Income Portfolio 2012 – Rolling Back to the Future

Although we were worried last month, my comment to Members was "Don't Panic" as we had faith in our positions (not blind faith – we did go over each one!) and, as always, time was on our side as this portfolio is all about SELLING premium and collecting dividends.  

Now, after literally doing nothing for 4 moths, it is finally time to make some adjustments as our January positions come due and require action.  So time to end the 4-month vacation and start earning our money…

We initiated our virtual income Portfolio way back on April 9th, after dealing with my Father's death and speaking to many of my Mom's friends in Florida got me to thinking there must be a way to structure a portfolio that will hold up through thick and thin and throw off a nice monthly income – using a combination of dividends and option sales.  Our goal was to put $500,000 to work and generate at least $4,000 a month in income without reducing the principal.  

As you can see from the chart on the right, this is not exactly a radical strategy but, strangely, it's also not one that retirees seem to be aware of.  Clearly, since 1990, the difference between dividend paying stocks and non-dividend paying stocks has made quite a difference.  These days, with most stocks moving in very high correlation – that is truer than ever because – if they are all going to go the same way, then any dividends you collect are a bonus, right?  

Of course, we try to outperform the S&P a bit as well and again, it's a no-brainer to use put option sales to improve your entries because, clearly, if you only enter a stock with a 15-20% discount, then again you are likely to outperform the rest of the index.   The final trick up our sleeve is, of course, Fundamentals – we try to pick good stocks that will do better than the rest of the S&P.

And we HEDGE!  We hedge because, EVEN THOUGH we picked a good stock and we will collect our dividends and even though we gave ourselves a discounted entry – WE STILL MIGHT BE WRONG!  We might be wrong or the market may collapse (as it did on us just 3 years ago) in such a way that…