Thursday, July 16, 2009

Have Your Cake and Eat it Too

I believe income and dividend investing will outperform the overall stock market for the next few years, but what if I'm wrong? What if stocks do rise? We have a way to profit in either case.

We can use an investment theme that works whether stocks rise or fall. We can buy Covered Call Funds, also known as Buy-Write Funds.

If you aren't familiar with covered call funds, they are similar to Mutual Funds except for one very important aspect; they sell options against the funds holdings to generate additional income. Selling options for income has an added benefit of providing stability to the price of the fund. You should also know they will rise less during strong Bull markets, because they will have sold stocks for smaller gains than they might have made by holding. Since I don't see a strong Bull market in our future, that shouldn't be an issue.

Covered Call funds also play into a theme I hold dear. In the long run you will come out better by making reasonable gains year after year while keeping losses to a minimum. Losses can be more devastating to a portfolio than most people realize. A 33% loss requires a 50% gain to get even and a 50% loss requires a 100% gain to get back even.

The first fund is:
Nasdaq Premium Income & Growth Fund (QQQX)
The Fund's investment objective is to provide stockholders with income and capital appreciation. The Fund pursues its investment objective principally through a two-part strategy. First, the Fund will invest, under normal circumstances, substantially all of its net assets in a portfolio of investments designed to closely track the NASDAQ 100 Index. Second, the Fund will write (sell) call options on the Index (the "Written Options") which are fully collateralized by the NASDAQ Investment Portfolio. Under normal circumstances, the notional value of the Written Options is not expected to exceed 50% of the Fund's net assets.

The yield on QQQX is over 13%.

click here for a current chart of QQQX

The second is:
Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW)
The Fund's investment program will consist primarily of owning a diversified portfolio of common stocks, a segment of which holds stocks of U.S. issuers and a segment of which holds stocks of non-U.S. issuers, and selling on a continuous basis call options on broad-based domestic stock indices on at least 80% of the value of the U.S. Segment and call options on broad-based foreign country and/or regional stock indices on at least 80% of the value of the International Segment.

The yield on ETW is over 14%.

Click here for a curent chart of ETW

Both these funds sold off hard during the Bear Market crash, but since the March 2009 bottom they have recovered much better than the market as a whole. QQQX and ETW are nearly back to pre -crash levels. The same can't be said for the S&P 500.

Click here the see a current chart

Owning these covered call funds provides us global diversification, income, and the potential added kicker of appreciation if the stock market does rise. We can have it all.

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