Dividends & Income: Smart Investing
April 25, 2016 | By Steven DiGregorio
It’s easy enough to buy low and sell high when the stock market moves up and down. But how do you profit as an investor when the market is sideways? A market with no definable direction is known as a horizontal, flat or sideways market. This defines a period in which prices waver within a narrow range without a clear upward or downward trend. Such a barren landscape can lull you into apathy and leave your money sitting high and dry. Flat markets don’t have to be a time of financial drought for your portfolio; there are strategies that can help you turn a profit. Turn to Dividends & Income.
Dividend stocks yield steady returns
The most common and best way for most investors to play a neutral market is to invest in stocks that pay dividends. Even if a stock trades flat, the dividend yield still produces profit.
Consider buying dividend paying stocks of companies with active stock buyback programs. Essentially, when a company buys back shares, this is indicative a strong balance sheet. The buy back program will help prop up potentially falling prices by repurchasing shares and therefore provides the investor with another line of defense.
Be cautious of a stock with a high payout ratio. This can be an indicator that there are few growth opportunities for the company and likely may not sustain its dividend for the long term.
The message is that not all dividend paying stocks are created equal. Payout ratios, earnings-per-share, and consistency are key fundamentals when researching these kinds of stocks.
Options as hedges
Using options are another way to generate income. Options are an advanced strategy that, to the novice, pose more risk than buy-and-hold investing, but used smartly options can help you manage risk and find profits in flat markets.
Here are some popular ways to use options in a flat market:
- Selling Covered calls are considered the most conservative investing strategy using options. If you own a stock that you think is going to trade sideways for a while but still want to generate some kind of a return, you can sell a call at a higher price than it currently trades at and collect a premium, or fee. If the stock does climb more than you expected, you still keep the premium and profit from the spread between the stock’s current price and the price you sold the call at.
- Buying Uncovered calls prior to an earnings call is another strategy. By buying a call with a strike price that is in or “near the money” (current price + cost of contract) and expires after the next earnings date, you’ve essentially taken a short term bet that the stock will rise. If it does, that is cause for the price of the option contract to skyrocket, especially if there is an earning surprise! This lets you play the stock market without putting a large amount of money at risk and capping the maximum amount of potential losses.
- Selling Uncovered calls is a riskier strategy. The difference is that you don’t own the stock. So if the stock price takes off and goes beyond the strike price, the contract may be exercised, requiring the seller of the call to purchase the stock at a higher price in order to fulfill the contract. This results in a potentially limitless loss potential to the seller of the contract. A riskier strategy, but played correctly can produce consistent income.
The stock market is a dynamic power that can play tricks on the unsuspecting investor. The calm surface may seem as still as a mountain lake, but strong currents can operate underneath in certain sectors. The trick is becoming smart enough to find them.
Stocks aren’t the only investment available to you, either. When stocks are doing poorly, other asset classes like bonds and commodities may not be experiencing the same problems and could be good areas to invest.
There is always a bull or bear market taking place somewhere if you look hard enough.
About Compass Asset Management Group
Our boutique-style firm has an investment philosophy is both prudent and value driven. We combine research from the largest firms on Wall Street with three decades of market experience to provide strategic, tactical and dynamic investment management. Compass Asset Management Group, LLC delivers personalized financial planning, estate planning and investment management advice in a private setting with a high degree of sensitivity to your concerns and objectives. Our goal is to exceed yours expectations by listening closely, understanding deeply and communicating well through frequent, personal consultations entirely focused on your financial goals.
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Compass Asset Management Group | 100 Stony Brook Ct. | Newburgh, NY 12550
845.563.0537
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Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
Please note that the content of this article does not constitute tax advice and is only intended for the educational purpose of the reader. Please consult your tax advisor for specifics regarding your circumstances.
Tags: dividends, income, income strategies, investing, options, strike price
