Late last week a colleague of mine posted an interesting image to our community platform at Wyatt Investment Research.

The image shows the age distribution of the 10 most popular stocks.

age-distribution-top-10-stocks

What I found most interesting about the image is the stock most widely held by our elder statesman 65 and older: General Electric (NYSE: GE).

As you can see in the chart above, 55% of GE shares are owned by those 65 and younger, while 45% consists of retired investors.

Why do so many retired investors dominate the GE shareholder population?

Well, in my opinion, most retirees think they need income, which leads them to favor large-cap value stocks paying healthy dividends. But sometimes 3.4% in dividend income from a company like GE doesn’t cut it.

Sometimes we need more frequent sources of income.

Since I know most of our loyal Income & Prosperity readers are 65-plus, I feel comfortable making the assumption that many of you already own GE at some capacity in your portfolios. If so, you will want to learn about the following strategy that has allowed readers of my High Yield Trader service earn an extra 13.2% since we added the stock to our portfolio over 18 months ago.

Over that same time frame the actual share price is slightly lower. So, investors haven’t really had a large window to take even small capital gains. That’s another reason why the 13.2% return over eight different payments (about one payment every two months) should be attractive to those of you who own shares in the multinational conglomerate.

Indeed, the time has come for the retired investor – either wealthy or in the process of accumulating wealth – to consider using one of our favorite income strategies: covered calls.

So what is a covered call?

Covered calls are an options strategy whereby an investor holds a long position in an asset like GE and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. The strategy is often employed when an investor has a short-term neutral-to-bearish view on a stock or ETF. For this reason the investor holds a long position in the asset and simultaneously has a short position via the option to generate income from the option premium.

For example, let’s say that you are a proud owner of GE stock. You like the company’s long-term prospects, as well as its share price, but want more out of the stock than the current 3.4% dividend.

With the stock currently trading for roughly $27 you sell a call option on GE – for every 100 shares you own – at the 28 strike for roughly $30. The return: 1.1% over 60 days. Of course, you can make this transaction roughly six times over the course of the year for an annual return of 6.6%, and that does not include any potential capital gains.

But you need to have a good understanding of the three potential scenarios:

  1. GE shares trade flat (below the $28 strike price) – the option will expire worthless and you keep the premium from the option. In this case, by using the covered call strategy you have successfully outperformed the stock.
  2. GE shares fall – the option expires worthless, you keep the premium, and again you outperform the stock.
  3. GE shares rise above $28 – the option is exercised, and your upside is capped at $28, plus the option premium you collected by selling calls. In this case, if the stock price goes higher than $28, plus the premium, your covered call strategy has underperformed the GE shares.

As I have often stated, most investors think of options as high-risk, speculative strategies where large losses can be incurred. While this is certainly true of some options strategies, covered calls are actually more conservative than investing in ETFs or stocks alone.

In other words, a covered call strategy is safer than buying a stock or an ETF. Why? Because covered calls:

  • Provide some protection in a down market
  • Lower your cost basis while decreasing the volatility of your portfolio
  • Are one of the few ways an index investor can achieve double-digit returns in a flat or slow-growth market

Remember, covered calls make money when stocks are slightly higher, flat or down. You only get the underlying stock “called” away if it rises significantly.

So again, why would any investor choose to shy away from such a proven income strategy that has outperformed the market and dividend-paying stocks over the long term? And if you already own GE, why not give it a try?

Again, we’ve been selling covered calls and puts in the High Yield Trader service for incredible returns since late April of last year. If you would like to know more about how we use our unique income strategies, please click here.

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