Here are three ideas for generating investment income.
Systematic Withdrawal Plan (SWP). If you own an equity mutual fund, consider creating a systematic withdrawal plan where you receive monthly distributions from your fund. The SWP allows you to receive income with equity-type returns. However, the income is not truly income because it includes a return of principal, capital gains, interest payments, and dividends. Let’s say you invest $100,000 in a mutual fund, and you want to receive $5,000 per year. If the fund earns 7% yearly, your projected growth in ten years is $127,632 after receiving $50,000 in payouts.
Covered Calls. If you own 1,000 shares of Apple, sell ten option contracts against your position to generate income. Apple is trading at $153 per share, and the April 160 option premium is $4.80 per contract. If you sell the April $160 call, you can receive $4,800 in income, and if Apple trades at $160 or higher on April 21, 2023, the stock will automatically sell at your strike price of $160. If Apple trades below $160 per share, you retain your shares, and you can write more contracts.
Bond Ladder. The yields on US Treasuries are the highest they’ve been in years, so now you can generate safe, conservative income with a short-term bond ladder. For example, you can buy US T-Bills maturing monthly – March, April, May, etc., and when the March T-Bill comes due, you can buy one due in June. The average yield for the 1-, 3-, 6-, and 12-month T-Bills is 4.82%.
Never depend on a single income. Make investments to create a second source. ~ Warren Buffett
February 13, 2023
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.