-chip stocks and write covered calls against them, you'd probably get a 3% a year dividend yield, which already exceeds the bond yield. If you write in-the-money calls you can write, get some time premium on top of the dividends, you might get 6% or 10% a year out of the combination of the dividend plus the call premium.
You are taking some equity risk because you are long stocks, but on the bond side, with all the money we're printing, inflation's going to come and those bonds are going to get creamed at that time unless you hold them to maturity.