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Investing for Income – Part Two

Posted on the 24 April 2011 by Phil's Stock World @philstockworld

Investing for Income – Part TwoWe are off to a super start already!

I was inspired to write up this virtual portfolio as an example of the kind of investments that would benefit my Mom and her friends down in Florida, who have little risk tolerance but NEED to draw a consistent income from their retirement accounts.  The state of financial planning from "expert advisers" is woeful to say the least so our intention has been to test-drive a virtual portfolio of $500,000 and see how it performs over time, our goal is going to be collecting $4,000 a month, nearly 10% without touching the principal.

One of the principles of a retirement portfolio is to make it as low-touch as possible.  Here we have our first two-week check-up but, once things are set up, we should be able to visit less often than that – hopefully quarterly as long as the market remains in our range.  

Be sure to read the original post for my caveats regarding this type of investing, as well as the goals we have for long-term savings.  Most importantly, be aware that I am not a financial adviser – everyone’s situation is unique and you need to consult with someone who is familiar with your overall financial situation.  In this particular case, were looking at a scenario where someone has $500,000 to invest and hopes to draw about $4,000 a month.  Our first trades were as follows:

  • 3,000 NLY at $17.23 ($51,690), now $17.58 (up $1,050) 
  • 30 NLY 2013 $12.50 calls sold for $4.95 (-$14,850), now $5 (down $300)
  • 15 NLY 2013 $15 puts sold for $2.05 (-$3,075), now $2.05 (even).  
  • No cash used to live on yet

Investing for Income – Part Two
Of course we don’t worry about being called away and it doesn’t matter too much what happens to the put and call prices as long as we are on track.  The bottom line is we put $17,925 in our pockets with and expectation of being called away with a $14,190 loss at $12.50 ($37,500) so a net gain $3,735 is expected on the stock + options combo on $33,765 cash committed is just 11% over 18 months but we are playing this one for the .62 quarterly dividend, which is another 14% with the next payment due in June ($1,860).  As we "only" need $12,000 a quarter and this takes care of 15% of it with just 6.5% of


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