Alternatives to Dividend Stocks

Dividend stocks are traditionally the go-to conservative stock investment.  Anyone who can’t sleep at night because they are too worried about their Fitbit investment or latest coal speculation can turn to a stodgy old slow-grower with a 4% dividend and sleep peacefully until the cat starts clawing through the door to be fed at 4 am (note: this may not happen to everyone).

There are all kinds of studies on the efficacy of dividend stocks and their low volatility.  So many in fact that trillions of dollars have poured into ETFs focusing just on dividend stocks, driving up the valuations of the classics to unappealing levels.

There are so many hoops to jump through to make dividend investing worth it, you may as well give up.  Meb Faber summarizes it well here.

There is still a need for low volatility, income producing investments, however.  Thankfully, for all of society, I have a few suggestions before the entire financial system comes crumbling down.

Use Fixed-Income

Let’s start with the easiest one – easiest for me at least, since I’ve written about this a ton before.  Well, at least twice, once in an article and once in a book.

Shareholder Yield

Another easy one.  This time we’ll return to the Meb Faber well.

Faber has an eBook on the subject, a domestic ETF (SYLD) and a Foreign ETF (FYLD).

Shareholder yield is the sum of: dividends paid, stock repurchased and debt repaid over the market cap.

The theory is that dividends are not the only way to return value to shareholders.  When you pay a dividend, you are sending the company’s assets to shareholders.  When you buy back stock or pay down debt, you’re increasing the shareholder’s claims on those same assets – without having to pay a tax on it.

Faber’s funds both sort their investment universes and purchase the top 100 stocks by shareholder yield.

Get an Investment Property

My fiancée and I have our first condo on the market right now.  If all goes well, it would add a substantial income each month.

Right now, the condo is listed for $1,200/mo and has been for about, I will soon be dropping that to $1,100.  Let’s assume it eventually rents for $1,100.

The mortgage each month is $515.  Part of that mortgage payment goes to pay off the principal balance (about $88k) and part goes to interest we will be able to write-off. The HOA is $150.

Of that $1,100, about $435 comes straight to us cleanly and about $300 or so comes will come back when we get a tax refund.  If we wanted, we could pay between $100 and $200 to a property management firm to manage the place for us.

Not bad for a condo I purchased as a bachelor with $5k down and lived in for two years.

Buy Some Mortgages

An investment start-up called PeerStreet is giving investors unprecedented access into the market for investing in mortgages.

The company partners with lenders to offer mortgages in which customers can invest.  The loans typically produce returns between 6-12% annually, have 6-24 month terms and have loan-to-value under 75%.

The company also produces all necessary information to underwrite the deals: credit scores, appraisals, etc.

Create an Online Investment Property

Online investment property is the fun term I like to use for niche sites.

Niches sites are education web sites built for a single purpose that either drive visitors to an affiliate product, a product created by the website creator or simply host ads.

Niche sites are typically built of search terms that are popular but not too popular, one podcasters I like often talks about how his aging mother created a second income with a game room website.

Typically, the site is full of good free content (it must be for good search engine optimization).  This could either be done by you or by writers hired on Fiverr or Upwork.

Ads can be from Google’s Adsense and for affiliate products seek out relevant industry products and just look through their sites for an affiliate program.

For more on this strategy from people who have done it well visit the Niche Site Duel.

Use Options

Here’s the one I prefer the most.  It’s simple and you can even use the same type of low volatility classic value stocks.

First, find the stock you want to use.  One I often use is Fiat.  Fiat has a low enough stock price ($10.75) that it would buying 100 shares would be doable for most investors and is worth substantially more than that price per the Morningstar value.

Our trade has a few layers, we start with selling naked puts.

Let’s look at some of the puts available a month out:

We like to look for options with a strike below the current price, so in this instance we would target the $10 strike.  The current price is $0.27.

Assuming the trade went through at $0.27, we would be selling the right for the buyer to put (sell) 100 shares of the stock to us at any time between now and 3/17/17 for $10 per share.  For that privilege, the buyer pays us $27.

To break-even on a sell the stock would have to fall from the current $10.75 to $9.73 which is a 9.5% drop in just over a month.  If it does not do that, we pocket the $27.  If you have a margin account, you would have to hold 20% of the underlying stock value ($1,000) plus the option value ($27) which is $205, the $27 is a 13% return on that margin requirement.  If you don’t have a margin account you would have to hold the $1,000 in cash and would earn 2.7%, which is >35% annually.

It is worth noting, the option price is often outdated, if you look at the bid/ask you would more likely be able to sell the option for around $0.17 or $0.18, this would be an 8% or 1.7% return.

The risk is the potential for Fiat to hit a speed bump and drop to $8 or $7 per share.  At that point you’d be opening a positon with a 20 or 30% loss.  AT that point you’d need a 25% or 43%, respectively, gain to break even.

Let’s say the stock did fall to $9 per share and was put to you.  You now own $900 of stock with a cost basis of $973 (including the $1,000 for the stock and the $27 option premium).  You can either hold the stock long-term, or start trading around the position with covered calls.

If you want to just exit the position where you started, target the $10 strikes.  Right now, similarly priced calls trade for about $0.15.  For offering to sell at $10 for a month you would make 1.7% – 22% annually.

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